Written by- Maitreyi Bhuyan
"The word accounting derives from the term accountability. If you want to achieve wealth, you must take responsibility for your money." - Robert Kiyosaki
When did you first come across the term accounting? Probably not before 9th grade. Regardless of when you heard about it, you cannot deny its significance. It's unfortunate that students are not introduced to accounting at an earlier stage in life. Usually, they only encounter it if they choose commerce or a similar field of study in the future. But is this fair? And why is accounting so crucial?
Let's use an analogy: when you fall ill, you use a thermometer to measure your temperature. It helps you understand what's happening in your body. Similarly, accounting serves as a thermometer for companies or businesses. It allows you to assess their profit and loss, assets and liabilities, and cash flow, which ultimately determines their financial health. Isn't that intriguing? Many people view accounting as a tedious task solely focused on recording financial transactions, but they overlook the beauty of numbers and how they are recorded, interpreted, and communicated to internal and external stakeholders.
Accounting is not just about debits and credits; it forms the foundation of any business. Consider this: can a business survive or thrive without accounting? Can it operate without understanding its financial performance? Can it identify money-generating activities? The answer to all these questions is no, emphasizing the importance of accounting. It is a logical process that allows accountants to identify issues within a business by analyzing financial statements. And it's not limited to businesses alone. Accounting is valuable in individuals' lives as well. Managing your own finances is empowering. It helps you track where your money comes from, where it goes, and if necessary, how to prioritize and reduce expenses to generate more income.
To provide you with a brief overview of this remarkable process, imagine starting a business. You inject capital in the form of cash and furniture, purchase inventory to sell, and subsequently make sales, which generate revenue to cover expenses like electricity bills. The first step is to record these financial transactions. Actions such as appreciating your employees, although crucial for your business, are not recorded because they lack a monetary component. Each transaction impacts both the debit and credit sides, which are recorded in primary books through journaling. They are then categorized in separate accounts to facilitate organization, known as the ledger. A trial balance is created to ensure both sides match, and ultimately, a balance sheet is generated to record assets (items that generate future income) and liabilities (items that require future payment). Through analysis, better decisions are made and information is communicated to interested parties. Voila! Accounting has set your business on the right path.
There are various principles and concepts introduced to maintain uniformity in accounting practices. Complexity increases when moving from sole proprietorships to partnerships, where profits and losses must be divided. The complexity intensifies further when dealing with corporations, as vertical balance sheets are created, shares and debentures are introduced, cash flow statements are prepared, and ratios are utilized to gain a clearer understanding of a company's situation. However, one aspect remains constant: utilizing the information to make wise financial decisions, as it is the best way to generate wealth.
Lastly, accounting is far from monotonous. It is interesting and is now utilized in areas such as forensic sciences and tackling financial crimes. Its importance in taxation cannot be denied either. The more you learn about accounting, the more you'll fall in love with it, and there will be no escape from its grasp.