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Accounting 101

Written by: Kathleen Howard

Article Overview: The basics of accounting are learned by the 4th grade. Get down to the basics of accounting and what made it complicated.

Accounting 101

If you're talking with someone you'd prefer not to, then swing the subject around to accounting. You'll quickly find yourself alone and you can amble over to another member of the opposite sex. If they also turn out to be not 'as advertised', you can always steer the subject over to accounting again.

Why is this? What is there about counting beans that seems to befuddle or bore so many people?

Accounting is the lifeblood of just about everything in this world. Gents may numerically track their girlfriends quite the same as young ladies count the merits of their latest beau. Recipes require a little of this or that. We borrow from the bank to pay our bills or to float a loan to a worthless relative.

Most accounting requires only that we master addition and subtraction from about the 2nd grade. For Advanced Accounting we might have to recall multiplication tables from maybe the 4th grade. After that we can drop out of school and tack an ACCOUNTING sign on our front porch.

Accounting is the art of keeping track of things. Thus, nearly everything of value in this world appears on a tally sheet somewhere. If a 4th grade school dropout can master this concept then certainly so can you and I.

Fundamentally we only need to track the money we take in and pay out. These are called Accounts Receivable (AR) and Accounts Payable (AP). This is true whether we are a home-based business or are responsible for a billion dollar corporation.

On a business level receivables may result from goods sold, buildings rented or stock value increase, while payables include items needed to maintain the business such as merchandise, building leases or office supplies.

Note that these 2 types of accounts may have wildly different numbers of entries. For instance a retail store may stock 10,000 items purchased from only 100 vendors. If so, this store may have more than 10,000 entries AR but not much more than 100 in its AP. We just stated that you only need AR and AP records to have a fundamental accounting system. That's true. But these alone can be difficult to interpret. To make an accounting system really useful we need to compare our figures to see if we're solvent or not. This is where a General Ledger (GL) comes in.

From the GL we can derive many useful financial statements, two of which are very important to every business: (1) a BALANCE SHEET, which is a snapshot of your financial position at any given point of time, and (2) a PROFIT & LOSS statement which pretty much says it all. Your banker will see things in there that will populate your nightmares for months to come.

Now you know the basics of accounting! But if a highly skilled field like this requires only a 4th grade education then why do we require children to continue in school?

Simple!

After the advent of income taxes in 1913, it became necessary to add grades 5-12 to make it possible for the average person to understand the complexity of our tax code. This has proven to be a losing battle. Today even many Doctoral graduates cannot properly calculate their own tax obligation!

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Article Tags: accounts receivable, addition and subtraction, advanced accounting, building leases, business level, counting beans, different numbers, dollar corporation, front porch, grade school dropout, home based business, lifeblood, merits, multiplication tables, payables, receivables, retail store, stock value, tally sheet, young ladies



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