Do you know about - understanding Accounting Vocabulary
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The following report is an passage from the free online course "Using Finance & Accounting in Your Small Business".
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When you learn something new like accounting concepts and terms, it helps to originate links between what you know and what you are trying to learn. In some ways, it is like studying a second language and decoding the new word is part of the studying process. For example, trying to translate the Spanish word necesario you might brainstorm with indispensable - and you would be right. How about blanco? Blanco is like blank which is like white. So, blanco is Spanish for the color white.
Try to make some logical connections about the accounting vocabulary. Take the word - accounting - and think about it. Really, the accounting ideas is a basic counting of what goes on in your business.
Let's move on to transactions. Transactions are the firm activities, or actions, that build day by day and come to be your expenses and income. Try to think about the term - transactions. Actions are firm activities, and trans means across or through. These are the basic construction blocks of an accounting system. Transactions are to accounting like what raw materials are to a factory, or gasoline is to your machine - the transactions are real and how your accounting ideas handles them impacts your business.
You must keep a report of your transactions to know how much money your firm earned and how much money your firm spent. Sounds obvious, right? Ask your bookkeeper or accountant how distinct some transactions are. It can get tricky swiftly if you are not clear about what happened in the transaction and how you want it recorded.
For example, if you were a carpenter you might pay cash for a pail of nails to assemble hand made wooden deck chairs. The nail purchase is a transaction and will have to be counted as a firm expense. In your workshop, you then assemble the chair using a pneumatic nail gun, sand paper, stain and varnish. The next day you deliver the chair to a customer in a neighboring town. You hand the customer a sales slip and they then write you a check. That, too, is a transaction. It is easy to see the transactions when money is spent or received. Did you, however, see the other transactions?
The stain and varnish, nail gun use and chair parts were also part of the transaction. What about the gasoline and truck used to deliver the chair? Did you have any left over nails or did you use them all? Maybe there is a miniature life left in the sand paper but it is not new anymore, is it? If we do not inventory for those costs we are missing a piece of the picture-an foremost piece-that could sway how much money you have at the end of the year.
In all your firm activities, try to think in terms of transactions because once you can recognize what transactions occur in your business, you will be able to found them into a meaningful manner. Right now, take a miniature to list what transactions occur in your firm each day, week and year. always thinking in terms of transactions might seem miserly, but it is foremost to be cost-conscious and honest with yourself about all your transactions. Your success in firm depends upon it.
Some transactions are initiated by customers and suppliers. Other transactions can take place inside your firm or back office. The bookkeeping group creates transactions when they adjust your books for year-end considerations like machinery depreciation or inventory shrinkage.
What is depreciation? Let's say you bought a brand new car, a 2006 Professor Now Coupe, and you spend ,500 on this new car. Next year the car has some dings on the doors, wear on the tires, stains on the seats and 20,000 miles on the engine. You know your car is not worth ,500 anymore. This means your car has lost value or depreciated.
When it comes to firm owned equipment, you can deduct this lost value as a firm expense. Sure, you did not spend cash on the lost value but with depreciation, this is a transaction your bookkeeper or accountant will force through at the end of the year. On your taxes, it helps you by expanding your expenses like all other cash transactions. Of course, the other side of depreciation means your tool is not worth as much anymore.
In order for you to get a honestly clear photograph of how your firm is operating, you need to be diligent and thoughtful about what your real expenses are. Depreciation is a real price even though it is not a cash transaction.
Learning to see transactions for what they are takes custom and contemplation. Transactions sway so many areas of your firm that you must analyze the daily details so you can piece together the big picture.
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