Introduction to Financial Accounting Concepts

Accounting.

This word is viewed as a GPA breaker, a four letter word with no respite, a class that should be purged from the business school’s curriculum.  Basically, this is a class subject with very few positive rumors.  Just mentioning accounting concepts can have students heading towards the exits.

However, with rumors and background aside, this class is required by every business student to take regardless of their major.  Marketing, Finance, Entrepreneurship, and of course Accounting are only a few of the majors inside American business schools that require accounting as a class.  There is a reason for this apparent madness. 

Frankly put, accounting is the language of business.  Everything that occurs within business, regardless of the business segment, is recorded via accounting.  Since it is the common language, for any individual looking to have a successful career in business, accounting must be understood and spoken.

The purpose of this blog is to provide additional clarification for accounting to business students who struggle with accounting concepts. Also, it is for those students who may have not been a business major in school but wish to take charge of their financial condition and succeed as much as possible.

The following lesson can also be viewed on our YouTube Channel if you click here.

Many think accounting is hard and full of math.  If you are taking an accounting class, it is common to hear these two descriptions of accounting by outsiders.  The problem is that this is a great misunderstanding of the academic subject of accounting.  First, accounting is not hard, it is just different from any other class that is offered in schools.  Whereas most classes can be easily mastered by simple memorization, accounting must be understood and concepts practiced instead of memorization without knowledge of the why behind it. 

Second, accounting is not full of math; anyone can succeed in accounting with only knowledge of the four basic mathematic functions. Accounting is a classification of items (called transactions) that occur within the course of business. 

Okay, we have determined that accounting is a classification of business items but what sort of items are we classifying?  The point of this post and this blog is to demystify accounting and the world of finance as much as possible by thinking about what laymen know about accounting.

Let’s think about a regular store that we shop at on a daily basis that buys goods and resells them to customers (you are welcome to call it Wal-Mart, Target, or any store you prefer).  What is the purpose of the store, or any other store for that matter?  

The goal is to make money.  

These companies are able to achieve this by buying goods and selling goods to customers at a higher price for what the companies paid for them. Good, this is the type of simplified breaking down of accounting that we are pursuing through this blog.  What other activities might this company partake in that we able to classify?  We have already named the first two.

• ·        Buying goods to sell to customers.

• ·        Selling goods to customers.

• ·        Purchasing buildings and vehicles.

• ·        Borrowing money to fund the business.

• ·        Selling stock to investors/shareholders.

• ·        Distributing dividends to shareholders.

• ·        Buying other businesses to grow.

Here is a graphic if you like learning through a visual channel:

**Study Tool** - Click to Download This Graphic

We are able to classify these events (transactions) into different categories (let’s call them accounts) where we can separate the different transactions as they come into the business and tally the amounts.

All businesses have many accounts and many of these accounts are used by businesses regardless of the industry or type of business.  The name of these common accounts include:

• ·        Cash

• ·        Accounts Receivable

• ·        Inventory

• ·        Plant, Property & Equipment

• ·        Accounts Payable

• ·        Bonds Payable

• ·        Common Stock

• ·        Retained Earnings

(Don’t worry about understanding all of these accounts right now or how they are classified, the important lesson to take away is that many business utilize accounts titled the same regardless of the business or industry.) 

These are just a few of the main functions and accounts of running a business that come off the top of my head.  These are concepts that can be understood by those not engaged or learned in business but have not had any accounting jargon applied to them and therefore are “clean” of confusing words.

Through the subsequent posts on the accounting learning page of this blog, we will dive into more detail of these topics and more that describe business through an accounting lens.  As we progress, the dividing line between laymen and accounting depictions of business so that we will learn the language of business (accounting) in a way that incorporates learning and not memorization of this different subject. 

The next lesson we discuss will depict more ways of how accounting classifies business transactions into these accounts.

To Your Success,