Business Management - Why You Need To Know Basic Accounting
A key skill a business manager must learn is basic accounting
. Understanding accounting will give you a better understanding of how your organisation works. This has many benefits as it gives you greater control and confidence over your budgets and your own destiny.As they say money makes the world go around and accounting ensures that money is controlled in a way that it enables business and commerce to happen. Accounting is necessary to track all the different financial transactions that happen within an organisation whether it is a small shop or a Fortune 500 company. The transactions can be formalised into financial reports for analysis.
Accounting provides a framework that monitors and controls the financial health of an organisation. Through accounting methods and reporting management can make decisions on whether there is potential to expand or cut back.
Accounting can also provide financial reports that can be used by top management and shareholders to determine the profitability and worth of an organisation. This can be determined by analysing the companys assets and liabilities. These two components are the foundation that accounting is built upon. As a manager you should have at the very least a basic understanding of each.
Assets
The term assets refers to something that has value. There are many different types of assets that a company can own such as cash, property, machinery, stock or accounts receivable which represents debtors who owe the company money.
Assets are divided up into two categories as follows:
Current assets
Current assets represent assets that can be converted into cash quickly. These types of assets can also be referred to as liquid assets. A company should always have a reserve or back up of current assets in case a crisis occurs. If a major bill needs to be paid urgently then, current assets can be converted into cash quickly to pay it off.
Fixed assets
These are assets that cannot be converted in to cash quickly. Fixed assets include equipment and machinery.
Liabilities
Liabilities are accounting terminology to mean that your company owes money. Liabilities can come in different forms that include bank loans, mortgages, and business expenses.
As with assets there are also current and fixed liabilities. Current liabilities are categorised as having to be settled or paid within one year for example, a short term loan or accrued expensed are current liabilities. Long term liabilities require settlement after one year. These can include long term loans such as a mortgage on a factory building.
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