Before we dig into the actual how to use QuickBooks software, it is important to understand the basic of Accounting. No matter if you are an accounting graduated person or from any discipline, we still need this. This article is part of our page A Complete Guide of QuickBooks. It is a work in progress, but I hope I can write more about this in our next post. If you have some experiences and a good understanding of accounting, for example, you can read the income statement and the balance sheet, maybe you can skip this chapter. But if you are new to accounting and bookkeeping and you want to start learning it, take your time to read this article. Let’s start with a high level of understanding of the purpose of accounting.
The Purpose of Accounting
The most important thing that you must understand about accounting is that it provides a complete financial information to the stakeholders. What do I mean by this stakeholders? Well, in a well-structured company, stakeholders are the people who do business with or interact with the firm. It includes managers, employees, banks, vendors, investor, government, and so on.
Managers, investors, and entrepreneurs
The first category of stakeholders is the Manager, Investors, and Entrepreneurs. This group requires information to determine if the business they run is making a profit. This group also needs any detailed information that gives a deep analysis of their business whether the business is growing, healthy or sick. The Manager may want to know which customers are profitable or vice versa. An investor in the other hand may want to know in depth which products are growing and give better results or prospective.
A related set of information requirements concerns asset and liability record keeping on a company. This is a very important thing that we should keep in mind. An asset is something that owned by the firms. For example, cash, inventory, and equipment. And a liability is some debt that the firm owes such as bank loan and account payable. A good accounting system will have these kinds of record in the system. So every time the stakeholders need the information, we can easily pull out and provide them quickly.
At this point, we should agree that if you work in a business, or you own and manage your business, you will need a good general information about the financial affair, a complete and very detailed information about assets, and liability.
The next stakeholders in the business are the creditors who lend money to your business. I assume you lend money from other people or organization, or banks. The company, in this case, the accounting team needs to supply a detailed information about the financial condition of the company that banks require to consider a loan request.
What kind of information needed by the lenders? Generally, the lenders want to know if your business is profitable and have a good positive cash flow. When you have positive cash flows, theoretically it will allow your business to repay the debt. A bank also wants to see any assets your business have that could be liquidated. Other firms sometimes have a similar financial reporting requirement for vendors. The retailer may perform specific accounting and reporting to get rebates from the manufacturers of the products they sell.
Another stakeholders that need financial information from your business is the federal and government agencies. Every business in a state needs to report their revenue, expenses, and profits which in the end will be used to calculate income tax to the government. Firm or business with employees also must report to the government on the paid wages over the employees and pay payroll taxes based on metrics for example number of employees, wages, and unemployment benefits.
It is important to understand some basic stuffs about accounting and general financial information before we actually jump into the QuickBooks software. We hope the above information give a brief introduction to the accounting and financial information you need to build in order to have a good accounting system in the future. See you on the next article.