Basic Accounting Principles
Considering that many of us cringe at the idea of having to balance our check book (myself included), it wouldn’t be a surprise to if understanding debits and credits makes you want to run away screaming. But like it or not, learning what all those debits and credits do is very important for being able to write financial reports. In this section, I’m going to introduce you to the concepts of accounting and how financial databases are built. The information is going to be greatly simplified so that it is easier to understand. Once you are finished, you should be able to apply the knowledge at your company.
Writing financial statements isn’t easy because each company has their own rules for how they want their financial information presented. Having to analyze the list of accounts in combination with all the journal entries and customizing the report can be a bit overwhelming. But, no matter how a company wants their information presented, the accounting rules that must be followed are well established. It’s imperative that you understand the basic accounting principles that every company uses before learning how to create the different financial reports.
The purpose of this section is to help you understand how the accounting principles work, but it is not to teach you how to put these principles into practice for a company. Learning how to use the accounting principles on a daily basis requires a formal education in accounting. But having a basic knowledge of these rules will make it easier for you to look at the records in a financial database and get an understanding of what they are doing. You can create reports with this data because you will know whether it accurately portrays the underlying data.
When looking at the financial transactions in a database, there are basically two things you are concerned about: the account name and the dollar amount. The account name is pretty easy to understand. For example, if the account is called ‘Cash’ or ‘Money Market Account,’ then you know it is an asset dealing with money. If it is called ‘Insurance Expense’ or ‘Parking Fees,’ you know it is an expense to pay for something. The second part, the dollar amount, is where things get tricky. And to be honest, this is what is going to cause you all kinds of grief until you get a solid understanding of how money is accounted for.
From a financial standpoint, everything a business does results in monetary transactions. For example, if money is borrowed from the bank, cash is received and the company has a new loan that needs to be paid back. If equipment is purchased, there is an increase in the total value of fixed assets owned and either cash is reduced or a new loan is recorded. These transactions are recorded as a set of entries where each amount is either a debit or a credit. The way that each gets recorded is dependent upon how the transaction is classified and whether it is increasing or decreasing the item. Let’s look at how this works.
