Understanding the Accounting Basics

Successful executives know everything about the business they are running. The know how each department operates and how every single person on the payroll affects the success of the company. A good understanding of accounting pan make the difference between a profitable and a bankrupt operation. Every company director must be knowledgeable in basic accounting practices so that they will know whether the company is doing well or stuggling and changes need to be made.

Although company directors could just simply trust the reports and the advice of their accounting department and external accountants, it is better for business if they can understand this and form their own opinions. If you have your own company, you should, at the very least have the following accounting skills.

1. A solid understanding of the basic accounting equation

This equation is the foundation of the double-entry bookkeeping system (the most popular bookkeeping method for most businesses). The equation is used to detect errors in bookkeeping and is written as follows…

ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

The term “ASSETS” refers to the actual property owned by the company, “LIABILITIES” refer to the debts owed by the company and “SHAREHOLDERS EQUITY” refers to the money left over as profit and interest payments for investors. Even though a company director is not responsible for keeping their company’s books balanced, they are most certainly responsible for making sure their accounting department is doing their job correctly. This will require regular reviews and briefings on the financial state of the company, and knowing how to use and interpret the basic accounting equation will help to gain a stronger understanding of where the company stands financially.

2. Familiarity with accounting terms

Although most company directors leave the actual number crunching to experienced accountants, they still must have the ability to correctly read and interpret financial statements and confidently report profit information to shareholders and employees. The only way this can be done is by learning the full meaning of every term in their financial statements, giving them the full picture of the company’s performance.

3. Knowledge of unethical and illegal accounting

Knowing the difference between good accounting and bad accounting can help a director spot the red flags in financial reports and stop the destructive practice before it causes irreparable damage.

4. Ability to use basic accounting software

Although it is still called bookkeeping, most ledger activity is now completed on the computer. Understanding how accounting software is used to keep a business’ books balanced is necessary to see the whole picture of company’s financial situation. It is also good for company efficiency, because if there are every any accounting problems, the director will be able to quickly understand why the issue happened and how it can be fixed.

You don’t have to spend years studying accounting to gain a solid understanding of the basics. There are hundreds of books about accounting, and if you are more interested in learning through a course, consider taking an online course or signing up for an online accounting class at a local college or university.