What is accounting and what does it consist of? #
The purpose of accounting is to provide information about the financial situation of a company, both for the company itself and for external stakeholders (tax authorities, banks, investors, etc.).
Accounting progresses from start to finish as follows:
- Accounting begins with a business transaction, such as the sale of coffee or the purchase of a coffee package.
- For this transaction, there must be a document (receipt, invoice, contract, etc.) that verifies the occurrence of the business transaction.
- Once the document exists, a entry is made in the accounting records. For example, the sale of coffee would be recorded as revenue for the company. In the context of the entry, the value-added tax portion (VAT portion) is itemized in the accounting. NoCFO does this automatically, provided you have the correct VAT rate and VAT treatment selected.
- Based on this and all other entries made during the financial year (usually a year), a financial statement is prepared, which serves as THE report for all external stakeholders. Other reports based on these entries can also be generated earlier, for example, on a monthly basis.
In summary, accounting is done based on the documents of business transactions, and from them, various reports can be generated that inform about the company's current state. Simple as that.
Now, let's move a bit closer to the practical work of accounting. NoCFO fundamentally performs accounting in double-entry. In single-entry accounting, entries are made only for income and expenses, meaning only an Income Statement is prepared (a report consisting of the company's income and expenses). Single-entry accounting is suitable only for sole proprietors.
However, in principle, double-entry accounting is always better, even for sole proprietors, if it is possible and profitable to do so. Double-entry accounting also takes into account the company's assets and liabilities, which are reflected in a report called the Balance Sheet.
Balance Sheet and Income Statement #
The Balance Sheet and the Income Statement are the two most important reports of a company that every entrepreneur should be familiar with and know what they consist of. In short, the Balance Sheet shows the company's assets, liabilities, and equity at a specific point in time (often the last day of the financial year, e.g., December 31st). The Income Statement, on the other hand, provides information for a specific period (e.g., the entire financial year from January 1st to December 31st) about the company's revenues and expenses, from which the profit (if revenues > expenses) or loss (if expenses > revenues) for the financial year can be calculated.
Balance Sheet: Assets #
The first half of the Balance Sheet, known as Assets, reveals the company's wealth (accounts in the range of 0-2000 represent these accounts). The second half of the Balance Sheet reveals how these assets are financed. The assets on the Balance Sheet can be further divided into two sub-categories:
- Non-Current Assets, which include items such as real estate, equipment, and patents. These are assets that, as the name suggests, are held by the company for the long term.
- Current Assets, which include the company's inventory of goods and supplies, receivables, as well as cash and bank balances. These are short-term assets compared to non-current assets.
Balance Sheet: Equity #
The Liabilities and Equity side of the Balance Sheet reveals how the aforementioned assets of the company are financed. Liabilities are divided into Equity and Debt (or Liabilities). Equity consists of the capital invested in the company (e.g., share capital, invested unrestricted equity fund), revaluations, and accumulated profits from previous and current financial years.
Balance Sheet: Liabilities #
The second half of the Liabilities and Equity side of the Balance Sheet is composed of Debt, or Liabilities. Liabilities consist of financial items borrowed from external sources, such as accounts payable and bank loans. Debt usually entails an obligation to repay, and it may involve paying financial costs such as interest. Debt is typically divided into:
- Long-term debt (repayment due after more than one year), and
- Short-term debt (repayment due within one year).
Income Statement: Revenues #
As mentioned earlier, the income statement provides information about a company's revenues and expenses over a specific period of time. The most common and familiar source of revenue in the income statement is undoubtedly Revenue, which is the aggregated sum of sales proceeds (excluding value-added tax).
Other sources of revenue in the income statement include, for example, Other Operating Income and Financial Income. Other Operating Income encompasses almost all other sales proceeds that do not belong to the company's so-called core business (e.g., profit from selling a car, assuming the company is not a car dealer). Financial Income, on the other hand, includes items such as interest income, investment income, and, for example, late payment interest income from receivables.
Income Statement: Expenses #
The expense items in the income statement can be further categorized into several sections. There are various types of expenses, but the most common ones are:
- Materials and Services
- Personnel Costs
- Depreciation and Impairment
- Other Operating Expenses
- Financial Income and Expenses
- Income Taxes
Expenses can be further broken down into subcategories. In particular, Other Operating Expenses are usually divided into items such as premises, vehicles, marketing expenses, and a few others.