Many business executives have a hole in their basic accounting education. Either they forgot what they learned in b-school or never got formal accounting training. A business leader that doesn’t know what they don’t know is in a dangerous position.
Do you trust your accountant and finance manager? A vast majority of them are trustworthy and reliable. However, business history is full of cases where people in charge of the company purse abused their position of trust through accounting manipulation, book-cooking and outright fraud. The essential foundation for financial oversight is an elementary study of financial record keeping and reporting.
Here are the four essential things business executives need to know about accounting:
- Know your history. Luca Pacioli is generally considered the Father of Accounting. Pacioli was born in Tuscany around 1445. He gets most of the credit for creating the system of debits and credits we use today.
- The accounting cycle is circular and predictable. Each accounting period usually flows from transactions to the general journal, and then to the ledger, trial balance and finally the financial statements. There are steps in between but this is the high level picture of the accounting cycle.
- Financial statements are either snapshots or time lapsed accounting images. The balance sheet captures a specific date while the income statement and cash flow statement look at an interval of time like a month, quarter or year.
- Accrual accounting is different from cash basis accounting. The heavy lifting of accrual accounting is typically handled by your accounting people. You need to know that accrual accounting smooths out the lumpy nature of cash transactions and is a generally accepted format for publishing financial statements. It’s harder though so you may have to pay and accountant to do it correctly.
Get smart on accounting. Then you will have the essential tools to understand your company financial record keeping procedures and make informed business decisions from the financial statements. You will be able to have confident conversations with your accounting staff, CPA and tax adviser and be a more financially capable executive.
- How to Clean Up Your Financial Records and Polish Your Business (proborrower.wordpress.com)
- Accounting Principles (egrejeen.wordpress.com)
- How To Interpret Cash Flow Statements (bjconquest.com)