Basic Accounting Principles

As an example, a company's accountants periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss that's called an income statement. These statements include elements such as accounts receivable (what's owed to the company) and accounts payable (what the company owes).

In what's called double-entry bookkeeping, the liabilities are also summarized. Obviously, a company wants to show a higher amount of assets to offset the liabilities and show a profit. The management of these two elements is the essence of accounting.

The owners of the company, which can be individual owners or millions of shareholders are most concerned with the summaries of these transactions, contained in the financial statement. The financial statement summarizes a company's assets. The financial statement also records what the sources of the assets were.

Accounting has been defined as, by Professor of Accounting at the University of Michigan William A Paton as having one basic function: "facilitating the administration of economic activity. This function has two closely related phases: 1) measuring and arraying economic data; and 2) communicating the results of this process to interested parties."

Much of accounting though, is also concerned with basic bookkeeping. This is the process that records every transaction; every bill paid, every dime owed, every dollar and cent accumulated and spent.

There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be chaos!

These statements include elements such as accounts receivable (what's owed to the company) and accounts payable (what the company owes). The financial statement summarizes a company's assets. The management of these two elements is the essence of accounting.