Disadvantages of Defined Contribution Pension Plans
Defined contribution plans have come under a lot of criticism because of the various disadvantages that they have. Many of these plans have been viewed as a covert way to absolve the government of any responsibility related to the retirement of its citizens. Given the many other socio-economic factors which are at play, defined contribution […]
Risks Associated with Sponsorship from Sponsored Entity’s Perspective
In the previous article, we have already seen that sponsorship is not really a risk-free activity. We became aware of the various types of risks which are faced by sponsors when they provide monetary assistance to sporting leagues. However, it is important to realize that the risks are not one-sided. Just like, sponsors are exposed […]
How Hedge Funds Makes Money ?
The inner workings of hedge funds are as elusive as their outward appearance. The general public usually does not know how hedge funds generate revenue and how they manage to pay their employees record salaries and pay rent for the prime properties where their offices are located. The general population is unaware of the various […]
Building a Startup Team
When people think about how startup founders invest their time, most of them think about dealing with investors or managing the operations of the firm. Almost, no one imagines that the founder of a startup company spends a considerable amount of their time in building a team. This is because hiring is not considered to […]
Lease Accounting: Right of Use Asset
In the previous couple of articles, we have already seen that sporting franchises prefer to lease out stadiums instead of investing their capital and building them. We also know that these leases need to be accounted for on the balance sheet of the sporting franchise. We learned about the basics of lease accounting. However, it […]
Accounting has been hailed by many as the “language of business”. There are many quotations like “A pen is mightier than the sword but no match for the accountant” by Jonathan Glancey which tell us about the power and importance of accounting.
The text book definition of accounting states that it includes recording, summarizing, reporting and analyzing financial data.
Let us try and understand the components of accounting to understand what it really means:
The primary function of accounting is to make records of all the transactions that the firm enters into.
Recognizing what qualifies as a transaction and making a record of the same is called bookkeeping.
Bookkeeping is narrower in scope than accounting and concerns only the recording part. For the purpose of recording, accountants maintain a set of books. Their procedures are very systematic. Nowadays, computers have been deployed to automatically account for transactions as they happen.
Recording for transactions creates raw data. Pages and pages of raw data are of little use to an organization for decision making. For this reason, accountants classify data into categories. These categories are defined in the chart of accounts. As and when transactions occur, two things happen, firstly an individual record is made and secondly the summary record is updated.
For instance a sale to Mr. X for Rs 100 would appear as:
Management is answerable to the investors about the company’s state of affairs. The owners need to be periodically updated about the operations that are being financed with their money. For this reason, there are periodic reports which are sent to them.
Usually the frequency of these reports is quarterly and there is one annual report which summarizes the performance of all four quarters. Reporting is usually done in the form of financial statements. These financial statements are regulated by government bodies to ensure that there is no misleading financial reporting.
Lastly, accounting entails conducting an analysis of the results. After results have been summarized and reported, meaningful conclusions need to be drawn.
Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common practice to compare profits, cash, sales, assets, etc with each other to analyze the performance of the business.
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An Overview of Contracts and Why They are Important to Business and Society
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