What Is Accounting?

What is accounting? It is the language of money, reporting of financial events. It is the act of organizing, keeping, recording, and examining the exchange of money.

It reports the value of an entity. An entity can be a person, business, or organization. The basic accounting equation states; your value is the difference of what you own and owe.

Value = Own - Owe

What an entity owns is called assets. What they owe is called liabilities. Their value is called worth. Therefore, the accounting equation is:

Worth = Assets – Liabilities

To keep people honest in reporting their financial health the Financial Accounting Standards Board (FASB) was formed. Twelve accounting principals were framed for all to follow. Giving guidance on what, when and how to measure financial items. One advantage of the principals is the creation of accrual accounting. Which allows future planning to be counted in the present. With out it, financial planning is difficult.

In summary, accounting is the reporting of worth. The worth of an entity is reported in a Balance Sheet. Profit is reported in an Income Statement. Profit and worth are different. An entity can have zero worth, but still have a profit. When that occurs an entity is making just enough money to cover their liabilities.

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