Whether you are doing front office works or back office works, at the end of the day, as a banker you have to deal with the accounting records and financial statements. So it is necessary for all bankers irrespective of their educational background to have knowledge about accounting basics. And they also need to improve their accounting skills.
This article is for those bankers who try to understand what is accounting all about. This post gives an overview on accountancy and accounting basics for a non accountant.
Accounting – A universal language of business:
Accounting is an art of recording all transactions related to a business; Then summarizing and analysing for interpretation of business performance; At last reporting them to the stake holders/statutory authorities for clear understanding about the business.
In short it is nothing but a language of business to communicate its financials with humans. Since business is a separate entity it must communicate with its owner(s) to make them know about its position at a particular point of time.
Accounting is the communication bridge between the business and it’s owner(s). For our effective communication we need letters, words and grammar or set of rules to make a meaningful sentence. Same way accounting is a language of business which has some set of standards, principles and concepts to make a meaning information from the financial data of the business.
Why accounting is needed?
To know about importance of accounting just imagine a world without any means of communication. Yes, I agree it was there before 10,000 years ago; But do you know what it costs the human beings?
Due to improper record keeping and communication, modern humans lost about 97% of their history. More over achievements of our man kind was almost started after the development of proper verbal and written communication. This development in communication had started during the past 6000 years. Now think how much we would have achieved during 1,94,000 years if we were improved our means of communication well before.
So accounting is a fundamental for any type and volume of business. Human memory cannot remember all the transactions of a business. In this fast moving world, there are billions of billions transactions has been recorded every day. Those transactions are then developed as financial statements. The management, regulators and investors use this financial statements to know about their business.
So the main purpose of accounting/accountancy is to give fair and accurate financial position of the business activity. Then the management and investors use them to make better decisions.
Importance of Accountancy:
- Record keeping / Book Keeping helps to compare a business with its past performance and with competitors.
- Helps us to know about the financial position of the firm/organisation.
- Analysing the financial data for taking better economic decision and policy.
- Helps us to deal with queries from statutory authority and act as an evidence if needed.
Accounting vs Book Keeping:
Many people use the terms Book keeping and Accounting in a same meaning. But the fact is, accounting means much more than book-keeping. While book-keeping is just recording of transaction in a systematic manner. Accounting is a much more broader term it includes recording, analysing and reporting the financial data. Therefore book-keeping forms a part of the accounting. It does not give financial position of the organisation.
The process of accounting includes the following
- Identification of transaction from source documents, like purchase orders, loan agreements, invoices, etc.
- Record the transaction as a journal
- Post them in the ledger
- Creating trail balance during the end of the period.
- Preparation of financial statements such as Profit and Loss Statement, Balance Sheet, Statement of Cash flows
Different Types of Accounting.
There are several types of accounting ranging from auditing to preparation of tax returns. They comprises manual or computerised records of financial transactions. Each of the following branches of accountancy has its own practical importance.
- Financial Accounting
- Cost Accounting
- Management Accounting
- Inventory Accounting
- Inflation Accounting
- Forensic Accounting
- Tax Accounting
That’s all for the accounting basics; I have provided the basic introduction to accountancy for non accountants. As a banker we must fluently speak, write and understand this universal language of business. Never worry about your educational background, accounting skills are easily developed with practice and consistent efforts. Your self-determined mind to study regularly is sufficient to develop the accounting skills.
If you want to do self-study then you definitely need a book. To prepare for the JAIIB exam and to improve your accountancy knowledge, buy the book Accounting and Finance for Bankers