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Wednesday, February 29, 2012

Accounting



If you are looking for someone to blame for all the confusion involved in accounting, you might want to blame Luca Pacioli. He was a Franciscan monk. Way back in 1494, old Luca developed the double entry system of accounting that is driving us all nuts today.

Pacioli’s system is called the “Method of Venice.” Basically, it involves a system for recording transactions within an entity. The whole idea is like one of those scientific laws of inertia that say for every action there must be an equal and opposite reaction. In the case of accounting, some entries will have several entries to balance it out.

Anyway, the whole idea behind accounting is to keep a scorecard for the business. Some people refer to accounting as “The Language of Business.” This is because what happens in a business can often be expressed in terms of numbers. When certain key indicators go up in a business, the business is seen as improving. When those indicators go down, the business is seen as declining.

In theory, accounting makes it possible to compare different companies to one another. Sort of an apples to apples comparison.

The idea behind financial statements issued by companies is so that people outside the company can have some basic idea of where the company stands financially speaking. These statements, which are audited by outside professionals, do not contain information that is used in running the business on a day-to-day basis.

Please note that this blog will not give you the basic skills to be an accountant. I will attempt, however, to explain a few financial terms so that you will be better able to understand things you read or hear from other sources. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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