Anza Money: Crash Course

accAll economic activity moves based on information. The economic activity itself can be very diverse and can be comprised of exchanges for goods and services. To simplify counting of the diverse economic objects societies introduced money. Money serves as a universal media of exchange, a unit of account, and a store value of goods and services. Accountancy is the process of communicating financial information about business to people. This communication takes place in the form of financial statements that express economic resources in terms of money. The principles of accountancy consist of three practical arts: Accounting, Bookkeeping, and Auditing.

Bookkeeping is the recording of financial transactions. Transactions may include sales, purchases, income, receipts and payments. Bookkeeping should not be confused with accounting, because accounting adds summaries and interpretations of financial transactions and events. Generally speaking, accounting serves as the language of business. Auditing is concerned with the verification of financial statements.

Auditors present their findings as an opinion about the statement’s validity and reliability. The task of auditing is to enhance confidence in financial statements for the intended users. Financial audits are typically performed by professional accountants who specialize in this type of practice.

A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. Historically, transactions involved the direct exchange of goods and services called barter. In the modern world, the financial transactions are valued in so-called Fiat Money. The term derives from the Latin fiat, meaning "let it be done" or "it shall be [money]", as such money is established by government decree. Currency refers to a generally accepted medium of exchange. Money can be expressed in units of different currencies, however, the exchange rates between currencies is changing over time under the influence of market forces.

Keeping financial books in order helps business managers remain informed about the current financial state of the business. It is also necessary for accountants who are hired to summarize financial statements and recommendations. The modern style of bookkeeping is increasingly reliant on electronic records. Software applications help to create consistent recordings of financial transactions and automate many accounting practices such as the generation of financial statements.

There are two basic accounting methods that shape your bookkeeping practice: cash-basis and accrual accounting. In cash-basis accounting a transaction record is created when money (cash) changes hands. In accrual accounting a record is created on a completed transaction even if cash does not change hands. In common language cash refers to money in the physical form of currency, such as banknotes i.e., - something that can be immediately used as a form of payment. Modern cash is being increasingly used in electronic form - it exists as a digital record kept by banking institutions. Banks are responsible for making sure that electronic records are as liquid as old fashioned coins and banknotes. The electronic form of money makes it very easy to do financial transactions.

Every business (including household management) has three key financial parts that must be kept in balance: assets, liabilities, and equity. Assets include everything the company owns such as cash, inventory, buildings, equipment, and vehicles.

Assets can be tangible or intangible, but they are characterized by values that can be converted to cash. How quickly this type of conversion can take place is defined by the asset’s liquidity (from the word “liquidate”). Cash is absolutely liquid by definition. Liability is an obligation of a business which is created by past transactions or events.

Liabilities can be current (expected to be liquidated within one year time) or long-term (longer than a year), but eventually they need to be paid off. This is why liabilities work against assets. In personal finance Net Worth (also called sometimes Net Assets or Wealth) is defined as total assets minus total liabilities.

Our daily economic activity is a chain of transactions. Sometimes we make transactions without even realizing it. Somebody can also make a transaction on our behalf. If we do not keep a well-structured book of the transactions, there is no way of knowing how the money is flowing and what our past, current, and future net worth amounts to. In other words, - there is no way that we can optimize and plan our business and finances. Here comes a very important aspect of financial management: it is temporal in nature! The money is constantly moving in and out of our possession, we eliminate old liabilities and create new ones, and we acquire and liquidate assets. To control this dynamic nature of the financial management it is helpful to Budget. Budgets can be used both as a tool for financial planning and as a report. Budgets are calculated over a given interval of time with known start and finish dates. This helps to get a snapshot of the constantly updating flow of money.

They say that money doesn’t smell. This might be true or not, but people tend to treat money differently depending on where the money is going to and coming from. For example, our income often feels less than it should be, whereas the liabilities (our obligations) look disproportionately burdensome. Jokes aside, it is very convenient to group transactions according to their function or category. Then, if we look at the list of grouped and chronologically sorted transactions (called ledger pages), we can analyze the incoming (credit) and outgoing (debit) flows of money. Banks find it useful to formalize some groups of transactions and call them accounts. Accounts may have names, identification numbers, and functional attributes, and they often serve as an address where the money shall be sent to or received from in a transaction. In personal finances and small business accounting, the formal addressing of accounts is not as important as their functional grouping. For example, one can have a cash account, a credit account, a mortgage account, and a stock trading account, to name a few.

The size of the money under management, intensity and diversity of the transactions defines how many accounts you may want or need to have. Accounts can be grouped by categories and split into sub-accounts. There exist several conventions regarding most frequently used account types and categories, but there is no such setup that would fit and satisfy all financial managers. The listing of all accounts is called a Chart of Accounts.

Financial transactions can be simple, but they can also be complex. An example of a simple transaction is buying a sandwich in a tax-free state. An example of a more complex transaction is paying for a hotel stay where you spent several nights at different rates and ordered movies and food. It is often important to split transactions, so that the different parts of the transaction can be accounted for in different categories.

As we mentioned, the outcome of bookkeeping activity is in generating financial statements. A financial statement (or financial report) helps to summarize information about the state of business or personal finances.