Since the goal of all businesses is to maximize profits, the management team needs information to help them navigate financial decisions. All businesses produce financial statements that provide different information about the organization’s financial health. That information is used by the senior managers to make important decisions regarding the organization’s future. The three main financial statements that are produced are:

• The Balance Sheet (also called a Statement of Financial Condition or Statement of Financial Position)
• The Income Statement (also called a Profit and Loss Statement, Statement of Operations, or Statement of Earnings)
• The Cash Flow Statement

You will want to be familiar with these documents so that you can read and interpret the information. Then you can apply that information to operating your own division or department.  None of these financial statements can be created without information from your organisation’s accounting or bookkeeping information.

Bookkeeping (Accounting)

Bookkeeping is the act of keeping up with the changes in an organization’s accounts. Every time your organisation performs a transaction of any kind, the accounts (books) change. For example, if you operate a retail establishment and you make a sale, the inventory of that item or items decreases and the amount of your cash increases. Various ledgers and journals are used to track these changes. Those ledgers and journals are then used to create the financial statements listed above.

Accounting has one very fundamental equation:

Total Assets = Total Liabilities + Equity

In either version of the equation, what will happen when a transaction occurs? At least two of the factors will change for any transaction. So, for example, if your equity increases, your assets must have increased or your liabilities must have decreased – or both. Accounting is the process of tracking all of these changes in the financial equation. The accountant or bookkeeper must then be able to record the information and report the information in ways that are helpful for those that are making decisions about the operations and direction of the organization.

Chart of Accounts

The tool used to track the changes described above is the Chart of Accounts. A business has specific accounts within their chart which correspond to the assets and liabilities that the organization has. For example, some accounts in the chart of accounts for a temporary agency might be:

Assets:

• Cash
• Accounts Receivable
• Equipment

Liabilities:

• Salaries
• Benefits
• Advertising
• Accounts Payable

There are usually dozens – if not hundreds – of accounts under both assets and liabilities. It depends on how the organization tracks all of their finances. For example, if you work for a large corporation with multiple departments, you will have more accounts in your Chart of Accounts than if you are a one-man consulting firm.

In conventional accounting, all of the accounts the company uses are grouped together by categories and then are numbered according to a standard format. The conventional numbering system is:

• Assets 101–199
• Liabilities 200–299
• Equity 300–399
• Revenue 400–499
• Expenses 500–599

Some organisations might use 600s for expenses. An organisation can also add account identifiers to further subdivide an account. For example, you could have an expense account 501 for “utilities” and add identifiers for each utility so that it might look like this:

• 501001 – Gas
• 501002 – Power
• 501003 – Water
• 501004 – Waste Disposal

An organisation with multiple departments that also budgets and tracks expenses by departments could use sub-identifiers to denote an expense for each department. So, for example, perhaps all utilities for the organisation start with a 501, then all the Marketing department utility expenses add a sub-identifier of 001, followed by another sub-identifier to denote the actual expense. So, let’s imagine you’re looking at all the charges for waste disposal across multiple locations. It could look like this:

• Marketing: 501004-001
• IT: 501004-002
• Training: 501004-003

Another way of dividing the chart of accounts is to have the first part of the account number identify the source of the fund that is used to pay for the expense or the destination fund of where the revenue will be going. You see this when an organization has regulations that limit or define how revenue needs to be used. For example, if your organisation has received a government grant, you may have to use that grant only for specific activities. You can use your chart of accounts to help you track the expenses you use that grant money for, which will make your life easier if you have to demonstrate your use of the grant funds.