What is Accounting?

Before anything else, let us first define what is accounting.

According to the American Institute of Certified Public Accountants (AICPA), "Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof."

Now, that's hard to comprehend at one reading. I'm sure, so many "how's" and so many "what's" are floating in your mind just to understand this definition.   

Allow me to explain what is accounting through the story below.

A booming roasted chicken business

Jane was a college student when she met Paul (not their real names), a mechanic. They instantly fell in love and got married in no time. God blessed them with three beautiful sons. But their finances became tighter than before. So they decided to engage into business, particularly in roasted chicken (which we fondly call “lechon manok”). 

Paul, with his experience on mechanical stuff, personally made the structure for the rotisserie. They bought, marinated, cooked and ate chicken after chicken after chicken until they (including their sons) found the correct combination of the spices that they thought would be the secret to their success in this business.

True enough, people from the neighborhood started buying their “lechon manok” and sooner opened a fastfood to cater the diners. It was not long after that they started opening other stalls in other areas of the city. And opened a few fastfood also. People loved their chicken and were buying them. Even companies order in bulk during occasions. Then they started branching out to the neighboring provinces. 

With their success, the family started to buy stuff to make for comfortable living. 

But despite the fact that sales was growing steadily, they were not generating enough cash to finance their expansion and new lifestyle. They didn’t have any idea if they were making income anymore. The only thing they knew was the amount of cash that is generated everyday. For most of the time, there wasn’t enough left after paying the bills and salaries of the staff. 

They started to suspect that the direct costs might be eating their gross margin. Or maybe they might have been pricing their product wrongly. Or perhaps the warehouse staff are not making truthful inventory of the dressed and marinated chicken. They also began to blame each other for too much spending. 

The cause for failure

Many owners of small business, and I mean Small Medium Enterprises (SMEs), are in fact, like Jane and Paul. Despite having built good businesses, sooner or later they find themselves struggling to stay afloat with their finances. They could not keep track of where their funds went and were going. They could not determine if their business was actually earning and how much.  Worst, they would know that their business is already losing – and losing fast.

A simple consideration

Many entrepreneurs think that in order to succeed in a business, they need to focus only on operating and marketing their products and services. However, they forgot to consider that they also need to make money out of it. And a good way to know if the business is indeed making money is to keep a reliable record of its income and expenses, which can be regularly reviewed to aid in decision making.

This process of keeping financial records is what we call accounting. And this is the reason why businesses need to have a sound accounting system.