Accounting numbers may be confusing to a lot of people, kind of scary. However, accounting is the language of business and its numbers are relevant to convey financial information. Learning how to find meaning in those numbers is a valuable skill that can make you understand where your business is going.
Measuring business transactions and accounting numbers need a context to be meaningful. A list of numbers doesn't mean much without knowing what you're looking at. When reviewing an accounting report full of numbers, look at the top of the page to figure out what you're looking at. Usually accounting reports have a heading at the top with a report's name to give you a clue at what the numbers mean. It could be a budget report or an accounts payable aging report. Or it could be a depreciation report. If you see no headings, ask about it.
Accounting numbers rarely pop up by themselves in random fashion. They are usually in column format with line descriptions, found in the left-hand side of the report. You can find meaning about the accounting numbers by looking at the description labels, such as account names or vendor names or customer names. The descriptions usually define which accounting numbers you're looking at. Be aware that some numbers are a summary of several other numbers. Pay attention to the columns descriptions, if available. They usually give structure to the numbers. If you see a column named "Administrative," then the numbers on the column relate to administrative area of the company. They could be expense dollars or number of employees under that column. The line descriptions should tell you if you're looking at expenses or something else.
Accounting numbers are usually used for analysis and to answer questions. If you want to know how much rent expenses you have left in your budget, you need to look at accounting numbers. They may give you summary information about how much rent you have spent and how much you have left over. If you inquire, you can get the details that make up the summary numbers. Many accounting systems provide this easily with "drill-down" function where you see a number, you find it odd, you click on it and see right away what the number is made up for. Many sophisticated accounting programs let you do simple queries on certain items and numbers easily and you don't need to work in the accounting department to use those.
Accounting quantifies operations, summarizing information, giving people the ability to see a situation from different perspectives. It's one thing to look at sales numbers for the year, but when you combine that with expenses, you can derive many issues, such as if the expenses are too high for sales or if payroll is unusually low, you can make certain decisions about those areas. Accounting numbers help in making sound decisions based on real data and not just a hunch. By looking at accounting numbers you may easily see old accounts receivable that need to be collected, for example. Without accounting data, you may not know who owes what and for how long. These numbers are practical and valuable to any business.
When looking at accounting numbers and accounting reports, keep these issues in mind:
1.) Dates and times on reports are very important. You need to know if you're looking at year-to-date amounts or monthly figures.
2.) Be aware that accounting numbers may be wrong. If you know that your supplies expense run on average $200 a month and you see $40 as expense in a month, then there is a likelihood of an error.
3.) Accounting numbers reflect how business is going, but it may not give you a complete picture. Accounting cannot quantify employees' morale or company's reputation. So, use accounting numbers as tools to run a business better and look at other information as well.
Sheila Shanker is a certified public accountant based in California. She writes online courses for professionals seeking CPE hours and has also published the book "Guide to Non-profits: From the Trenches." Her articles have been published in national magazines such as the "Journal of Accountancy," "Architecture Business and Economics" and "Veterinary Economics." Shanker holds a Master of Business Administration.