Definition: Accounting is defined as the entire process of creating, maintaining, and distributing records of transactions in conjunction with an organization, such as a financial institution. Accounting is a required part of any type of business. It is one of the core components for any work that involves tracking and managing a set number of financial assets to support the organization.
Accounting is the study of financial records that track your financial activities over time. Accounting can help you figure out how you are doing financially, and if there are any holes in your financial statements.
Accounting can also include analyzing assets and liabilities, income statement analysis, capital structure analysis, financial statement analysis, governmental regulations, and accounting conventions and guidelines.
Business accounting systems are designed for consistency and efficiency of operations. As such, they support the highest level of accuracy and efficiency possible given a given budget. The role and function of accounting are sometimes confused with management accounting, which typically relates to undertaking the task of determining whether or not an organization meets its financial reporting obligations.
Traditional accounting methods are based on cash flow and income statements. Cashflow is what’s leftover after all costs of goods sold, taxes, interest on debt, rent payments, dividends, and so on are budgeted for the year. An income statement shows what your company made in profits from sales, inventory, and other production activities.
Accounting is one of the important data activities conducted in the company. The work of an accountant is to organize, analyze and report information from any source. The goal is to help prevent or reduce errors while producing financial reports or financial reports to internal departments/agencies of the company such as management or financial planning.
Types of Accounting
There are 7 different types of accounting depending on who’s doing the accounting:
- Financial accounting is how accounts are kept and managed.
- Management accounting is when you calculate a company’s profit and loss in real-time.
- Governmental accounting uses the revenues and expenses from one specific government agency to compare and analyze how another agency is doing.
- Tax accounting requires both the level of detail and analysis of corporate income taxes as well as individual tax returns.
- Forensic accounting uses statistical analysis of data collected from audited financial statements.
- Project accounting uses estimates from the specification development stage to complete a product or service launch or upgrade to the current requirements.
- Social accounting involves tracking the activities within a company based on demographics such as gender or age
Accounting is immensely important to a business because it provides an accurate reflection of almost every financial decision a business makes. Its primary purpose is to ensure that money is flowing into the right hands at the right time. Simply put, accounting helps define your company’s financial health by giving you a handle to leverage your company’s resources responsibly and systematically.
The objectives of accounting are:
- To know what should be recorded on paper and how it should be recorded on paper. Whether it be balance sheet, profit/loss statements, or cash flow statement all need to be looked at and discussed so that no confusion can arise later on when discussing changes with management. Accounting can be used by both an individual and an organization to manage records and keep track of all transactions happening within their business.
- To boost transparency, increase efficiency, facilitate compliance and encourage collaboration. These objectives are achieved in the most effective environments through how accounts are organized and reported on the various areas of business including staffing, professional services, and customer care.
- Financial statement analysis, evaluating information in the financial statements and determining how well the financial information is presented or processed. Preparing a financial statement is a critical step in producing a well-rounded and complete report.
- An accountant tracks costs and revenue and then helps executives decide how best to allocate their available resources.
- As part of accounting activity, the business or its employees develop and maintain working files containing data, which are called information systems in accounts. The data includes information such as income statements, statements of cash flows, balance sheets, forecasts, and profit and loss statements.
- Each accounting function is primarily concerned with supporting a particular business objective, which is usually the cash management performance of an organization.
- Positioning refers to the good or service that you provide in the market. A good name, a good logo, an attractive online copy, and efficient marketing techniques are all part of positioning. Any business whether public or private needs to make an effort to gain a favorable position in the marketplace so a customer will be willing to purchase certain goods or services from you. Positioning requires a long-range perspective on the economy and so most accounting firms will look at economic conditions in other countries to determine their clients’ best offers.
- The core business is to keep the books following the law and internal company policies. The basic concept of accounting is to gather and report information. But some rules and regulations must be followed by each company to meet the intents and purposes of the regulations. An important part of the core routine involves preparing financial statements (balance sheet, statement of cash flows, income statement, etc.) for individual companies. These financial statements show what a company is doing with its resources and income.
- Accounting is the reporting of income and expense where corporation records are maintained, and it involves all kinds of statistical tabulation, and analysis as well as budgeting activities. The purpose of such activities is to control fraud, assess the financial position, estimate resources required to meet financial obligations, and manage cash flow. All these activities are conducted based on carefully selected rules and procedures.