What Is Accounting?
Accounting is the practice of keeping track of a company’s financial activities. Summarizing, analyzing, and reporting these transactions to oversight authorities, regulators, and tax collection authorities are all part of the accounting process. Accounting financial statements are a succinct overview of the financial activities across an accounting period, outlining a company’s operations, financial position, and cash flow.
How Accounting Works
Accounting is one of the most important functions in practically any company. It could be handled by a bookkeeper or accountant in a small business or by big financial departments with dozens of staff in larger corporations. Various accounting reports, such as cost accounting and managerial accounting, are vital in assisting management in making educated company decisions.
Financial statements are brief and consolidated reports that explain a major company’s operations, financial status, and cash flows over a specific time period. They are based on hundreds of individual financial transactions. As a result, all accounting certifications are the result of years of study and difficult exams, as well as a minimum of years of practical accounting experience.
Types of Accounting
The techniques utilized to compile interim and yearly financial statements are referred to as financial accounting. The balance sheet, income statement, and cash flow statement summarize the results of all financial activities that occur during an accounting period. An external CA or CPA firm audits most companies’ financial statements once a year. A public company, for example, is an example of a publicly traded company for which audits are a legal requirement. However, as part of their loan covenants, lenders often need the results of an external audit every year. As a result, most businesses will undergo annual audits for various reasons.
Managerial accounting makes use of a lot of the same information as financial accounting, but it organizes and uses it differently. In managerial accounting, for example, an accountant creates monthly or quarterly reports that a company’s management team can utilize to make operational choices. Many other aspects of accounting, including as budgeting, forecasting, and numerous financial analysis techniques, are included in managerial accounting. Basically, any data that could be beneficial to management belongs under this category.
Cost accounting assists businesses in making costing decisions in the same way that managerial accounting assists firms in making management decisions. Cost accounting, in its most basic form, evaluates all of the costs associated with creating a product. This data is used by analysts, managers, business owners, and accountants to estimate how much their products should cost. Money is viewed as an economic factor in production in cost accounting, but money is viewed as a measure of a company’s economic performance in financial accounting.
Requirements for Accounting
When generating financial statements, accountants typically use generally accepted accounting principles (GAAP), International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS). GAAP, IAS and IFRS are a collection of standards and concepts aimed to improve financial reporting comparability and uniformity across industries. Its accounting requirements are based on double-entry accounting, which requires every accounting transaction to be recorded as both a debit and a credit in two different general ledger accounts that will be rolled up into the balance sheet and income statement.
Example of Double Entry Accounting
To demonstrate double-entry accounting, here is an example of a company sending an invoice amounting to 100 to one of its customers:
When the invoice is sent, the accountant records a debit to accounts receivables, which goes through the balance sheet, and a credit to sales revenue, which flows through the income statement, using the double-entry method.
Accounts receivable (Debit) – 100
Sales revenue (Credit) – (100)
When the customer pays the invoice, the accountant credits accounts receivables and debits cash.
Cash (Debit) – 100
Accounts receivable (Credit) – (100)
Because all of the accounting entries are balanced against each other, therefore, double-entry accounting is also known as balancing the books. The accountant should understand that there must be a mistake in the general ledger if the entries aren’t balanced.