What Is Accounting?
Accounting is how finances are tracked by an individual or organization, such as a small business.
As an individual, you may use an accountant only for submitting your taxes, which is handled by certified public accountants (CPAs), who must pass an exam to prove their mastery of accounting.
Business accounting is the process of collecting and analyzing financial information for a company. It can be done by an individual, business or accounting team. The information you gather helps you understand the company’s business activity and create financial reports.
For businesses, tax collectors, regulators and other oversight agencies want to see thorough and proper accounting records. If your business ever seeks investors or other shareholders, these agencies will review your accounting paperwork.
Why Is Accounting Important For Your Business?
Business accounting is important for a number of reasons. As a business owner, you need to understand the types of assets, inventory and liabilities your business has. This is what is going to help you continue to grow your business and secure investors.
Here are the biggest benefits of small business accounting:
- Evaluating business performance: Financial statements help you understand how your business is doing. They can help you see areas where your business is performing well, as well as the things you need to work on. This information is crucial if you hope to bring on investors.
- Creating financial projections: Understanding your business’s financial data helps you make financial projections and make smarter decisions with your money.
- Filing annual tax returns: Staying on top of your business accounting will make things much easier come tax season. You’ll understand how much you owe on your quarterly and annual tax statements.
What Do Accountants Do?
The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” Accountants log a business’s accounts payable, accounts receivable and other financial transactions, typically using accounting software.
In the United States, most accountants abide by the generally accepted accounting principles (GAAP) to present a company’s financial information to those outside the company in a format that everyone can understand. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.
What Are The Different Types Of Accounting?
There are tax accountants, financial accountants, public accountants, government accountants and others. Forensic accountants are employed by regulators and law enforcement to help track illegal activity. Diving even further, crypto accountants deal with cryptocurrency assets.
Here’s a breakdown of the main types of accounting.
- Financial accounting: This type of accounting is accomplished with investors in mind. It is used to assess the financial health of a business and helps management get an accurate idea of a business’s finances. This type of accounting is essential for companies to be transparent about their financial health.
- Managerial accounting: This type of accounting is used to generate financial statements for companies, including product costs, cash flow reports, profit and loss statements, and business acquisition reports. This type of accounting is essential for business leaders, as it provides accurate financial data and can help companies make decisions about their money.
- Tax accounting: Tax accounting focuses on how your business works with the IRS. Accountants can help you understand your financial picture when filing your yearly or quarterly taxes. This is an essential service that all small businesses should utilize.
- Forensic accounting: Forensic accounting involves auditing and accounting practices. This type of accounting is frequently used by banks, attorneys and businesses to examine financial transactions. Forensic accountants are often used when fraud or embezzlement is suspected.
- Cost accounting: Cost accounting examines the actual cost of doing business. This type of accounting is usually used for manufacturing and service-based businesses; it looks at the fixed and variable costs a business incurs.
What Is An Accounting Cycle?
An accounting cycle is the process your company has in place for recording and analyzing the various accounting-related events within your company. It’s important to establish effective bookkeeping and accounting practices in order to manage the financial health of your company.
There are eight main steps in an effective accounting cycle:
- Identifying transactions: This is the basic step of establishing accurate and correct record keeping practices. Accounting software and POS systems can often assist with this.
- Recording transactions: Much like step one, recording can be accomplished with cloud-based software systems. The key is for every transaction your business engages in to be recorded somewhere.
- Posting transactions: When a transaction is recorded, it should be posted to a general ledger, which holds the total transactions of the entire business.
- Listing unadjusted trial balance: This is the review of your company’s finances at the end of the accounting period, which could be quarterly, monthly or on another predetermined basis. Trial balances are established for each account within your business at the end of each period.
- Creating worksheets: These sheets identify where adjustments need to be made to each balance.
- Adjusting journal entries: Any necessary adjustments may be recorded as their own journal entries.
- Generating financial statements: Most businesses need an income statement, balance sheet and cash flow statement.
- Closing the books: The accountant wraps up the cycle with a closing entry, which resets the temporary account balances on the general ledger and serves as an overview of the given time period for future analysis.
Where can I find more information?
Author: Matt D’Angelo
Article Title: How To Define Accounting For Businesses
Publisher: Business News Daily