Accounting is the process of recording financial transactions related to a company. The accounting process involves summarizing, analyzing and reporting these transactions to supervisory agencies, regulators and tax collection entities.
The financial statements used in accounting are a concise summary of financial transactions during the accounting period, summarizing the company’s operations, financial status and cash flow.
Accounting
Accounting is one of the key features of almost any business. It can be handled by a bookkeeper or accountant in a small company or by a large financial department of dozens of employees in a large company.
Reports generated by various accounting flows, such as cost accounting and management accounting, are invaluable to help management make informed business decisions.
- Regardless of the size of the business, accounting is a necessary function for decision-making, cost planning and economic performance measurement.
- Bookkeepers can handle basic accounting needs, but certified public officials (CPA) should be used for larger or more advanced accounting tasks.
- The two important types of enterprises are management accounting and cost accounting. Management accounting helps management teams make business decisions, while cost accounting helps business owners decide how much the product should cost.
- Professional accountants follow a set of standards called universally accepted accounting principles (GAAP) when preparing financial statements.
Financial statements summarizing large-scale corporate businesses, financial status and cash flows are concise and consolidated reports based on thousands of personal financial transactions.
As a result, all accounting designations are a combination of years of study and rigorous examinations, combined with a minimum of years of practical accounting experience.
While basic accounting functions can be handled by bookkeepers, senior accounting is often handled by qualified accountants with names such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA).
Also Read: 12 Things About Financial Statements
In Canada, these names are Chartered Accountants (CA), Certified General Accountants (CGA) and Certified Management Accountants (CMA); however, these three will be unified under Chartered Professional Accountants (CPA) in the near future.
The Responsible Career Licensing Alliance (ARPL) was established in August 2019 to respond to a series of national easing adjustment proposals, thus making the CPA even more lenient. ARPL is a coalition of various senior professional groups including engineers, accountants and architects.
Financial accounting is the process used to generate temporary and annual financial statements. The results of all financial transactions that occur during the accounting period are summarized into the balance sheet, profit and loss statement and cash flow statement.
The financial statements of most companies are reviewed annually by external CPA companies. For some people, such as publicly traded companies, auditing is a legal requirement.
However, lenders also usually require the result of an external audit every year as part of their debt covenant. So most companies will conduct annual audits for some reason.
Management accounting uses the same data as financial accounting, but it organizes and uses information in different ways. That is, in management accounting, the accountant reports monthly or quarterly that the company’s management team can be used to make decisions about how the business operates.
Management accounting also includes many other accounting aspects, including budgeting, forecasting and a variety of financial analysis tools. Essentially, any information that may be useful for management falls under this umbrella.
Just as management accounting helps companies make decisions about management, cost accounting helps companies make decisions about costs. Essentially, cost accounting considers all expenses related to the production of the product.
Analysts, managers, business owners and accountants use this information to determine how much their products should cost. In cost accounting, money is regarded as an economic factor in production, while in financial accounting, money is regarded as a measure of the economic performance of a company.
In most cases, accountants use universally accepted accounting principles (GAAP) when preparing financial statements in the United States. GAAP is a set of standards and principles designed to improve the comparability and consistency of financial reporting in the industry.
Its standard is based on dual-input accounting, which inputs each accounting transaction as a debit and credit in two separate general ledger accounts that will be remitted to the balance sheet and profit and loss statement.
To illustrate dual entry accounting, imagine a business sending invoices to one of its clients. Accountants using the dual input method record debits from accounts receivables, which flows to the balance sheet, and credit for sales revenue, which flows to the profit and loss statement.
When a client pays an invoice, the accountant remembers accounts receivable and debit cash. Double input accounting is also called balanced books because all accounting entries are balanced with each other. If the entry is not balanced, the accountant knows that there must be an error in the general ledger.
Read also: Definition, Type, and Importance of Finance
Accounting history is almost as long as money itself. Accounting history can be traced back to ancient civilizations in Mesopotamia, Egypt and Babylon.
During the Roman Empire, for example, the government recorded their financial records in detail. However, modern accounting has existed as a profession since the early 19th century.
Luca Pacioli is considered the “father of accounting and bookkeeping” for his contribution to the accounting development of his career. Pacioli, an Italian mathematician and friend of Leonardo da Vinci, published a book about bookkeeping systems sometime between 1470 and 1517.
By 1880, the modern accounting profession had been fully established and recognized by the Institute of Chartered Accountants in England and Wales. The institute has created many systems of today’s accountant practice.
The formation of the institute was largely due to the industrial revolution. Not only do businessmen need to track their records, but they also try to avoid bankruptcy.
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