Defining a subject is the key to understanding what the subject is all about. No matter the field of study, a great definition can enhance rapid learning. Knowing what it is all about, how it works, and sometimes knowing the history of the particular subject can help us gain more knowledge and ease learning in that particular field or subject. So let us define accounting:
Accounting is the “language of business”.
Accounting is a system of recording information about a business.
The information that is collected and recorded is primarily in numbers.
This information is then presented to the management and other users of the information to help them make decisions.
An accounting system is used to keep and maintain records for a business.
To account for something means to keep a record of something in your business by using the accounting system.
In other words, accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to the management and various users of the report for informed decision making.
Record keeping is vital for almost any business. Record keeping may be handled by a bookkeeper or accountant.
An accountant or bookkeeper collects and records this information in the accounting system and presents it in specific formats to the management and other users of the financial information for decision making.
Accounting information collected and recorded are finally presented in the form of financial statements which are the key reports of every business.
Bookkeepers are usually involved more in data collection and entry.
Accountants can fulfill the role of bookkeepers too, but they are more often involved in the preparation and presentation of financial statements, and sometimes involved in financial advisory or consultancy.
Accountants use generally accepted accounting principles (GAAP) when preparing financial statements. GAAP is a set of standards and its standards are based on double entry principle, Double entry accounting principle is a method of accounting which enters each expense or revenue in two places on a company’s books of accounts.
COMPONENTS OF ACCOUNTING
Recording
The primary function of accounting is to make records of all the transactions that the firm enters into. Recognizing what qualifies as a transaction and making a record of the same is called bookkeeping.
Summarizing
Accountants classify data into categories, and these categories are defined in the chart of accounts.
Reporting
The Management of a company is answerable to the investors and other stakeholders about the company’s financial state of affairs. The shareholders or owners need to be consistently kept updated about the financial operations of the company. For this reason, reports are sent to them on a regular basis. This could be sent out yearly, half yearly, quarterly or even monthly. These Reports are usually done in the form of financial statements.
Analyzing
Accounting also entails conducting analysis on results. After results have been summarized and reported to the management, meaningful conclusions need to be drawn. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. In this case, items like profits, sales, and cash are compared with each other to analyze how the business has performed in a given period of time.
FINANCIAL ACCOUNTING, MANAGEMENT ACCOUNTING, COST ACCOUNTING
Financial accounting refers to the processes accountants use to generate the annual accounting statements of a firm.
Management accounting uses much of the same processes but utilizes information in different ways. In this case, an accountant generates monthly or quarterly reports that the team can use to make decisions about how the business operates.
Cost accounting helps businesses make decisions about costing. Essentially, it considers all of the costs related to producing a product.
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