What Is Accounting? All You Should Know

What is accounting?  All you should know – In this article your question on accounting will be answered and help you grow better in your understanding of business accounting. 

Maybe you are smart, but do you know a small business doesn’t make you a finance expert? 

Accounting is important because of the time and money it can save you in the future. Moreover, it doesn’t matter If you love numbers or consider yourself the more creative person. 

Also, entrepreneurs should be aware of the financial health of their businesses and have a good grasp of accounting. 

This article will be a guide for you to ease you into the world of business accounting. By the end, you’ll feel ready to tackle your own business’s accounting. 

READ MORE: Accounting Intern at Basscomm Group Limited

What Is Accounting? 

Accounting involves documenting the financial transactions of a business and encompasses the analysis, summarization, and reporting of these transactions to regulatory authorities and tax authorities.

Moreover, the financial statements used in accounting are the concise summary of financial transactions over an accounting period, summarizing a company’s operations, financial position and cash flows. 

What Is The Purpose of Accounting? 

Accounting is one of the important functions of almost any business. It can be handled by the bookkeeper or an accountant at a small firm or by sizable finance departments with dozens of employees at large companies. 

Moreover, the financial statements summarize a large company’s operations, financial position and cash flows over a particular period and are concise and consolidated reports based on thousands of individual financial transactions. 

However, all professional accounting designations are the culmination of years of study. Also, the rigorous examinations combined with the minimum number of years of practical accounting experience. 

Brief History

The history of accounting has been around almost as long as money itself.  The history dates back to ancient civilizations in Mesopotamia, Egypt and Babylon. 

For example, during the Roman Empire, the government had detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century. 

Furthermore, Luca Pacioli is considered “The Father of Accounting and Bookkeeping” due to his contributions to the development of the profession of accounting. 

Also, an Italian mathematician and friend of Leonardo da Vinci, Pacioli published a book on the double-entry system of bookkeeping in 1494. 

In the year 1880, the modern profession of accounting was fully formed and recognized by the Institute of Chartered Accountants in England and Wales. 

Furthermore, the institute created diverse systems by which accountants practice today.  The formation of the institute occurred in large part due to the Industrial Revolution. Merchants not only needed their records but also searched to avoid bankruptcy. 

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What Are The Different Types of Accounting?

Accounts can be tasked with recording specific transactions or working with specific sets of information. 

Moreover, there are many broad groups that most accountants can be grouped into. 

• Financial Accounting 

Financial Accounting is the process that is used to generate interim and annual financial statements. 

Moreover, the results of the financial transactions that occur during the accounting period are summarized in the balance sheet income statement and cash flow statement. 

The financial statements of most companies are audited yearly by an external CPA firm. 

For some, publicly traded companies are a legal requirement. However, lenders require the results of an external audit annually as part of their debt covenants. Therefore, most companies will have annual audits for one reason or another. 

• Managerial Accounting 

Managerial Accounting uses much of the same data as financial accounting, but it organizes and utilizes information in diverse ways. 

Namely, in managerial accounting, an accountant, an accountant generates monthly or quarterly that a business’s management team can use to make decisions about how the business operates. 

Moreover, it also encompasses other facets of accounting, including budgeting, forecasting and various financial analysis tools.  Essentially, the information that can be useful to management falls under this umbrella. 

• Cost Accounting 

Managerial accounting helps businesses make management decisions, and cost accounting helps businesses make decisions about costing. Moreover, cost accounting considers every cost related to producing a product.  

Also, analysts, managers, business owners and accountants make use of this information to determine what their products should cost. 

In cost accounting, money is cast as an economic factor in production, whereas in financial accounting, money is considered to be a measure of a company’s economic performance. 

• Tax Accounting 

While financial accountants often use one set of rules to report the financial position of a company, tax accountants often use a different set of rules. 

These rules are set at the federal, state or local level based on what return is being filed. 

Moreover, tax accounts balance compliance with reporting rules while also attempting to minimize a company’s tax liability through thoughtful strategic decision-making. 

However, a tax accountant supervises the entire tax process of a company: strategic creation of the organization chart, the operations, the compliance, the reporting and the remittance of liability. 

READ MORE: Introduction to Accounting

Conclusion 

Accounting is the foundation of financial management and reporting. It enables businesses to track, interpret, and communicate their financial data accurately.