Accounting is one of the most important aspects of running a business. It involves tracking and recording all financial transactions and analyzing and reporting that information to financial institutions, regulators, tax collection entities, and oversight agencies. Accounting can also be used to help with future planning, projections for future expenses, profits, sales, and more.
Accounting involves closely tracking and recording all financial information related to a business throughout the year.
- Recording financial transactions: Accountants must record all the financial transactions made on a daily basis, including money that comes in or out. This includes expenses such as rent, utilities, cost of resources to produce goods, as well as income from goods sold. Liabilities like loans and accounts payable should also be recorded.
- Categorizing transactions: There are multiple types of transactions that businesses make on a daily basis. Categorizing these transactions helps you to easily track, locate, and organize all the financial information that is generated. There are five types of accounts under which most transactions are grouped: assets, liabilities, equity, expenses, and revenue.
- Preparing accounting reports: There are three main financial statements or reports that businesses need:
- Income statement: This statement shows the revenue and expenses of a business over a period of time, such as a month or a year. It can give you a sense of how profitable the business has been.
- Balance sheet: This statement shows the business assets, liabilities, and equity at a specific point in time. It can help to determine the financial health of a business.
- Cash flow statement: This statement shows how much cash a business has coming in and going out over a period of time. This is an indicator of whether there is enough cash to cover expenses and any future liabilities.
Types of Accounting
There are different types of accounting based on the information being recorded or analyzed.
- Financial accounting involves generating yearly or periodic financial statements. This includes a summarized balance sheet, income statement, and cash flow statement. This kind of accounting is mainly for generating financial reports for external agencies. Financial accounting is governed by regulations including the Generally Accepted Accounting Principles (GAAP) issued by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS).
- Managerial accounting is used to provide information to internal decision-makers, such as managers and executives. Managerial accounting can be used to track costs, set budgets, and make other business decisions. These statements could be made either on a monthly or quarterly basis.
- Cost accounting is used to track, analyze, and understand the cost of a business activity including the day-to-day operational expenses and the cost of manufacturing a product or providing a service. Cost accounting can be used to determine the profitability of a business activity and to make decisions about pricing and production.
- Tax accounting is for tracking and reporting income and expenses for tax purposes. This ensures businesses are paying the right amount of taxes to the government.