Are you afraid of the word “Accounting”? Many hands are raised, and we can hear the usual excuses flowing through our heads. That it entails working with a large amount of numbers, is complex, and has many sub-branches. That makes things even more unclear!
We listened to your concerns and decided to create a helpful blog introducing you to the accounting field in the clearest possible terms. We will delve deeply into the topic, covering everything from the present definition of accounting, its history, and types, to the role accounting, plays in business and the qualifications needed to become an accountant. Can’t handle so much financial information at once? You can save this article as a favorite and return to it whenever you like.
Many people know that accounting is an essential component of any organization, regardless of its size or sector. The company can easily prepare for the future thanks to well-kept accounting accounts that help it both understand where it is at the moment and where it is going. But let’s start with the fundamentals first before moving on to those sophisticated notions.
What is Accounting?
Accounting is the process through which a company gathers, comprehends, and arranges all of its financial data, though not necessarily in that order.
You might think of accounting as a procedure that will help you better understand your company’s financial situation. All that is needed is a vital piece of information that is well arranged, such as business transactions, estimates, and tax information.
It is similar to how mothers manage the family budget by keeping track of the costs depending on the available funds in order to prevent overspending and develop better plans. Not to mention the skill of continually adapting to sudden or unforeseen financial needs for a stronger position in the future.
History
If you believe that accounting is a relatively recent invention of mankind, be ready for a shock. Accounting dates back more than 7,000 years!
Such prehistoric accounting documents have been found in Mesopotamia. Then, civilizations started keeping track of the items they bought and sold. Crops, livestock, and animals were also included in the deals. Egypt and Babylon too have these relics of ancient activity.
In actuality, accounting was even experimented with by the Roman government. Even the building of temples and other structures was documented, along with information about money and land grants.
Basics of Accounting
Modern accounting is a field in which we can use a wide range of resources, including expert assistance. You still need to comprehend the fundamentals of commercial accounting ideas, though.
Imagine a situation where your hired accounting expert or professional hands you all the required paperwork once the job is finished. How will you understand your company’s financial standing if you don’t know what those papers contain? Or make a more wise financial decision? No. The following accounting fundamentals must therefore be thoroughly mastered:
INCOME STATEMENT
It is a financial statement that shows the success of your company. It displays the net profit or loss your business has experienced over a given accounting period. Keep in mind that the income statement will take all of the expenses incurred during that specific reporting period into account.
BANK RECONCILIATION
A bank reconciliation process compares the balance on your most current bank statement to the balance in your entity’s book of accounts. There must be a careful evaluation and correction if there are any discrepancies between the two.
There are several fundamental accounting words you cannot afford to overlook in addition to the accounting as mentioned above fundamentals. To make it easier for you, we have compiled a list of them below.
BALANCE SHEET
A balance sheet is a financial statement that lists your company’s assets, liabilities, and equity at the conclusion of a given period. It simplifies evaluating your company’s financial situation and long-term viability.
CASH FLOW STATEMENT
Another important financial statement that outlines the cash intake and outflow for a predetermined period is the statement of cash flow, sometimes known as the cash flow statement. In order to display an accurate cash situation at the specified time, the statement examines your entity’s financing, operating, and investing activities.
Accounting Types
Financial Accounting
A division of accounting known as financial accounting is responsible for monitoring a company’s financial activities. It is the process of compiling financial reports or statements by documenting, summarising, and reporting your company’s transactions by the accepted standards. Financial accounting, for instance, is used to create the income statement and balance sheet for your organization.
Financial accounting emphasizes previous performance rather than future performance, which is crucial to remember. Financial statements give you a precise view of your company’s performance over a given time frame.
TAX ACCOUNTING
Tax accounting is concerned with everything tax-related, from tax returns to tax planning. This area of accounting is governed by the Internal Revenue Code (IRC), which mandates that businesses and individuals abide with the most recent tax laws.
Accurate tax calculations, tax return preparation and filing, as well as tax planning and strategy development, are all components of tax accounting. It also aids in determining how to legally reduce tax obligations and evaluating the results of tax-related decisions.
COST ACCOUNTING
Cost accounting is a branch of accounting that deals with operational expenses. It is a part of managerial accounting, which is what the fourth point will focus on.
Cost accounting is a method used by businesses internally. Contrary to popular belief, service-based businesses can also profit from this style of accounting in order to improve cost control.
MANAGERIAL ACCOUNTING
Identification, analysis, interpretation, and communication of financial information to the management of a corporation are all topics covered by managerial or management accounting. It covers a variety of topics, including risk management, cost analysis, cost forecasting, and financial analysis.
In contrast to financial accounting, this sort of accounting only has users inside the company. Additionally, managerial accounting practices are exempt from general accounting rules. Furthermore, there are no limitations on how this information can be presented to end users.
GOVERNMENTAL ACCOUNTING
The process of gathering, documenting, categorizing, interpreting, and summarizing the financial transactions of all different types of governmental organizations is known as government accounting. State, county, federal, and municipal governments are represented on the list.
All government entities, as well as those who receive government funds, are answerable to the taxpayers, hence budgets are the fundamental focus of governmental accounting. Additionally, they must follow the intended uses of these allotted resources.
FIDUCIARY ACCOUNTING
Accounting functions performed by a fiduciary or an organization or individual acting on another’s behalf, are referred to as fiduciary accounting. In other words, recording transactions associated with an estate entity or a trust is a part of fiduciary accounting. It also covers the organization’s periodic status reports. This type of accounting includes topics like receivership, estate accounting, and trust accounting.
