What
is 'Accounting'
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
oversight agencies and tax collection entities. Accounting is one of the key
functions for almost any business; it may be handled by a bookkeeper and
accountant at small firms or by sizable finance departments with dozens of
employee’s at large companies.
Breaking
Down 'Accounting'
The reports generated by various streams of
accounting, such as cost accounting and management accounting, are invaluable
in helping management make informed business decisions. While basic accounting
functions can be handled by a bookkeeper, advanced accounting is typically
handled by qualified accountants who possess designations such as Certified
Public Accountant (CPA) in the United States, or Chartered Accountant (CA),
Certified General Accountant (CGA) or Certified Management Accountant (CMA) in
Canada.
Generally
Accepted Accounting Principles
In most cases, accountants use generally
accepted accounting principles (GAAP) when preparing financial statements. GAAP
is a set of standards related to balance sheet identification, outstanding
share measurements, and other accounting issues, and its standards are based on
double-entry accounting, a method which enters each expense or incoming revenue
in two places on a company's balance sheet.
Creating
Financial Statements
The financial statements that summarize a
large company's operations, financial position and cash flows over a particular
period are concise statements based on thousands of financial transactions. As
a result, all accounting designations are the culmination of years of study and
rigorous examinations combined with a minimum number of years of practical
accounting experience.
Example
of Double Entry Accounting
To illustrate double-entry accounting, imagine
a business issue an invoice to one of its clients. An accountant using the
double-entry method enters a credit under the accounts receivables column and a
debit under the balance sheet's revenue column. When the client pays the invoice,
the accountant debits accounts receivables and credits revenue. Double-entry
accounting is also called balancing the books, as all of the accounting entries
are balanced against each other. If the entries aren't balanced, the accountant
knows there must be a mistake somewhere in the ledger.
Financial
Accounting versus Management 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. Namely, in management accounting, an accountant generates
monthly or quarterly reports that a business's management team can use to make
decisions about how the business operates.
Financial
Accounting versus Cost Accounting
Just as management accounting helps businesses
make decisions about management, cost accounting helps businesses make
decisions about costing. Essentially, cost accounting considers all of the
costs related to producing a product. Analysts, managers, business owners and
accountants use 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.
