Accounting is a broad field that examines the present situation of a company’s financial operations. On the other hand, today’s accountants are far from the classic “numbers person” who prefers a spreadsheet to a strategic business strategy. Accountants’ ideas—and the insights of finance teams in general—inform and shape strategy across the board.
Accountants interact closely with various stakeholders, including executives, investors, boards of directors, human resources, information technology, and sales and marketing teams, and serve as liaisons between their organisations and government, tax, and regulatory bodies.
Fractional CFOs—skilled CFO who serve on a contract or part-time basis—or accounting partners may be used by startups, nonprofits, and small businesses, but the accounting function is critical to success, whether internally or outsourced.
What Is Accounting and How Does It Work?
Accounting is the method of a company’s transactions being recorded and categorised, then summarising, evaluating, and reporting on them. The resulting data, which is presented in the form of a balance sheet, income and cash flow statement, forecasts, and other reports, is used to guide business leaders as they:
- Examine your personnel and payroll options.
- Inventory levels should be balanced or assessed.
- Look for new business opportunities.
- Increase your profit margins.
- Control your cash flow.
- Examine the company’s financial situation.
Lenders, investors, auditors, and, in the case of public firms, investors use the report and other data that accountants create outside of the company.
Important Points to Remember
- Accounting covers a wide range of tasks, including everything from basic accounting to analysing a company’s financial health, estimating revenue, calculating taxes, and guaranteeing legal compliance.
- Accounting is divided into five categories: managerial, cost, project, tax, and financial accounting.
- Generally Accepted Accounting Principles (GAAP) must be followed by public firms in the United States (GAAP)
What Is the Role of an Accountant?
An accountant is responsible for a wide range of financial tasks. The most prevalent is reviewing financial information, assessing accounts, offering insights into the company’s finances, and generating budgets and reports. Small business accountants may also be responsible for bookkeeping, including maintaining the general ledger, paying invoices, handling payroll, and reconciling accounts.
A certified public accountant (CPA) is an accountant who has been granted certification by a national board of accountancy. An applicant must complete sufficient coursework, have real-world experience, and pass a CPA exam to obtain a CPA license. CPAs help businesses optimise earnings by providing legal and tax advice and developing financial plans.
There are many different types of accounting specialities. Managerial, cost, project, tax, and financial accounting are the five basic categories businesses use.
Managerial accounting provides the financial data reporting, analysis, and interpretation that decision-makers use to develop and refine business strategies. Managerial accountants aid planning by analysing cost-volume-profit, advising on organizational structure, and analysing deviations.
Cost accounting is a branch of managerial accounting that examines how much a company spends on labor and supplies to produce its goods. Cost accounting data improves operations, such as inventory valuation, product pricing, and project budgeting.
Tax accounting is concerned with compiling tax returns and making tax payments and is governed by the Internal Revenue Code of the United States. Accountants guarantee that businesses adhere to ever-changing and complex regulations.
Professionals like project managers and accountants use project accounting to integrate important financial responsibilities on a project-by-project basis and report progress and success to the management.
Project accounting informs project managers about the status of direct costs, overhead costs, and any revenues in a project. These data appear in financial reports thanks to project accountants, and project managers use these reports to decide if the project’s cost and work breakdown structure must be adjusted (WBS).
This discipline is concerned with giving information to outside parties interested in the company’s operations. A financial accountant often prepares balance sheets, income statements, and cash flow statements to assist investors in understanding the firm’s performance or persuade a bank to lend money to the company.
Bookkeeping vs Accounting
Although the phrases “accounting” and “bookkeeping” are commonly used indiscriminately, bookkeeping is a subset of accounting. Maintaining regular accounting records in the respective accounts, or ledgers, is what bookkeeping entails. The company’s general ledger is a master accounting document, holding a complete record of the company’s activities, which eventually reflects these records.
Accounting entails a lot more than just bookkeeping, and it takes care of advanced components like summarizing data, performing analysis, financial communication, tax preparation and legal compliance. A senior accountant in a company, for example, would oversee the general ledger, prepare financial statements, and collaborate with external auditors.
What is the Process of Accounting?
Accounting is a function that every firm needs. Entrepreneurs must make a significant decision about when to engage an in-house accountant. A single person can do all accounting duties for small organisations while also serving as the CFO. Hiring an independent accountant may be a better option, especially for tax purposes. Many small firms utilise software to keep track of their income and expenses, which they then send to an outsourced accountant to analyse.
Accounting functions include recording, categorising, analysing, and reporting financial operations, regardless of whether the organisation uses outside accounting partners or in-house workers. Internally oriented reports assist managers in allocating finances and making business choices such as product pricing. For compliance, other reports are used.
Accounting had existed from the dawn of time when ancient civilisations began selling products. In Egypt and Mesopotamia, the earliest evidence of accounting may be found on clay tablets going back to 3,300 BCE.
Medieval Europe gave birth to some of today’s accounting concepts. In 1458, merchant Benedetto Cotrugli was said to have invented the debit/credit accounting method. Luca Bartolomeo Pacioli, an Italian mathematician and Franciscan monk, is often regarded as the father of accounting and bookkeeping. In his 1494 book Summa de Arithmetica, Geometria, Proportioni et Proportionalita—”The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality,” which has affected the teaching and practice of accounting to this day—he defined double-entry bookkeeping.
Accountants record transactions using the double-entry bookkeeping system. Each transaction is documented as a journal entry, including credit to one account and a debit to another, and these entries must be counterbalanced. This system ensures that each transaction is accurately documented and that the five key account types—revenue, expenses, assets, liabilities, and equity—all balance.
Here’s an example of double-entry bookkeeping in accounting: A customer receives an invoice from a company. The accountant records a debit to accounts receivable using the double-entry approach. The sales revenue account receives the balancing credit.
The accountant credits the accounts receivable account and debits the cash report when the customer pays the invoice.
Why Is Accounting So Important in Your Company?
Accounting helps with a variety of important company responsibilities. At its most basic level, it allows a company to keep track of revenue, expenses, assets, liabilities, and shareholder equity and monitor cash flow and determine whether consumers have paid. The company has paid its obligations.
Accounting gives companies with the information that can help them plan for the future. Managers can, for example, utilise inventory accounting procedures to determine whether the cost of producing a product has grown and, if so, adjust the pricing or change suppliers. They can use sales data to help them decide what new things to offer and which customers to prioritise.
Accountants also assist their clients in obtaining money and locating investors. Whether they’re lending to tiny enterprises or giant corporations, most lenders want proof that the company is profitable. Investors also want to know what kind of return they may expect from their investments.
Finally, accounting aids in tax preparation and compliance. Public corporations must provide accurate financial accounts to disclose income to the IRS, and both private and public companies must provide quarterly tax estimates and a yearly tax return.
If reports are wrong, a corporation could be under-reporting and facing a government audit or fines or over-reporting and spending more than it should. Reporting for loan covenants and U.S. Securities and Exchange Commission (SEC) reporting standards for public corporations are two other compliance challenges.
GAAP? What is it?
The Financial Accounting Standards Board (FASB) publishes the Generally Accepted Accounting Principles (GAAP) in the United States (FASB).
Public corporations must adhere to GAAP in their accounting operations, including when generating financial statements. This aids investors and government officials evaluate and comparing financial statements from various businesses. Although privately held companies are not required to follow GAAP, they frequently do so—particularly if they want to go public in the future.
Areas of Accounting Expertise
Corporate finance is a broad term that incorporates a variety of skills. Larger businesses may employ accountants who specialise in one or more of the following areas:
Ensuring that employees get paid accurately and on time, with the appropriate deductions made from their paychecks, such as taxes and health insurance premiums.
Using historical data value inventories, calculate product selling prices, and create budgets.
Emphasise sending invoices, collecting payments, and paying bills in accounts receivable/accounts payable (AR/AP).
Bookkeeping entails keeping track of transactions and balancing the books.
Keep track of whether customers pay on time and take action if they don’t.
Ensure that the company pays all applicable taxes and uses any available deductions.
The Accounting Cycle’s Steps
There are eight major milestones in the accounting cycle during each accounting period. Most of these processes can be automated with accounting software.
- Identify and categorise transactions: An accountant, for example, might classify sales orders as income.
- Journal Entries: Individual transactions are placed into the appropriate accounts in the journal entries.
- In the general ledger, enter the following journal entries: This work must be completed in compliance with double-entry accounting requirements.
- Prepare an unadjusted trial balance: This report compares debits and credits and covers all of the business’s accounts and balances. The balance of debits and credits must be maintained.
- Adjust accounting entries: An accountant will add entries that haven’t been recorded earlier, such as interest from bank accounts, after an accounting period.
- Make an amended trial balance report: which contains the changes made in the previous step.
- Prepare the following financial statements: Create financial statements, including an income statement, balance sheet, and cash flow statement, using the account balances from Step 6.
- Put the books away: Make sure you’re ready for the upcoming accounting period.
Small Business Accounting vs Enterprise Accounting
While many accounting concepts are the same for small and large businesses, there are a few crucial practical distinctions, the most significant of which is the volume of financial activities. A tiny firm may only process a few hundred transactions every month, whereas a large corporation may process hundreds, if not millions.
Another point of distinction is the way transactions are recorded. Cash basis accounting and accrual basis accounting are the two most common approaches. Cash basis accounting is commonly used by small enterprises since it is simpler. When money moves hands, revenue and expenses are documented using this manner.
Accrual basis accounting is required for businesses that comply with GAAP, such as public enterprises. Accounting on an accrual basis is more complicated, but it provides a more realistic view of its financial status. Accrual accounting records revenue when it is received, and accrual accounting, regardless of when money is exchanged. A corporation that receives payment in advance for a multi-year contract, for example, would record a share of the revenue each year.
Meeting The Needs of an Accounting System
Many typical accounting processes, such as paying bills and running reports, can be automated using an accounting system. Accounting software, especially when coupled with other corporate programs, may reduce human effort, and this automation saves money and eliminates errors for enterprises. The finance department will typically play a vital role in the system’s setup, especially when it comes to bespoke reporting and approval protocols.
The time it takes to maintain and update accounting software varies depending on the system you use. On-premises and cloud-based accounting software are the most common options for businesses, and installing and managing on-premises software and hardware often necessitates IT knowledge.
Accountants offer the expertise necessary to manage daily financial transactions, comply with tax and regulatory standards, and produce insights into the company’s performance, whether your organisation uses in-house resources or employs an independent provider.