What is Accounting?
Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business. The primary purpose is to provide stakeholders like oversight agencies, regulators, and tax authorities with detailed financial information. Through financial statements, businesses offer a summary of their financial performance and position over a specific accounting period.
Key Takeaways
- Accounting is critical for decision-making, cost planning, and economic performance measurement regardless of a business’s size.
- Bookkeepers manage basic accounting; however, larger or complex accounting tasks warrant a Certified Public Accountant (CPA).
- Managerial and cost accounting are pivotal for business decisions and product costing, respectively.
- Accountants adhere to Generally Accepted Accounting Principles (GAAP) when preparing financial statements.
- Accounting influences strategic planning, external compliance, fundraising, and operation management.
The Purpose of Accounting
Accounting at any business size is fundamental, often handled by bookkeepers or expansive finance departments. Financial and managerial accounting provide invaluable reports aiding management in making informed business decisions. Detailed financial statements derived from endless individual transactions serve as the backbone for such analyses and compared business insights.
A Brief History of Accounting
Ancient Origins to Modern Profession
Accounting is as old as money itself, invented by ancient civilizations like Mesopotamia, Egypt, and Babylon. Roman Empire records exemplify detailed financial documentation early on. The true evolution into a profession began in the 19th century, with Luca Pacioli, dubbed “The Father of Accounting and Bookkeeping,” bringing prominence through his double-entry bookkeeping book in 1494.
With the Chartered Accountants Institute formation in 1880, modern accounting streamlined, largely prompted by the Industrial Revolution. Protecting finance from bankruptcies became as central as meticulous record-keeping. 2019 marked the formation of the Alliance for Responsible Professional Licensing (ARPL), advocating rigorous qualification processes amidst deregulatory threats.
Diverse Types of Accounting
Financial Accounting
Financial accounting focuses on creating interim and annual financial metrics. The summarized results of transactions reflect in balance sheets, income statements, and cash flow statements, undergoing annual audits for accuracy, particularly legal requirements among publicly-traded companies.
Managerial Accounting
Managerial accounting utilizes similar data but structures it to aid managers in decision-making. Regular reports on various accounting aspects furnish insights for strategic forecasts, budgets, and financial analysis.
Cost Accounting
Considered vital for manufacturing and product pricing, cost accounting evaluates production-related expenditures. Unlike financial counts, it treats costs as intrinsic production factors, aiding management in price setting.
Tax Accounting
Split from financial norms, tax accountants adjust to federal, state, or local tax guidelines aimed at optimizing tax liabilities while ensuring adherence to reporting norms.
Career Opportunities in Accounting
Renowned for ubiquitous influence across professions, advanced accountancy involves roles like Certified Public Accountants (CPAs) or Certified Management Accountants (CMAs). The Canadian merge of several designations into Chartered Professional Accountant (CPA) underscores the industry’s structured adaptation.
Prominent roles include:
- Internal or External Auditors: Ensuring corporate compliance and safeguarding assets.
- Forensic Accountants: Investigating internal and external financial transactions.
- Tax Accountants: Streamlining business tax liabilities and regulatory compliance.
- Managerial Accountants: Illuminating financial facets aiding in operational decisions.
- IT Analysts/Accountants: Managing the systems processing financial records.
- Controllers: Overseeing financial reporting, receivables, and procurement.
With an average U.S. salary exceeding $113,000 annually (May 2023 datum), CPAs are significantly remunerated.
Accounting Standards and Software
Standards
U.S. accountants align with GAAP, favoring transaction neutrality to maintain ledger equilibrium, while IFRS governs outside U.S., aided by international boards. Tax accounting compliance is reported using Internal Revenue Code within the U.S., customizing per jurisdictional regulations globally.
Software Platforms
QuickBooks, Quicken, FreshBooks, Xero lead small business solutions while large entities opt for comprehensive systems like Oracle and NetSuite.
The Accounting Cycle
Transaction intake and cyclic report generation define financial accountants’ methodologies. The ordered steps entail:
- Collecting transaction documents.
- Journal entry postings.
- Unadjusted trial balance preparation.
- Adjusting journal entries for period necessities.
- Crafting the adjusted trial balance.
- Generating comprehensive financial summaries.
Cash and Accrual Accounting Methods
Accrual Method (Preferred for Larger Firms)
Accrual captures transactions when they occur, irrespective of cash flow, necessitating accrual journal entries for consistency.
Cash Method (Ideal for Small Entities)
Deferred until cash exchange, accounting here operates direct on cash receipt principles; simplifying processes considerably.
Detailed Transactions:
- Accrual records both order placement and fulfillment stages, reflected in balanced mysalary entries.
- Cash method logs single entry upon money transfer.
Conclusion: The Pivotal Role of Accounting
Growth and Strategy
Accounting is vital for forecasting, identifying premier products, and recognizing detrimental expenses.
Funding and Investments
Reliable records attract investors and meet compliance for loans, necessary for sustained viability.
Owner Transition and Settlement
Precise valorization aiding business sale or closure roots in accounting documentation compliance.
Payment Management
Sustained vendor relationships rest on accounting-led timely debt management.
Payment Collection
Credit extension tracking predominantly relies on accounting-driven scheduling and records.
Regulatory Compliance
Public companies mandatorily reveal financial summaries per variant accounting roots, ensuring market regulation and avoiding penalties.
Accounting remains fundamentally a linchpin for deliver realistic evaluation enabling business stability, growth, and regulatory adherence.
Related Terms: GAAP, financial statements, managerial accounting, cost accounting, tax accounting.
References
- American Institute of Certified Public Accountants. “CPA Licensure”.
- Gary J. Previts, Peter Walton, and Peter Wolnizer. Global History of Accounting, Financial Reporting and Public Policy: Eurasia, Middle East and Africa, Pages 1-29. Emerald Group Publishing, 2012.
- Jane Gleeson-White. Double Entry: How the Merchants of Venice Created Modern Finance, Pages 28, 47 and 91. W. W. Norton & Company, 2012.
- The Institute of Chartered Accountants in England and Wales. “Timeline: 1853-1880”.
- Alliance for Responsible Professional Licensing. “AICPA, NASBA Help Launch New Coalition to Protect Professional Licensing”.
- U.S. Securities and Exchange Commission. “All About Auditors: What Investors Need to Know”.
- American Institute of Certified Public Accountants. “Frequently Asked Questions FAQs - Become a CPA”.
- Institute of Management Accountants. “CMA Certification”.
- Chartered Professional Accountants Canada. “The CPA Profession”.
- Glassdoor. “CPA Salaries”.
- Financial Accounting Foundation. “About GAAP”.
- International Financial Reporting Standards Foundation. “Who Uses IFRS Standards?”
- Internal Revenue Service. “Tax Code, Regulations, and Official Guidance”.
- U.S. Securities and Exchange Commission. “Financial Reporting Manual”.
