What Is Accounting? The Basics Of Accounting (2024)

Accounting is the process of recording, classifying and summarizing financial transactions. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.

Accounting is like a powerful machine where you input raw data (figures) and get processed information (financial statements). The whole point is to give you an idea of what’s working and what’s not working so that you can fix it.

Why Accounting Is Important

Accounting information exposes your company’s financial performance; it tells whether you’re making a profit or just running into losses at the end of the day.

This information is not just available to you, but also to external users such as investors, stakeholders and creditors who would want to be enlightened about your business, to figure out whether it’ll be a good choice to invest in and what they can expect in returns.

Besides playing a key role in providing transparency for stakeholders, accounting also ensures you make informed decisions backed by data.

Accountant vs. CPA vs. Tax Pro

In accounting, you’ll come across certain titles which appear to bear similar duties but actually have unique job descriptions. In this section, we’ll briefly review the roles of accountants vs. CPAs and tax professionals.

An accountant is a professional with a bachelor’s degree who provides financial advice, tax planning and bookkeeping services. They perform various business functions such as the preparation of financial reports, payroll and cash management.

A certified public accountant (CPA) is a type of professional accountant with more training and experience than a typical accountant. Aspiring CPAs are expected to have a bachelor’s degree, more than two years of public accounting work experience, pass all four parts of the CPA exam and meet additional state-specific qualifications if required. In the U.S., licensed CPAs must have earned their designation from the American Institute of Certified Public Accountants (AICPA).

Tax professionals include CPAs, attorneys, accountants, brokers, financial planners and more. Their primary job is to help clients with their taxes so they can avoid paying too much or too little in federal income or state income taxes.

As a general note, CPAs are considered to be more qualified than tax professionals when it comes to preparing taxes on an individual basis as they are trained to analyze business and personal finances to maximize savings and minimize taxes. It’s also worth noting that while all CPAs are accountants, not all accountants are CPAs.

Accounting can be broken down into several categories; each category deals with a specific set of information, or documents particular transactions. In this section, we discuss four of the most common branches of accounting:

Financial Accounting

This is the practice of recording and reporting financial transactions and cash flows. This type of accounting is particularly needed to generate financial reports for the sake of external individuals and government agencies. These financial statements report the performance and financial health of a business. For example, the balance sheet reports assets and liabilities while the income statement reports revenues and expenses. Financial accounting is governed by accounting rules and regulations such as U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

Managerial Accounting

This focuses on the use and interpretation of financial information to make sound business decisions. It’s similar to financial accounting, but this time, it’s reserved for internal use, and financial statements are made more frequently to evaluate and interpret financial performance.

Cost Accounting

This is the process of tracking, analyzing and understanding the costs involved in a specific business activity. This includes all direct and indirect expenses associated with your business’s day-to-day operations. Cost accounting is particularly important because it helps you ensure that you are spending money on things that benefit your business’s bottom line.

Tax Accounting

This is the act of tracking and reporting income and expenses related to your company’s taxes. You don’t want to be in a situation where you have to pay more income tax than is normally required by the Internal Revenue Service (IRS).

So far, we’ve seen the types and benefits of accounting. This leads us to the next question of knowing how to carry out accounting efficiently. There are many ways to manage your business accounting. They include:

Outsource to Professionals

You can outsource your accounting work to outside professionals who specialize in bookkeeping and tax preparation. Outsourcing can offer many advantages because it allows you to take advantage of specialized skill sets that may not be available when hiring someone in-house. It’s also flexible and generally costs less.

Using Accounting Software

Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or bookkeeper. Besides, this frees up time so you can focus on running your business smoothly. Check out our recent piece on the best accounting software for small businesses.

Hiring an In-House Accountant

You can choose to manage your business accounting by hiring an in-house accountant or CPA. This can be a great option if you want to ensure your books are in order, and that your company’s financial information is accurate, but it does come with some drawbacks. For one thing, the cost of hiring someone like this can be a substantial burden on your business’s finances.

There are many ways to do accounting, but there are also certain practices that make it easier to keep track of your finances. Some best practices include:

• Keep your personal finances separate from that of your business to get an accurate view of your company’s financial health. This applies a lot to small businesses just getting started with accounting.
• Pay attention to details. Make sure that all transactions are accounted for and properly totaled to facilitate accurate reporting at year-end.
• Hire an accounting professional if you don’t have the time to learn accounting software. This will save you stress and give you the needed time to focus on other important parts of your business.
• Keep adequate records of all assets, liabilities and cash flows for tax purposes. Pay attention to tax laws and regulations. Stay up to date on current news so you can know what’s happening in the financial world.

Bottom Line

Accounting is popularly regarded as “the language of business” because it doesn’t just help you keep track of your money, but also helps you make informed decisions about your business. To speed up action, you may hire accounting professionals or purchase accounting software to ensure accurate financial audits and reporting.