Finance is all about managing money, and accounting is the systematic way of tracking money. Good accounting can make or break fortunes, be it managing household expenses or running a big business. Small wonder an accounting scandal like the Satyam Computers fiasco in 2009 made big news as it affected all stakeholders, including investors. Accounting is the process of recording financial transactions related to a business. In other words, accounting helps a firm record, organize, and process financial information. It includes summarizing, analyzing, and reporting transactions to regulators that oversee these processes.
How does accounting work?
At a basic level, accounting involves accountants and bookkeepers. Though the terms are often used interchangeably, they differ in terms of the tasks performed. Bookkeepers handle the day-to-day job of recording financial transactions, while accountants analyze that data, provide insight, and generate accounting reports. Put simply, accountants can be bookkeepers, but not all bookkeepers are accountants. In fact, the roles complement each other, performing the important function of maintaining the financial hygiene of a business.
We have seen that accounting is of prime importance to any organization. Accounting adds value by preparing and examining the financial records of companies. Management can make wise business decisions thanks to the information provided by various streams of accounting, such as cost and managerial accounting.
Different Types of Accounting
The accounting system evaluates an organization based on various parameters. Read on as we explain some of these methods in detail.
Financial accounting is the process of tracking, recording, and reporting financial transactions by generating financial statements. For context, financial statements are reports that provide information regarding a company’s financial position and cash flow. Accountants specializing in financial accounting advise how a business can become more profitable by tracking all economic activity. They also ensure that internal procedures are followed and all financial transactions appear on relevant financial statements.
Besides, financial accountants need to pay close attention to detail to present the financial status report to regulators. There are two types of financial accounting: cash and accrual accounting. They use double-entry accounting to record financial transactions accurately.
Management accounting, also known as managerial accounting, is a form of accounting used by businesses worldwide. Unlike financial accounting, management accounting provides management with the information necessary to make high-level decisions for the company. Accountants of this type document, monitor, and assist in an organization’s financial planning. However, this information is only for internal stakeholders rather than the public, so they must disclose this information discreetly to concerned parties.
Management accountants analyze and create a budget to meet short- and long-term goals. They analyze past performance to foresee future performance. Three standard management accounting types are strategic, performance, and risk management.
Cost accounting looks closely at the actual cost of doing business. In simple words, cost accounting considers all costs related to the making of a product to determine its selling price. Cost accountants document, present, and review manufacturing costs. They look at both variable and fixed costs that a business incurs, like the cost of materials, labor, maintenance, and production costs. Cost accountants provide management with important information to ensure that the output aligns with the cost of production. Cost accounting is a sub-category of management accounting.
Tax accounting is perhaps the most common type of accounting since the term is quite popular with individuals who need to file their income tax returns every year. Tax accountants focus on tax returns and payments rather than preparing public financial statements. For instance, your accountant can give suggestions on how to save on tax.
In a larger context, tax accountants also help businesses comply with regulatory requirements when filing their tax documents yearly. They also assist companies in planning for future tax returns, such as avoiding certain tax burdens and understanding the implications of specific tax decisions. Usually, larger organizations hire tax accountants to navigate the complexities of filing tax returns.
In the United States, the Internal Revenue Guide governs the issues of accounting tax by laying out guidelines and rules for individuals and firms in preparing tax returns. Generally speaking, tax accounting aims to meet the requirements of local and national tax laws. Tax accounting is critical in tracking funds related to business entities and people.
Why is accounting important?
Many of us pay attention to accounting only when we file our annual income tax returns. Yet, accounting touches our lives in more ways than one. For example, checking credit card balances or points and keeping tabs on pending charges to debit cards are also a form of accounting. Other forms of personal accounting can include setting a monthly budget, tracking spending, and making investments and savings. Long story short, keeping track of your money and planning your financial decisions accordingly is important.
Likewise, accounting is vital in keeping a business up and running. In short, accounting helps businesses keep track of what they own and what they owe, which is crucial for them to make sound investment decisions.
Advantages of accounting
Accounting is more than just number crunching. It has several advantages and dates back thousands of years. Let’s understand some of these advantages and why it is still at the core of all financial activities.
- Physical records: Accounting helps businesses keep a record of all transactions systematically. There’s only so much a human brain can record. But proper accounting ensures that financial transactions are recorded for future reference.
- Complying with law: Whether filing individual tax returns or running a business, there are specific laws to comply with. What’s more, a proper record with documented accounting information is admissible as evidence in a court of law in the event of a legal roadblock.
- Helps management with major decisions: Accounting helps and guides the management to determine the selling price, deduction of cost, and increase in sales, which, in turn, shapes the overall financial situation of a business. Moreover, accounting information helps the management plan future actions.
Accounting enjoys a well-deserved reputation for maintaining the financial health of individuals and businesses. Sadly, corporate accounting has received more than its fair share of flak due to unethical accounting practices that tarnish the image of auditors and companies. But then, it all boils down to the ethics of doing business.
What are the 4 types of accounting?
The four types of accounting are financial accounting, managerial accounting, tax accounting, and auditing. Each serves different purposes and provides information for decision-making, financial reporting, taxation, and ensuring accuracy and compliance.
What are branches of accounting?
The branches of accounting include financial accounting, management accounting, cost accounting, tax accounting, auditing, and forensic accounting. Each branch focuses on different aspects of financial information, management, cost analysis, taxation, and investigation of financial fraud or irregularities.
Why Is Accounting Important for Investors?
Accounting is important for investors because it provides reliable and transparent financial information about companies. It helps investors assess profitability, financial health, and risk. Accurate accounting data enables informed investment decisions and enhances trust and confidence in the market.