Accounting is a process of systematically summarizing and recording business transactions, and analyzing and verifying the data derived from those transactions. The final product is financial information about an organization’s economic activities that provide answers to questions about how well the organization has used its resources; what it has accomplished with them; and where problems may exist.
Thus, accounting is used as both a tool for reporting on past events (the historical cost principle) as well as predicting the future consequences of current decisions (the accrual basis). It can be considered as part of both management or financial accounting that deals with providing information for forecasting, planning and decision making while control accounting provides information about the results of operations under existing conditions. This will help businesses in making informed decisions.
Accounting definition by AICPA: (Accounting) The process or system of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are (a) affected by an enterprise either directly or indirectly ,and (b) which enter into the determination of financial position or results of operations.
Accounting records. The total equipment used to gather data about products, customers, costs, and other items for the purpose of representing the information graphically .
Explain 10 steps of the Accounting Cycle.
The Accounting Cycle or Accounting Process involves the recording of transaction observance to pre-defined rules and then the summarization of that data into financial statements known as ?”…financial reports”… The information in these reports is used by stakeholders to make rational decisions about allocating scarce resources. It has six steps, which are listed below with an explanation for each one:
- Identify transactions
- Journalize the transactions
- Post the journal entries
- Prepare a trial balance
- Adjust T account balances
- Generate financial statements
An overall flowchart is shown below depicting these steps in sequence:
What are the Main Types of Accounting?
Types of Accounting include Managerial accounting and financial accounting. Managers need the information to run the Trade business, as people who have a full understanding of how their work as part of a production process or service delivery team contributes to the organization’s mission.
Financial accounts are reports that reflect the performance of an entire firm rather than just one department. There are three types of financial statements: Balance sheet, Income statement and Statement of Cash Flows.
1. Financial Accounting.
Financial accounting provides information about an organization for use by external users, such as investors, creditors, regulatory agencies, or tax authorities. The primary users of financial accounting information are the people who decide whether to provide financial support to the organization and those who purchase the products and services that it offers. Many non-financial managers also study these reports because they provide them with a more complete picture of their organizations’ financial health.
Financial accounting helps provide information about an organization’s historical activities, its financial position and results of operations for external users such as investors or creditors. Generally accepted accounting principles (GAAP) are used in order to get a clear picture of how well an organization has done over a period of time by following certain rules and guidelines when recording transactions. These transactions could include monetary exchanges between two or more entities that involve goods or services that will be used at some future date.
What is Financial Statement?
The purposes of financial statements include:
- (a) Communications: To communicate information about an organization’s historical activities, its financial position and results of operations to various external users such as investors, lenders and regulatory agencies;
- (b) Evaluation: To provide the users with insights necessary for evaluation, interpretation and analysis by external agencies;
- (c) Planning: To support strategic decisions in planning future activities and evaluating performance based on budget comparisons over time
2. Managerial Accounting.
Managerial accounting aids the decision-making process within a company. Managerial accountants provide a series of reports that managers use to run their departments or divisions, which allows them to determine whether their operations are reaching desired goals for efficiency and productivity.
3. Cost Accounting
Cost accounting or management accounting is used by managers within a business to make informed decisions about the profitability of their organization. Cost accountants accumulate data concerning all expenses incurred, including fixed costs and overhead; they often prepare short-term (e.g., monthly) reports on operations as well as providing data for use in financial statements, tax returns and strategic planning by upper management.
What is the Difference Between Managerial Accounting and Financial Accounting
Financial accounting provides information about an organization for use by external users such as investors or creditors whereas managerial accounting provides information to help managers improve their departmental processes. Financial statements are prepared according to generally accepted accounting principles so that investors can assess the overall health of a company from one document rather than having to use it.
Forensic accounting, or Forensic Auditing, is the speciality practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. Forensic accountants offer independent evidentiary-based findings to be used in legal processes.
Types of Forensic accounting.
Financial forensic accounting services include litigation support, bankruptcy and restructuring consulting, investment banking, financial due diligence and valuations.
Who can be a Forensic Accountant?
Forensic accountants are either independent consultants or employees in accounting firms who have accumulated significant experience in a related practice area.
5. Government Accounting
Government accounting yields a set of accounting information that is appropriate for the particular needs of a government organization. Government organizations have unique characteristics in addition to the general characteristics common to all organizations, including:
- (a) special-purpose governments such as local and state governments;
- (b) political influence over operations and activities;
- (c) benefits or services that are not marketable or transferable to other entities, which affects how these costs should be reported in financial statements when compared with companies providing similar benefits.
6. Tax Accounting
Tax accounting is defined as the process of compiling, analyzing and reporting financial information about income taxes to the entity’s management.
7. Audit Accounting?
Audit accounting is a field of professional accounting dedicated to the examination and evaluation of financial records and other business transactions, generally from the point of view of providing assurance that assets are safeguarded from loss due to fraud or errors.
What is the process of accounting?
The process of accounting involves the recording, classifying and summarizing of financial transactions. All business activities that involve a financial transaction will have a corresponding entry in either a general ledger account or a sub-ledger account. The chart of accounts is used to classify these accounts into separate categories such as assets, liabilities, income and expenses to name several. These entries are then summarized into an end of period figures via various closing procedures as well as the generation of income statements as well as balance sheets to provide users with pertinent information on their company’s fiscal health.
Recording in Accounting:
Accounting records are referred to as financial statements and consist of a journal, ledger and sub-ledger.
Journal: The journal is made up of original entry bookkeeping transactions recorded in chronological order by date such as cash receipts or invoices. Cash payments would also be included in the journal but they would normally exist under an offsetting credit such as “bank service charges” which reduces the debit account balance and increase the credit account balance for this account category. If there was no pre-existing debit or credit balance then this transaction would create a new one, much like recording your first ever ATM withdrawal does not impact your checking account’s current balance just simply adds the transaction to your record-keeping system.
Classification in Accounting:
Classifying transactions is when an account is used to record a transaction in a separate category for example assuming you have 4 bank accounts in your financial statement system which are Savings, Checking, Business and Personal then every day you receive cash in one of these accounts via a deposit or withdrawal that accounting entry would be classified as “Cash” the end result is the balance sheet accounts remain unchanged but now they exist in separate categories.
The process of summarizing can be broken down into two steps: period ending procedures and finalization.
Summarizing in accounting is when you make transactions from your journal and ledger accounts and consolidate them to reflect on your periodic financial statements. Some businesses use journals entries to record every transaction that occurs within the accounting period while other companies choose to do this once a month or quarter depending on their needs.