What is Accounting & Book Keeping

What is Accounting & Book Keeping

Accounting is a process designed to capture the economic impact of everyday transactions. Each day, many events and activities occur in an entity, these events and activities are in the normal course of business; however, each of these events may or may not have an economic impact. Events or activities that have an effect on the accounting equation are accounting events. 

What is accounting?

Accounting is the process of transforming the financial information associated with economic activity into usable financial information. Accounting is the art of recording, summarizing, reporting, and analyzing financial transactions. An accounting system can be a simple, utilitarian check register, or, as with modern automated enterprise resource planning systems, it can be a complete record of all the activities of a business, providing details of every aspect of the business, allowing the analysis of business trends, and providing insight into future prospects.

The American Institute of Certified Public Accountants (AICPA)

Accountancy is "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof."

The outcome of the accounting process is a group of financial statements that reflect an organization's financial position, liquidity, and profitability. Periodically, financial statements are prepared to reveal the financial position and the results of operations. These financial statements are the output of the accounting process and become an input into the analysis and decision-making activities of business owners, investors, managers, creditors, and government regulators.

These financial statements or reports are shared with the stakeholders (interested parties) who analyze, interpret, and use this accounting information for their own purposes.  This information helps the users with their analysis and decision making for various objectives like investment or understanding and improving the current business. Automated accounting is an information system that provides reports to stakeholders about the economic activities and conditions of a business.

The etymology of Word Accountant:

The word "Accountant" is derived from the French word Compter, which took its origin from the Latin word Computer. The word was formerly written in English as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form as “Accountant”

What is the role of accounting in business?

As discussed earlier, accounting provides information for managers to use in operating the business effectively and efficiently. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business. Accounting is generally referred to as the “language of business.” This is because accounting is the means by which business information is communicated to the stakeholders.

For example, accounting reports summarizing the profitability of a new product help management decide whether to continue selling the product. Likewise, financial analysts use accounting reports in deciding whether to recommend the purchase of the Company’s stock. Banks use accounting reports in determining the amount of credit to extend to the company and suppliers on the other hand use accounting reports in deciding whether to offer credit to the company for purchases of supplies and raw materials. Governments and other statutory bodies use accounting reports to calculate and assess taxes appropriately.

Role of Accounting Department:

The accounting job is typically done by the Accounting Department, led by an accounting manager, controller, comptroller, or similar title. These folks record all the transactions that occur as the company does its business and then prepare reports that help the company management, and outside constituencies understand the financial impact of those transactions.

The accountants maintain the accounting software, process all the documentation pertaining to transactions that have occurred and record them into the company's general ledger. From all these transaction records the accountants are able to prepare a variety of reports. Some are for people outside the company, like the government, bankers, investors, and stockholders and others are the reports that are important for running the company efficiently. Accountants prepare financial reports that managers use to understand their company’s financial past and make decisions about its financial future. Automated accounting programs typically produce a variety of reports and we'll discuss these reports in-depth in later sub-sections that pertain to the general ledger.

What is bookkeeping?

Bookkeeping is the practice of recording transactions. Bookkeepers tend to focus on the details, recording transactions in an efficient and organized manner, and they may or may not see the overall picture. Accountants use the work done by bookkeepers to produce and analyze financial reports. Although accounting follows the same principles and rules as bookkeeping, accounting converts them into meaningful financial information that captures all of the details necessary to satisfy the needs of the business — managerial, financial reporting, projection, analysis, and tax reporting. Effective accounting practices across a company will create a system of financial reporting that gives a complete picture of the business.

Related Links

You May Also Like

  • Introduction to Legal Entities Concept

    Introduction to Legal Entities Concept

    Modern business organizations operate globally and leverage a large number of registered legal entities, and operate through complex matrix relationships.  To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders. Learn more about Legal Entities and their importance for businesses.

  • Multi Currency - Functional & Foriegn

    Multi Currency - Functional & Foriegn

    Currency is the generally accepted form of money that is issued by a government and circulated within an economy. Accountants use different terms in the context of currency such as functional currency, accounting currency, foreign currency, and transactional currency. Are they the same or different and why we have so many terms? Read this article to learn currency concepts.

  • GL - Different Accounting Methods

    GL - Different Accounting Methods

    The accounting method refers to the rules a company follows in reporting revenues and expenses. Understand the two common systems of bookkeeping, single, and double-entry accounting systems. Learners will also understand the two most common accounting methods; cash and accrual methods of accounting and the advantages and disadvantages of using them.

  • Prepayments and Prepaid Expenses

    Prepayments and Prepaid Expenses

    Prepayments are the payment of a bill, operating expense, or non-operating expense that settle an account before it becomes due. Learn the concept of prepaid expenses. Understand the accounting treatment for prepaid expenses. Understand the concept by looking at some practical examples and finally learn the adjusting entry for these expenses. 

  • GL - Errors & Reversals

    GL - Errors & Reversals

    Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.

  • The Accounting Cycle

    The Accounting Cycle

    Learn the typical accounting cycle that takes place in an automated accounting system. We will understand the perquisites for commencing the accounting cycle and the series of steps required to record transactions and convert them into financial reports. This accounting cycle is the standard repetitive process that is undertaken to record and report accounting.

  • Hierarchical Organization Structures

    Hierarchical Organization Structures

    Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.

  • GL - Enter & Analyze Journals

    GL - Enter & Analyze Journals

    In every journal entry that is recorded, the debits and credits must be equal to ensure that the accounting equation is matched. In this article, we will focus on how to analyze and recorded transactional accounting information by applying the rule of credit and debit. We will also focus on some efficient methods of recording and analyzing transactions.

  • GL -  Periods and Calendars

    GL - Periods and Calendars

    In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.

  • What is a General Ledger?

    What is a General Ledger?

    The purpose of the general ledger is to sort transaction information into meaningful categories and charts of accounts. The general ledger sorts information from the general journal and converts them into account balances and this process converts data into information, necessary to prepare financial statements. This article explains what a general ledger is and some of its major functionalities.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved