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
-
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
-
An account inquiry is a review of any type of financial account, whether it be a depository account or a credit account. In this tutorial, you learn what we mean by drill through functionality in the context of the general ledger system. We will explain the concept of drill-down and how it enables users to perform account and transaction inquiry at a granular level and the benefits of using this functionality.
-
In most of the automated financial systems, you can define more than 12 accounting periods in a financial year. This article will explain the concept of the adjustment period and the benefits of having adjustment periods. Adjustment periods have their inherent challenges for the users of financial statements and there is a workaround for those who don’t want to use adjustment periods.
-
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.
-
For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts.
-
GL - Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
-
Trial Balance in General Ledger
One of the greatest benefits of using a double-entry accounting system is the capability to generate a trial balance. What do we mean by trial balance? As the name suggests a trial balance is a report that must have its debits equals to credits. Understand the importance of trial balance and why it is balanced. Learn how it is prepared and in which format.
-
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
-
Five Core General Ledger Accounts
Typically, the accounts of the general ledger are sorted into five categories within a chart of accounts. Double-entry accounting uses five and only five account types to record all the transactions that can possibly be recorded in any accounting system. These five accounts are the basis for any accounting system, whether it is a manual or an automated accounting system. These five categories are assets, liabilities, owner's equity, revenue, and expenses.
-
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.
