What is accounting? Understanding the definition of accounting and the key concepts behind it can help you manage your small business’s finances.
- The language of a small business is accounting. Being a small business without enough knowledge of your company’s financial situation leaves you helpless.
- An accountant monitors the financial health and profitability of your company, including the precise amount of cash coming in and leaving out.
- Financial, management, and tax accounting are the three primary categories of accounting.
- This article is intended for new business owners who want to advance their knowledge of basic accounting concepts and the work of accountants.
What is accounting?
Accounting is the process through which a person or a company, such a small business, keeps track of their finances.
You may only utilize an accountant as an individual to file your taxes, which are handled by certified public accountants (CPAs), who are required to pass an exam to demonstrate their accounting expertise.
The procedure of gathering and examining financial data for a business is known as business accounting. A person, company, or accounting team can complete it. You may make financial reports and comprehend the commercial operations of the organization with the aid of the information you collect.
Tax collectors, regulators, and other oversight organizations want to see complete and accurate financial records for enterprises. These organizations will examine your accounting records if your company ever seeks investors or other shareholders. For instance, accounting issues are virtually always to blame when a transaction is struck on a TV show like The Profit or Shark Tank and then goes through.
Why is accounting important for your business?
Accounting in business is significant for a variety of reasons. You must comprehend the many kinds of assets, inventories, and liabilities your company has as a business owner. You will be able to build your company and attract investors by doing this.
The following are the main advantages of accounting for small businesses.
Evaluating business performance:
You may evaluate the performance of your firm using financial statements. They can assist you in identifying both the strengths and weaknesses of your company and the areas that require improvement. If you want to recruit investors, this information is essential.
Creating financial projections:
You may develop financial estimates and more informed financial decisions by understanding the financial facts of your company.
Filing annual tax returns:
When tax season arrives, maintaining good company accounting practices will make life much simpler. When you receive your quarterly and annual tax statements, you’ll know how much you owe.
What do accountants do?
Accounting is described by the American Accounting Association as “the process of discovering, measuring, and conveying economic information to permit users of the information to make educated judgements and choices.” Accountants use accounting software to record a company’s accounts payable, accounts receivable, and other financial activities.
According to Stan Snyder, CPA, “Accountants employ the work done by bookkeepers to compile and evaluate financial reports.” Although accounting and bookkeeping have similar concepts and regulations, an accountant may create a system that will record all the information required to meet the needs of the firm, including management, financial reporting, projection, analysis, and tax reporting.
The majority of accountants in the United States use generally accepted accounting standards (GAAP) to communicate financial data from a firm to individuals outside the organization in a way that is clear to everybody. For businesses that conduct business internationally as well as for federal, state, and municipal governments, there are many sets of accounting standards.
The internal management team of a company receives the data from accountants that it needs to maintain the financial stability of the firm, according to Harold Aver Kamp, CPA and owner of Accounting Coach. According to him, part of the data comes from the transactions that have been documented, while other data consists of estimations and forecasts based on various assumptions.
What are the different types of accounting?
Public accountants, financial accountants, tax accountants, government accountants, and others are all types of accountants. Regulators and law enforcement use forensic accountants to assist them find unlawful activities. To go even further, bitcoin assets are handled by crypto accountants.
Typically, an accountant works for an individual, a company, or the government. To collect and manage both public and private financial data, accounting organizations like Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers are known.
Here is a list of the several categories of accounting.
Investors are taken into account when performing this style of accounting. It aids management in getting a clear understanding of a company’s finances and is used to evaluate the financial health of a corporation. In order for businesses to be open and honest about their financial situation, this form of accounting is required.
Financial statements for businesses, such as product costs, cash flow reports, profit and loss statements, and reports on business acquisitions, are produced using this kind of accounting. Business executives need this kind of accounting since it offers precise financial data and may aid organizations in making financial choices.
Tax accounting is concerned with how your company interacts with the IRS. When paying your yearly or quarterly taxes, accountants can assist you comprehend your financial situation. All small companies ought to use this crucial service.
Auditing and accounting procedures are part of forensic accounting. Banks, lawyers, and companies regularly utilize this sort of accounting to review financial transactions. When fraud or theft are suspected, forensic accountants are frequently called upon.
The true cost of conducting business is examined in cost accounting. This style of accounting examines the fixed and variable expenses a firm face. It is typically utilized for manufacturing and service-based enterprises.
By examining each component separately, accounting ratios assist in revealing hard-to-find circumstances and patterns. This kind of formula aids accountants in calculating a company’s condition and future prospects. There are five basic categories into which accounting ratios fall:
- A company’s liquid assets are compared against its liabilities using liquidity ratios.
- The capacity of a company to make a profit after spending is gauged by profitability ratios.
- Utilizing leverage ratios, you may assess equity and compare total debt to total assets.
- By contrasting the cost of items sold over a period of time with the quantity of inventory on hand during that same period, turnover ratios gauge efficiency.
- Market-value ratios evaluate a company’s financial position in comparison to its competitors.
Many accountants decide to pursue CPA certification, which calls for passing an exam and gaining professional experience. According to the Pennsylvania Institute of Certified Public Accountants, CPAs perform financial statement audits for both public and private businesses, act as consultants in a variety of fields, such as tax, accounting, and financial planning, and are trusted advisors and decision-makers in strategic business matters. Accountant, controller, chief financial officer, and financial adviser are among the roles held by CPAs.
Accounting vs. bookkeeping
Despite their apparent similarity, bookkeeping and accounting are actually extremely distinct. A practice based on records is bookkeeping. It focuses on recording data, monitoring significant figures, and measuring the crucial financial facets of your company. When these figures and reports are analyzed and extended to aid in company decision-making, accounting enters the picture.
Therefore, while keeping accurate books and putting in place good bookkeeping processes are essential, they only represent a portion of the labour involved in creating a profitable company. To make wise choices regarding the direction of your company, you require accounting procedures. Without an appropriate interpretation, what use is data?
Basic accounting tasks
Here are some of accountants’ main job duties:
An accountant may document each transaction daily or once a week, depending on the amount of transactions (e.g., billing customers, receiving cash from customers, paying vendors).
Document and file receipts.
Accountants may make copies of all submitted invoices, all cash deposits (cash, checks, and credit cards), and all cash receipts (cash, check and credit card statements). They may also create an organized file system that is simple to use, follow, and keep up with.
Pay vendors and sign checks.
Accountants may track accounts payable and have funds scheduled to pay suppliers on time and avoid late fees.
Balance business checkbooks.
Accountants may perform this on a regular basis to make sure that the cash transaction entries for your company are right and that you are working with the appropriate cash position.
Process or review payroll and approve tax payments
Various periods need you to comply with payroll tax responsibilities based on federal, state, and local legislation. Accountants ensure that you deduct, report, and deposit the needed income taxes, Social Security, Medicare, and disability taxes to the relevant agencies by the deadlines.
What is an accounting cycle?
An accounting cycle is the procedure used by your business to track and examine the different accounting-related activities that take place there. Establishing efficient bookkeeping and accounting procedures is crucial if you want to manage your company’s financial well-being.
An efficient accounting cycle consists of eight basic components.
Establishing precise and proper recordkeeping procedures begins with this essential step. POS systems and accounting software are frequently helpful in this regard.
Recording can be carried out via cloud-based software tools, much like step one. The most important thing is that every transaction your company does is documented.
When a transaction is recorded, it should be posted to a general ledger, which holds the total transactions of the entire business.
Listing unadjusted trial balance:
This is the examination of the financial standing of your firm at the conclusion of the accounting period, which may be quarterly, monthly, or on another set schedule. At the conclusion of each period, trial balances are created for each account in your company.
These sheets identify where adjustments need to be made to each balance.
Adjusting journal entries:
Any necessary adjustments may be recorded as their own journal entries
Generating financial statements:
Most businesses need an income statement, balance sheet and cash flow statement
Closing the books:
In order to reset the temporary account balances on the general ledger and provide a summary of the specified time period for future study, the accountant closes the cycle with a closing entry.
Tools for businesses
There are several solutions available on the market that can assist you if managing your company’ accounting isn’t one of your skills. The best way to get started is to get accounting software.
You can issue invoices, reconcile bank transactions, pay your vendors and staff using accounting software. The precise software you require will depend on the kind of business you operate and the functionality you require.