Introduction to Accounting and Its Importance
The topics covered in this article are:
- What is accounting?
- Importance of Accounting
- Types of Accounting
What is Accounting?
Accounting is an organized and systematic way of recording the financial transactions which are made by a business. It is a process that summarizes, analyzes, and reports the business transactions to third parties like regulators, oversight agencies, and tax collectors.
Being one of the most important functions of a business, accounting is carried out by a professional accountant or bookkeeper in small firms, and by financial departments at bigger companies. Accounting generates various important reports of cost accounting and managerial accounting which the management helps the business management in making informed decisions. Introduction to Accounting and Its Importance.
Bookkeepers may handle basic functions of accounting, but only qualified accountants who are designated by the central authorities (Chartered Accountant, etc.) are supposed to handle advanced accounting functions of a business.
Accounting helps in creating financial statements of a company. Financial statements of a business summarize its operations, cash flow, and financial position in the market for a said period of time. They concisely summarize several financial transactions which the business may have made and recorded in a particular time period. This helps investors and other entities to analyze the financial position of a business and make decisions accordingly.
While preparing financial statements of a business, accountants usually follow the Generally Accepted Accounting Principles (GAAP). GAAP is basically a set of accounting principles or standards that follows the double-entry system of accounting. It is used in the identification of balance sheets, measuring outstanding shares, and other issues of accounting.
Importance of Accounting
Accounting mainly helps in recording transactions in an organized manner and creating financial statements for a business. However, accurate and proper accounting can pose as a defense mechanism of business. Accurate accounting helps in reducing the business exposure to fraudulent risks. If the accounting is done right, then the audits conducted by the government will not create any hurdle in the daily operations of the business.
Accounting allows the business to grow in a measured and planned manner. It helps in tracking the business assets, liabilities, expenses, and income so that the business can make informed financial decisions. Decisions made on the basis of present financial health and past performance of the business will help in molding a more financially stable future. This will propel the growth of the business and guide it to the path of attaining maximum profit.
Accounting done wisely will help the business in attracting and satisfying its customers. It helps the business to have knowledge of its financial position and understand its sources of revenue and expenses. This gives a better understanding of the business to the management and shows how the business can be grown while maintaining customer satisfaction.
Lastly, accounting informs the business what it owes and what it is owed. It helps in tracking loan and interest repayments, managing payroll records, maintaining a budget, attracting potential investors, and setting up accurate financial records for payment of business taxes.
Types of Accounting
There are three main categories of accounting: financial accounting, managerial accounting, and cost accounting. They are elaborated as follows:
Financial accounting involves those processes which are used by professional accountants to generate the accounting and financial statements of a business, annually. These statements are then made public to be viewed by investors, creditors, customers, and regulatory bodies.It aims at providing the financial information of a business to its outsider parties. Financial accounting considers money to be a measure of the economic performance of a business.
Managerial or Management accounting involves those processes which are used by professional accountants to generate monthly and quarterly reports, which can be used by the management of the business to make important business decisions. It aims at helping managers and supervisors of the company in making financial decisions.
Cost accounting involves those processes which take into account all the costs related to the manufacturing of a product. The information produced by cost accounting further helps managers, analysts, accountants, and business owners to do the costing of their products. Cost accounting considers money to be an economic factor of production.
Introduction to Accounting and Its Importance
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