The Encyclopedia Britannica defines accounting as the "systematic development and analysis of information about the economic affairs of an organization." In other words, accounting is the systemic tracking of an organization's finances.
According to the definition provided by the American Accounting Association, accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information.
Financial accounting may not be as important for an individual. However, for businesses, which constantly negotiate with tax collectors, regulators, and other oversight agencies, corporate accounting helps in the maintenance of proper accounting records.
The overarching objective of financial accountancy jobs is the production and dissemination of financial information about the company in the form of income statements, balance sheets, profit and loss accounts, and other related financial data. These data are passed on to finance auditors. The information may be shared with potential investors, creditors, and other interested parties.
What is Business Accounting?
A business keeps track of its operations with the help of accounting tools and services every year. Corporate accountants are tasked with analyzing business finances to enable the business owners to make better business decisions.
A financial audit is also under the preview of business accounting whereby financial information of an organization is organized into reports that reflect the financial health of the business.
Business accounting is the systematic recording, analyzing, interpreting and presenting of financial information.
The tasks of accounting may be entrusted to one individual within a small organization or outsourced to corporate accounting firms. These specialist accountancy firms help businesses meet their compliance obligations. They also undertake depreciation accounting that enables business operators to make smart money decisions.
Basic Accounting Tasks
- Maintain transaction records: Transactions, such as billing customers, receiving cash from customers, paying vendors, signing checks, may be managed by the accountant in an organization.
- Review documents and file receipts: Business accountants typically copy all invoices sent, cash receipts, and payments (cash, checks, credit card deposits, and credit card statements). They are also responsible for maintaining a filing system that is easy to track and maintain.
- Ensure accuracy of cash transactions: Business accountants may be required to balance business checkbooks to maintain the accuracy of cash transaction entries.
- Manage payroll tasks and approve tax payments: Payroll tax requirements are governed by national, state, and local laws. Accountants ensure the reporting and deposit of the applicable income, medical, or any other taxes to the appropriate individuals or agencies within the stipulated deadlines.
The discipline of accounting is broadly classified into management accounting and financial accounting. For the purposes of this article, let us explore the various aspects of financial accounting.
Financial accounting is the area of accounting that stakeholders, such as the Income Tax Department, stockholders, prospective stock buyers, business owners and boards of directors, are most interested in.
Financial accounting may take the form of a balance sheet, income statement, and a statement of cash flows. The data for these statements are generated from tools such as a business' general ledgers and journals that record financial transactions.
Financial ratios are calculated based on the information from the above three statements. Financial ratios can be of different types.
- Liquidity ratios, such as the current ratio, is a demonstration of how quickly assets can be converted by a business into cash.
- Leverage ratios, such as debt to assets, debt to capital, or equity, demonstrate how debts are used to finance business operations.
- Efficiency ratios, such as the asset turnover ratio, demonstrate how assets and finances are used by a company uses its assets and finances.
The Business of Accounting
The primary objective of accounting activities is the dissemination of a business' financial information to its stakeholders, including management, investors, and creditors. The activities of the company are measured, summarized, and communicated to the management and other interested parties by the accountants.
Accurate and timely financial data help managers make smart business decisions. Accountants are responsible for producing this information. They interpret the meanings of financial reports and make suggestions for solving business problems. Let us explore some of the crucial roles of accountants and functions of accounting in business.
Internal Management Accounting
Companies entrust accounting services with the job of producing internal reports throughout the year, for management to be used for decision-making. This is the primary job of a managerial accountant.
It is also the job of the managerial accountant to modify and adapt these reports to the specific purposes and needs of individual managers in the company. Such reports are usually not released to the public.
Aging of accounts receivable, inventory levels, monthly sales, and status of account payable are some examples of managerial accounting. The internal reports are also used to prepare budgets and forecasts.
Accounting Data for Smart Decision-Making
The operation of a business depends on accurate data about the company's assets, liabilities, profits, and cash position. This is where accounting plays a crucial role as it plays a leading role in the evaluation of the viability of investments.
Accounting prevents the misuse of assets, increases production and profit, controls costs and helps increase the efficiency of the overall management.
For an investment to be successful, it is important to conduct a careful analysis of costs and projections of expectations for future cash flows. Accounting processes provide the relevant financial data for the management to make intelligent business decisions
Government Regulations Accounting
Businesses are regulated by various government rules and enforcement agencies. Businesses are required to comply with regulations, pay taxes on their corporate income and sales. The job description of an accountant also includes the filing of accurate and timely income reports and taxes. Failure to comply may result in fines and penalties for the company.
Planning and Accounting
Business accounting is a lot about making future projections for the successful operation of businesses. Accountants are responsible for cash flow projections, sales planning, purchases of fixed assets, and projecting inventory levels. These projections are based on the analysis of historical data.
Accounting Data for Budgeting
Historical data also comes in handy while preparing future budgets and cost controls. Accountants use this information to make expense and investment forecasts for managers. The latter prepare overhead expense budgets and sales plans, along with cash flow projections. Monitoring of regular accounting reports helps to make sure costs remain within the budgets.
Employed extensively in manufacturing companies, cost accounting helps in the calculation of costs of making products, the determination of break-even sales volumes, and the setting of optimum inventory levels.
Based on this information, managers are able to develop pricing strategies for the company to make a reasonable profit on the products. Manufacturing costs must be accurately accounted for as the development of sales plans depends on them.
The Essence of Business Accounting
The maintenance if financial records is crucial for both small and big businesses. Accounting helps prevent financial frauds, besides the already stipulated functions it performs for organizations. Under Indian laws, it is mandatory to conduct periodic auditing of accounts of businesses.
Finance professionals, seeking to become full-time accountants can opt for one the following certifications in accountancy to set the ball rolling in their accountancy career.
- Chartered Accountancy (CA)
- Cost and Management Accountants (CMA)
- Chartered Institute of Management Accountants (CIMA)
- Association of Chartered Certified Accountants (ACCA)
- CPA (Certified Public Accountant)
Both types of accounting, managerial and financial, are considered two arms of the same machine that aid productive management of a company or organization. To summarize, business accounting essentially consists of the three activities, namely, the identification, the recording, and the communication of the economic events of a company.
Sometimes, accounting might also mean analyzing and interpreting financial statements and explaining the meaning of reported data.
Using various techniques and principles of bookkeeping, accountants systematically record these economic events. They use financial statements to present the record to relevant stakeholders who use the accounting information to further the goals of the business.