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What is 'Accounting'

Accounting is the systematic and comprehensive recording of financial transactio

ns pertaining to a business, and it also refers to the process of summarizing, a
nalyzing and reporting these transactions to oversight agencies and tax collecti
on entities. Accounting is one of the key functions for almost any business; it
may be handled by a bookkeeper and accountant at small firms or by sizable finan
ce departments with dozens of employees at large companies.
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BREAKING DOWN 'Accounting'
The reports generated by various streams of accounting, such as cost accounting
and management accounting, are invaluable in helping management make informed bu
siness decisions. While basic accounting functions can be handled by a bookkeepe
r, advanced accounting is typically handled by qualified accountants who possess
designations such as Certified Public Accountant (CPA) in the United States, or
Chartered Accountant (CA), Certified General Accountant (CGA) or Certified Mana
gement Accountant (CMA) in Canada.
Creating Financial Statements
The financial statements that summarize a large company's operations, financial
position and cash flows over a particular period are concise statements based on
thousands of financial transactions. As a result, all accounting designations a
re the culmination of years of study and rigorous examinations combined with a m
inimum number of years of practical accounting experience.
Generally Accepted Accounting Principles
In most cases, accountants use generally accepted accounting principles (GAAP) w
hen preparing financial statements. GAAP is a set of standards related to balanc
e sheet identification, outstanding share measurements and other accounting issu
es, and its standards are based on double-entry accounting, a method which enter
s each expense or incoming revenue in two places on a company's balance sheet.
Example of Double Entry Accounting
To illustrate double-entry accounting, imagine a business issues an invoice to o
ne of its clients. An accountant using the double-entry method enters a credit u
nder the accounts receivables column and a debit under the balance sheet's reven
ue column. When the client pays the invoice, the accountant debits accounts rece
ivables and credits revenue. Double-entry accounting is also called balancing th
e books, as all of the accounting entries are balanced against each other. If th
e entries aren't balanced, the accountant knows there must be a mistake somewher
e in the ledger.
Financial Accounting Versus Management Accounting
Financial accounting refers to the processes accountants use to generate the ann
ual accounting statements of a firm. Management accounting uses much of the same
processes but utilizes information in different ways. Namely, in management acc
ounting, an accountant generates monthly or quarterly reports that a business's
management team can use to make decisions about how the business operates.
Financial Accounting Versus Cost Accounting
Just as management accounting helps businesses make decisions about management,
cost accounting helps businesses make decisions about costing. Essentially, cost
accounting considers all of the costs related to producing a product. Analysts,
managers, business owners and accountants use this information to determine wha
t their products should cost. In cost accounting, money is cast as an economic f
actor in production, whereas in financial accounting, money is considered to be

a measure of a company's economic performance.

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