What is Accounting?

Accounting is a term that describes the process of consolidating financial

information to make it clear and understandable for all stakeholders
and shareholders. The main goal of accounting is to record and report a
company’s financial transactions, financial performance, and cash flows.

Accounting standards improve the reliability of financial statements. The

financial statements include the income statement, balance sheet, cash
flow statement, and the statement of retained earnings. The standardized
reporting allows all stakeholders and shareholders to assess the
performance of a business. Financial statements need to be transparent,
reliable, and accurate.

Summary

 Accounting is a term that describes the process of consolidating

financial information to make it clear and understandable for
all stakeholders and shareholders.
 The main goal of accounting is to accurately record and report
an organization’s financial performance.
 Accounting can be classified into two categories – financial
accounting and managerial accounting.
Importance of Accounting

1. Keeps a record of business transactions

Accounting is important, as it keeps a systematic record of the

organization’s financial information. Up-to-date records help users
compare current financial information to historical data. With full,
consistent, and accurate records, it enables users to assess the
performance of a company over a period of time.
 

2. Facilitates decision-making for management

Accounting is especially important for internal users of the organization.

Internal users may include the people that plan, organize, and run
companies. The management team needs accounting in making
important decisions. Business decisions may range from deciding to
pursue geographical expansion to, instead, improving operational
efficiency.

3. Communicates results

Accounting helps to communicate company results to various users.

Investors, lenders, and other creditors are the primary external users of
accounting information. Investors may be deciding to buy shares in the
company, while lenders need to analyze their risk in deciding to lend. It is
important for companies to establish credibility with these external users
through relevant and reliable accounting information.

4. Meets legal requirements

Proper accounting helps organizations ensure accurate reporting of

financial assets and liabilities. Tax authorities, such as the U.S. Internal
Revenue Service (IRS) and the Canada Revenue Agency (CRA), use
standardized accounting financial statements to assess a company’s
declared gross revenue and net income. The system of accounting helps
to ensure that a company’s financial statements are legally and accurately
reported.

 
Types of Accounting

Accounting can be classified into two categories – financial accounting and

managerial accounting.

1. Financial Accounting

Financial accounting involves the preparation of accurate financial

statements. The focus of financial accounting is to measure the
performance of a business as accurately as possible. While financial
statements are for external use, they may also be for internal
management use to help make decisions.

Accounting principles and standards, such as GAAP (Generally Accepted

Accounting Principles), IFRS (International Financial Reporting Standards),
or ASPE (Accounting Standards for Private Enterprises), are standards that
are widely adopted in financial accounting. The accounting standards are
important because they allow all stakeholders and shareholders to easily
understand and interpret the reported financial statements from year to
year.
 

2. Managerial Accounting

Managerial accounting analyzes the information gathered from financial

accounting. It refers to the process of preparing reports about business
operations. The reports serve to assist the management team to make
tactical decisions.

Managerial accounting is a process that allows an enterprise to achieve

maximum efficiency by reviewing financial accounting, deciding on the
best following steps to take, and then broadcasting the required steps to
all internal business managers.

An example of managerial accounting is cost accounting. Cost accounting

focuses on a detailed break-up of costs for effective cost control.
Managerial accounting is very important in the decision-making process.

Careers in Accounting

The role of an accountant is to responsibly report and interpret financial

records. Small businesses may hire only one accountant. Large companies
may employ an entire accounting department.

The broad range of the accounting profession can vary widely and may
include roles from tax planning to audit accounting. Accountants may
become certified with the CPA (Certified Public Accountant) designation.
The four largest accounting firms include Deloitte, KPMG, PwC, and Ernst
& Young.