ccounting is the process of keeping track of all financial

transactions within a business, such as any money coming in

and money going out. It’s not only important for businesses in
terms of record keeping and general business management,
but also for legal reasons and tax purposes. Though many
businesses leave their accounting to the pros, it’s wise to
understand the basics of accounting if you’re running a
business. To help, we’ll detail everything you need to know
about the basics of accounting.

What Is Accounting?

Accounting is the process of recording, classifying and

summarizing financial transactions. It provides a clear picture
of the financial health of your organization and its
performance, which can serve as a catalyst for resource
management and strategic growth.

Accounting is like a powerful machine where you input raw

data (figures) and get processed information (financial
statements). The whole point is to give you an idea of what’s
working and what’s not working so that you can fix it.

Why Accounting Is Important

Accounting information exposes your company’s financial
performance; it tells whether you’re making a profit or just
running into losses at the end of the day.

This information is not just available to you, but also to

external users such as investors, stakeholders and creditors
who would want to be enlightened about your business, to
figure out whether it’ll be a good choice to invest in and what
they can expect in returns.

Besides playing a key role in providing transparency for

stakeholders, accounting also ensures you make informed
decisions backed by data.

Accountant vs. CPA vs. Tax Pro

In accounting, you’ll come across certain titles which appear

to bear similar duties but actually have unique job
descriptions. In this section, we’ll briefly review the roles of
accountants vs. CPAs and tax professionals.
An accountant is a professional with a bachelor’s degree who provides financial advice, tax planning

A certified public accountant (CPA) is a type of professional

accountant with more training and experience than a typical
accountant. Aspiring CPAs are expected to have a bachelor’s
degree, more than two years of public accounting work
experience, pass all four parts of the CPA exam and meet
additional state-specific qualifications if required. In the U.S.,
licensed CPAs must have earned their designation from the
American Institute of Certified Public Accountants (AICPA).

Tax professionals include CPAs, attorneys, accountants,

brokers, financial planners and more. Their primary job is to
help clients with their taxes so they can avoid paying too much
or too little in federal income or state income taxes.

As a general note, CPAs are considered to be more qualified

than tax professionals when it comes to preparing taxes on an
individual basis as they are trained to analyze business and
personal finances to maximize savings and minimize taxes.
It’s also worth noting that while all CPAs are accountants, not
all accountants are CPAs.

Types of Accounting
Accounting can be broken down into several categories; each
category deals with a specific set of information, or documents
particular transactions. In this section, we discuss four of the
most common branches of accounting:

This is the practice of recording and reporting financial

transactions and cash flows. This type of accounting is
Financial Accounting
particularly needed to generate financial reports for the sake
of external individuals and government agencies. These
financial statements report the performance and financial
health of a business. For example, the balance sheet reports
assets and liabilities while the income statement reports
revenues and expenses. Financial accounting is governed by
accounting rules and regulations such as U.S. GAAP
(Generally Accepted Accounting Principles) and IFRS
(International Financial Reporting Standards).

Managerial Accounting

This focuses on the use and interpretation of financial

information to make sound business decisions. It’s similar to
financial accounting, but this time, it’s reserved for internal
use, and financial statements are made more frequently to
evaluate and interpret financial performance.
Cost Accounting

This is the process of tracking, analyzing and understanding

the costs involved in a specific business activity. This includes
all direct and indirect expenses associated with your
business’s day-to-day operations. Cost accounting is
particularly important because it helps you ensure that you
are spending money on things that benefit your business’s
bottom line.

Tax Accounting

This is the act of tracking and reporting income and expenses

related to your company’s taxes. You don’t want to be in a
situation where you have to pay more income tax than is
normally required by the Internal Revenue Service (IRS).

Ways To Manage Your Business Accounting

So far, we’ve seen the types and benefits of accounting. This
leads us to the next question of knowing how to carry out
accounting efficiently. There are many ways to manage your
business accounting. They include:

Outsource to Professionals

You can outsource your accounting work to outside

professionals who specialize in bookkeeping and tax
preparation. Outsourcing can offer many advantages because
it allows you to take advantage of specialized skill sets that
may not be available when hiring someone in-house. It’s also
flexible and generally costs less.

Using Accounting Software

Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments
Hiring an In-House Accountant

You can choose to manage your business accounting by hiring

an in-house accountant or CPA. This can be a great option if
you want to ensure your books are in order, and that your
company’s financial information is accurate, but it does come
with some drawbacks. For one thing, the cost of hiring
someone like this can be a substantial burden on your
business’s finances.

Effective Accounting Practices To Adopt

Immediately

There are many ways to do accounting, but there are also

certain practices that make it easier to keep track of your
finances. Some best practices include:

Keep your personal finances separate from that of your

business to get an accurate view of your company’s financial
health. This applies a lot to small businesses just getting
started with accounting.
 Pay attention to details. Make sure that all transactions are
accounted for and properly totaled to facilitate accurate
reporting at year-end.

Hire an accounting professional if you don’t have the time to

learn accounting software. This will save you stress and give
you the needed time to focus on other important parts of
your business.

Keep adequate records of all assets, liabilities and cash flows

for tax purposes. Pay attention to tax laws and regulations.
Stay up to date on current news so you can know what’s
happening in the financial world.

Bottom Line

Accounting is popularly regarded as “the language of

business” because it doesn’t just help you keep track of your
money, but also helps you make informed decisions about
your business. To speed up action, you may hire accounting
professionals or purchase accounting software to ensure
accurate financial au
1. Financial accounting

Financial accounting is primarily concerned with the process of compiling information for financial reports for e

Financial accountants will generally work with

revenues and disbursements, which include
overseeing or participating in general ledger
accounting, accounts payable, accounts
receivable, payroll, grant management and
fixed assets. A financial accountant will be
concerned with accurately recording and
reporting financial transactions that have
already occurred.
Financial accountants are concerned with compliance and must abide by Generally Accepted Accounting Princip

2. Managerial accounting
This type of accounting documents, monitors
and assists in the financial planning of an
organization. Their documentation is typically
meant for internal stakeholders rather than
the public. A managerial accountant must be
careful in communicating confidential
information and to whom. They work with
their managers to analyze and create a
budget to meet the needs of the short- and
long-term goals of the organization.
Managerial accountants are concerned with
analyzing past performance in order to make
predictions about future performance.

Related: 16 Accounting Jobs That Pay Well

3. Cost accounting
Cost accounting can be seen as a
subcategory of managerial accounting;
however the activities of cost accountants will
affect both financial and managerial
accountants. Cost accountants are
responsible for documenting, presenting and
reviewing manufacturing costs. They oversee
all variable and fixed costs to see if output
aligns with the cost to produce a product.
They also work with managers to decide on
future decisions based on the financial
forecast and the progress of production.

How unit costs are calculated can vary

between industries and even similar
businesses. Cost accountants are
responsible for implementing, overseeing and
providing feedback on how these costs are
being tracked. A primary concern is how to
allocate overhead. Direct materials and direct
labor are easily tracked, but indirect costs—
such as the cost of the machinery, building,
utilities, shared staff, etc.— can be allocated
in different ways.
Cost accountants can also be used to find out
the true cost of an employee. In the same
way that indirect costs are allocated to
products or services to establish a unit cost,
department costs and overhead can be
allocated to employees to determine how
much it costs to employ them versus how
much money they bring in. This can be used
for employees that have revenue associated
with their roles like sales staff or healthcare
providers.

4. Auditing

External auditing is the action of a company

providing financial documents to a third party
for financial feedback. In this instance, a third
party is a reliable source in describing if a
company's financial statement is a
representation of GAAP. External auditing is
conducted by a Certified Public Accountant
(CPA).
Internal auditing determines the effectiveness
of internal accounting processes. An internal
auditor can review employee departmental
responsibilities, management policies and
approval procedures on related projects. In
turn, they provide useful feedback that can
help a company to become more profitable
and efficient. Qualifications for internal
auditors will vary as this is an internal role. An
accountant can become a Certified Internal
Auditor (CIA), and some public companies
and governmental agencies may require their
internal auditors to hold this certification.

Related: What Is a CPA?

5. Tax accounting

Tax accountants help businesses stay in

compliance with the Internal Revenue Code
when they file their tax documents each year.
They also assist companies in planning for
future tax returns, such as avoiding certain
tax burdens and understanding the
implications of specific tax decisions. Usually,
larger organizations will hire a tax accountant
to navigate the complexities of financial
records.
Related: 6 Essential Accounting Skills

6. Accounting information systems

Accounting information systems, or AIS, is

the system by which a company collects,
stores and processes its financial and
accounting data. Many AIS are now built to
integrate with other departments such as
connecting the hiring process in Human
Resources to the payroll function of a newly
hired employee. This flow-through process
helps minimize the manual entry of
information.
AIS professionals manage the improvement
of successful accounting procedures.
Employees working in this field decide on the
best times to install updated technology and
monitor the progress of existing systems to
determine if there is an increase in
productivity over a given timeframe. They can
make decisions in conjunction with the IT
department to instill continuity with
technological processes. They also frequently
assist with technical support in maintaining
AIS, such as creating new accounts in the
system or troubleshooting errors in the
software.

7. Forensic accounting
Forensic accounting is used to investigate the
financial records of individuals or businesses.
It can require accountants to recreate
financial information when some information
is missing or not available to review. The goal
of forensic accounting is to gather all
available documentation and accurately and
comprehensively account for all transactions
in financial statements. These professionals
often work on legal cases involving fraud,
claims and disputes.

8. Public accounting
Public accounting refers to businesses that
provide accounting advice to clients based on
their needs. They can work in auditing, assist
with tax returns, consult on procedures
tailored to the installation of technology or
computer programs and provide legal advice.

Related: Chartered Accountant vs. Certified Public Accountant: What Is the Difference?

9. Governmental accounting
Governmental accountants manage the
financial planning and allocation of resources
to departments within a local, state or federal
government. This type of accounting has
standards that must comply with the
Governmental Accounting Standards Board
(GASB), which is responsible for developing
consistent accounting procedures for local
and state governments. Federal employees
will comply with the Federal Accounting
Standards Advisory Board (FASAB).
Governmental accountants will also monitor a
government's budget and allocate funds
appropriately.

What accounting types have in

common
Although these different types of accounting
focus on different aspects of business or
even different types of businesses, all of
these fields:

Follow certain standards

Adhere to facts
 Emphasize ethical processes

It is considered a primary feature of

accountancy to serve the public interest by
accurately reporting an entity’s financial
situation. Regardless of your job title, the
standards that inform your reporting or who
you work for, it is important for all
accountants to be accurate in their work.

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Related accounting careers

Here is a list of careers that accountants can
pursue. For the most current information from
Indeed, click on the salary links.

1. Staff accountant

National average salary: $54,662 per year

Primary duties: A staff accountant works
under a controller or CPA to preserve and
maintain financial records and budgets for an
organization. They often enter journal entries
or data into the accounting information
system or otherwise monitor the activity in the
system for accuracy.

2. Payroll accountant

National average salary: $57,526 per year

Primary duties: A payroll accountant is
responsible for carrying out compliance
duties for the organization. They report all
employee financial activities from the
business to the local, state and federal
government in addition to having the correct
amount of taxes taken out of each
employee's paycheck.

3. Tax accountant

National average salary: $63,499 per year

Primary duties: A tax accountant provides
tax preparation advice to companies to file
their taxes correctly and to potentially save
money through the timing of their financial
transactions. They make certain that a
company is compliant with filing their federal,
state and local taxes.

4. Auditor

National average salary: $57,661 per year

Primary duties: An auditor reviews financial
documents to ensure their accuracy. An
internal auditor may perform random or
scheduled audits to ensure that internal
policy is being followed and to make
recommendations regarding policy. An
external auditor will be a CPA, who will
generally do on-site, scheduled audits
following an audit plan.

5. Financial accountant

National average salary: $63,787 per year

Primary duties: A financial accountant
ensures that financial transactions are
accurately recorded and reported. They
frequently work with the general ledger either
entering journal entries or otherwise
overseeing these entries. They may also
ensure confidential tax information is properly
documented. They also publicize financial
information for stakeholders and monitor
internal transactions accordingly.

Video: A Day in the Life of an Accountant

In this video, we follow Ektaa, a tax
accountant working for a family-owned
accounting firm, as she shares the skills and
education needed to be a successful
accountant.

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