Ultimate Guide To Learn Financial Accounting6 mins - Introduction
The process of recording and summarizing financial information is called accounting. It is a detailed and systematic logging of financial transactions related to your business. Accounting is also called the procedure of analyzing, summarizing, and then reporting the transactions to the regulators, tax department, and other agencies.
Financial statements help in summarizing hundreds and thousands of financial transactions of a company’s operations, cash flows, and the financial position over a certain time. It is one of the key functions for almost any business, and no business can do without it. Usually, a bookkeeper or an accountant handles all the accounting matters.
There are multiple branches of accounting via which different reports are generated for a business. A couple of examples would be management accounting and cost accounting. These streams assist a company in making calculated business decisions. Basic accounting matters are normally a bookkeeper’s job, and the advanced accounting issues are handled by qualified accountants who are Chartered Accountants (CA), Certified Public Accountants (CPA) in the US or Certified Management Accountants CMA in Canada.
The Components of Accounting
There are two main components of accounting:
— Financial Accounting (Book-keeping)
— Management Accounting (Analysis)
Financial Accounting is also known as book-keeping. It involves summarized recordings of financial information. Transactions regarding expenses, purchases and sales are recorded under financial accounting, in a summarized form. These are then presented in the form of financial statements that give you an insight into the overall financial health and working of a business.
Another aspect of financial accounting is organizing the financial data that assists business owners with effective management of their business by acquiring key information like:
— The amount customers have to pay to the business
— The amount of capital owners have invested in the business
— How much does the business owe banks, employees, tax authorities, suppliers, and others?
— Is the business profitable?
To sum up, book-keeping is the backbone of an accounting system and lays the foundation of analysis in management accounting.
Managerial accounting and management accounting is the same thing. This form of accounting gives information to businesses and their management for analysis, decision-making, control, and planning of business matters such as budgeting, performance measurement and information relating to investment decisions.
Here is what accounting entails
Generate Financial Statements
Financial statements that summarize the cash flows, financial position, and operations of a large organization, for a particular period, are concise and are created based on thousands of financial transactions. Therefore, all accounting designations are a result of years of rigorous examinations and study coupled with some years of practical accounting experience.
Using GAAP (Generally Accepted Accounting Principles)
Accountants use generally accepted accounting principles (GAAP) in most cases while creating financial statements. It is a set of standards regarding balance sheet identification, outstanding share measurements along with other accounting issues. The GAAP standards rely on double-entry accounting in which each expense is entered in two places on the balance sheet.
Double Entry Accounting
For a better understanding of the double-entry system, take the example of a business which issues an invoice to its client. Using the double-entry method, the accountant enters a debit under the column of accounts receivable on the balance sheet and then credits it under the revenue column of the income statement.
When the client pays, the amount is credited in the accounts receivables and the cash is debited. Another name for double-entry accounting is called balancing the books because all books are balanced against each other. If the entries fail to match, then the accountant would know that there is some miscalculation or discrepancy in the ledger.
Financial Accounting vs. Management Accounting
The procedures which accountants use to generate annual accounting statements of a firm fall under financial accounting whereas, management accounting uses almost the same processes but uses the information in a variety of ways. An accountant creates monthly or quarterly reports in management accounting, which the management team can use to make decisions about how the business operates and should operate in the future.
Financial Accounting vs. Cost Accounting
Similar to management accounting that helps businesses in making decisions about management, cost accounting assists businesses in making cost-related decisions. Cost accounting takes into account all costs regarding the production of a product. Everyone from analysts, business owners to managers and accountants use this information to determine the cost of their product.
Under cost accounting, money is the economic factor in production. On the other hand, financial accounting is the measure of a company’s economic performance.
Significance of Accounting
Accounting helps organizations in determining their financial obligations and rights. A business can’t calculate, say, the exact amount that business should pay to the supplier for the cost of purchase, sales tax, discounts, withholding tax, refunds, and duties, etc. Business needs accounting to fulfill their legal obligations and in asserting their legal rights. And businesses over a certain size are required to prepare financial statements and maintain accounting records to fulfill legal responsibility.
Record Financial Information
Organizations need to have a systematic and reliable way of recording financial information. Accounting is crucial to ensure that business owners have a reliable record of their financial transactions.
Overview of Business Performance
Accounting information is summarized for use in financial statements. They provide an overview of the business’ financial activities during a certain period along with information regarding the financial position at a specific date (such as the end of the year).
Owners take help from these financial statements in assessing the position and performance of their business that could help them in making the right investment decisions like whether they should invest, dispose, or diversify their funds.
Help with Planning and Control
Organizations are in a better position to develop budgets and forecasts through accounting. Take the example of variance analysis, which offers a system to the business for monitoring the organizational expenses by comparing them with the budgeted expenditure. Organizations can plan their finances ahead and in controlling any deviations from the budget. Accounting helps with managerial decisions.
To sum up, accounting is a reliable process of recording, organizing, and analysis of financial information that allows a business to effectively manage their operations.