presentation definition in accounting

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Presentation

In complex financial structures.

In accounting, presentation refers to the way financial information is organized and displayed in financial statements and reports. It is crucial because effective presentation enhances clarity, comprehension, and the decision-making process for stakeholders who rely on these documents to assess the financial health of an organization.

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• Complex Financial Structures - 12.3 Substantive testing procedures

5 Must Know Facts For Your Next Test

• Presentation involves not only the layout of financial statements but also the classification and aggregation of financial data to ensure clarity.
• Effective presentation can significantly improve the understanding of complex financial information for users like investors, creditors, and regulators.
• The format and structure of financial statements must comply with relevant accounting standards, such as GAAP or IFRS, which dictate specific presentation requirements.
• Consistency in presentation across reporting periods helps stakeholders make comparisons over time, aiding in trend analysis.
• The use of visuals, such as charts or graphs, can enhance the presentation of data, making it more accessible and easier to digest for users.

Review Questions

• Effective presentation of financial statements directly influences stakeholder decision-making by enhancing clarity and comprehension. When information is well-organized and clearly displayed, it allows stakeholders to quickly identify key data points and trends. This improved understanding helps investors, creditors, and management make informed choices regarding investments, creditworthiness, and strategic planning.
• Accounting standards play a critical role in dictating the presentation format of financial statements to ensure consistency and transparency. Standards such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) outline specific requirements for how various elements should be presented. These guidelines help ensure that all companies adhere to similar formats, making it easier for stakeholders to compare financial information across different organizations.
• Poor presentation in financial reporting can lead to misunderstandings, misinterpretations, and a lack of trust among stakeholders. When information is confusing or poorly organized, it increases the risk that users may draw incorrect conclusions about a company's financial health. This can result in decreased investor confidence, potential regulatory scrutiny, and long-term reputational damage. Maintaining high standards of presentation is crucial for building and sustaining stakeholder trust in the integrity of financial reports.

Related terms

Financial Statements : Formal records that provide an overview of the financial activities and position of a business, including the balance sheet, income statement, and cash flow statement.

Disclosure : The process of providing relevant information in financial statements that ensures transparency and helps stakeholders make informed decisions.

Materiality : A concept in accounting that dictates which information is significant enough to influence the decision-making of stakeholders and should therefore be included in financial reports.

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What Is Financial Accounting?

• How It Works

Financial Statements

Accrual method vs. cash method.

• Why It Matters
• Users of Financial Accounting
• Financial vs. Managerial Accounting
• Professional Designations

The Bottom Line

• Corporate Finance

Financial Accounting Meaning, Principles, and Why It Matters

• Accounting Explained With Brief History and Modern Job Requirements
• Accounting Equation
• Current and Noncurrent Assets
• Accounting Theory
• Accounting Principles
• Accounting Standard
• Accounting Convention
• Accounting Policies
• Principles-Based vs. Rules-Based Accounting
• Accounting Method
• Accrual Accounting
• Cash Accounting
• Accrual Accounting vs. Cash Basis Accounting
• Financial Accounting Standards Board (FASB)
• Generally Accepted Accounting Principles (GAAP)
• International Financial Reporting Standards (IFRS)
• IFRS vs. GAAP
• US Accounting vs. International Accounting
• Understanding the Cash Flow Statement
• Breaking Down The Balance Sheet
• Understanding the Income Statement
• Financial Accounting CURRENT ARTICLE
• Financial Accounting and Decision-Making
• Cost Accounting
• Certified Public Accountant (CPA)
• Chartered Accountant (CA)
• Accountant vs. Financial Planner
• Tax Accounting
• Forensic Accounting
• Chart of Accounts (COA)
• Double Entry
• Closing Entry
• Introduction to Accounting Information Systems
• Inventory Accounting
• Last In, First Out (LIFO)
• First In, First Out (FIFO)
• Average Cost Method

Financial accounting is a specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time.

These transactions are summarized in the preparation of financial statements—including the balance sheet, income statement, and cash flow statement—that record a company’s operating performance over a specified period.

Work opportunities for a financial accountant can be found in both the public and private sectors. A financial accountant’s duties may differ from those of an accountant who works for many clients preparing their accounts, tax returns, and possibly auditing other companies.

Key Takeaways

• Financial accounting is the framework that dictates the rules, processes, and standards for financial recordkeeping.
• Nonprofits, corporations, and small businesses use financial accountants to prepare their books and records and generate their financial reports.
• Financial reporting occurs through the use of financial statements, such as the balance sheet, income statement, statement of cash flow, and statement of changes in shareholder equity.
• Financial accounting differs from managerial accounting, as financial reporting is for reporting to external parties, while managerial accounting is for internal strategic planning.
• Financial accounting may be performed under the accrual method (recording expenses for items that have not yet been paid) or the cash method (only cash transactions are recorded).

Investopedia / Laura Porter

How Financial Accounting Works

Financial accounting utilizes a series of established principles. The accounting principles used depend on the business's regulatory and reporting requirements. Companies and organizations often have an accounting manual that details the pertinent accounting rules.

U.S. public companies are required to perform financial accounting in accordance with generally accepted accounting principles (GAAP) . Their purpose is to provide consistent information to investors, creditors, regulators, and tax authorities.

The statements used in financial accounting cover the five main classifications of financial data or financial accounts, which are:

• Revenues – Included here is income from sales of products and services, plus other sources, including dividends and interest.
• Expenses – These are the costs of producing goods and services, from research and development to marketing to payroll.
• Assets – These consist of owned property, both tangible (buildings, computers) and intangible (patents, trademarks).
• Liabilities – These are all outstanding debts, such as loans or rent.
• Equity – If you paid off the company’s debts and liquidated its assets, you would get its equity, which is what a company is worth.

Revenues and expenses are accounted for and reported on the income statement, resulting in the determination of net income at the bottom of the statement. Assets, liabilities, and equity accounts are reported on the balance sheet, which utilizes financial accounting to report ownership of the company’s future economic benefits.

International public companies also frequently report financial statements in accordance with International Financial Reporting Standards (IFRS) .

Balance Sheet

A balance sheet reports a company’s financial position as of a specific date. It lists the company’s assets, liabilities, and equity, and the financial statement rolls over from one period to the next. Financial accounting guidance dictates how a company records cash, values assets, and reports debt.

A balance sheet is used by management, lenders, and investors to assess the liquidity and solvency of a company. Through financial ratio analysis, financial accounting allows these parties to compare one balance sheet account with another.

For example, the current ratio compares the amount of current assets with current liabilities to determine how likely a company is going to be able to meet short-term debt obligations.

Income Statement

An income statement , also known as a “profit and loss statement,” reports a company’s operating activity during a specific period of time.

Usually issued on a monthly, quarterly, or annual basis, the income statement lists the revenue, expenses, and net income of a company for a given period. Financial accounting guidance dictates how a company recognizes revenue, records expenses, and classifies types of expenses.

An income statement can be useful to management, but managerial accounting gives a company better insight into production and pricing strategies compared with financial accounting.

Financial accounting rules regarding an income statement are more useful for investors seeking to gauge a company’s profitability and external parties looking to assess the risk or consistency of operations.

Cash Flow Statement

A cash flow statement reports how a company used cash during a specific period. It is broken into three sections:

• Operations – These are the costs of a company’s core business activities.
• Financing – This is money the company receives from taking loans or issuing shares, as well as money paid in interest on loans and dividends to investors.
• Investments – This is money that comes from buying and selling the company’s investments, such as securities or fixed assets.

Financial accounting guidance dictates when transactions are to be recorded, though there is often little to no flexibility in the amount of cash to be reported per transaction.

A cash flow statement is used by management to better understand how cash is being spent and received. It extracts only items that impact cash, allowing for the clearest possible picture of how money is being used, which can be somewhat cloudy if the business is using accrual accounting.

Shareholders' Equity Statement

A shareholders' equity statement reports how a company’s equity changes from one period to another, as opposed to a balance sheet, which is a snapshot of equity at a single point in time.

It shows how the residual value of a company increases or decreases and why it changes. It gives details about the following components of equity:

• Share capital – Money raised by selling stock in the company
• Net income – Any profit after expenses and deductions
• Dividends – The part of the profit that is paid to shareholders
• Retained earnings – Whatever is left after paying dividends

Nonprofit entities and government agencies use similar financial statements; however, their financial statements are more specific to their entity types and will vary from the statements listed above.

There are two primary types of financial accounting: the accrual method and the cash method. The main difference between them is the timing in which transactions are recorded.

Accrual Method

The accrual method of financial accounting records transactions independently of cash usage. Revenue is recorded when it is earned (when a bill is sent), not when it actually arrives (when the bill is paid). Expenses are recorded upon receiving an invoice, not when paying it. Accrual accounting recognizes the impact of a transaction over a period of time. 

For example, imagine a company receiving a $1,000 payment for a consulting job to be completed next month. Under accrual accounting, the company is not allowed to recognize the $1,000 as revenue, as it has technically not yet performed the work and earned the income.

The transaction is recorded as a debit to cash and a credit to unearned revenue, a liability account. When the company earns the revenue next month, it clears the unearned revenue credit and records actual revenue, erasing the debt to cash.

Another example of the accrual method of accounting is expenses that have not yet been paid. Imagine a company received an invoice for $5,000 for July utility usage.

Even though the company won’t pay the bill until August, accrual accounting calls for the company to record the transaction in July, debiting utility expenses. The company records a credit to accounts payable. When the invoice is paid, the credit is cleared.

Cash Method

The cash method of financial accounting is an easier, less strict method of preparing financial statements: Transactions are recorded only when cash is involved. Revenue and expenses are only recorded when the transaction has been completed via the facilitation of money.

In the example above, the consulting firm would have recorded $1,000 of consulting revenue when it received the payment.

Even though it won’t actually perform the work until the next month, the cash method calls for revenue to be recognized when cash is received. When the company does the work in the following month, no journal entry is recorded, because the transaction will have been recorded in full the prior month.

In the other example, the utility expense would have been recorded in August (the period when the invoice was paid). Even though the charges relate to services incurred in July, the cash method of financial accounting requires expenses to be recorded when they are paid, not when they occur. 

Financial Accounting

Records transactions when benefit is received or liability is incurred

A more accurate method of accounting that depicts more realistic business operations

Required for larger, public companies as part of external reporting

Records transactions when cash is received or distributed

An easier method of accounting that simplifies a company down to what has already actually occurred

Primarily used by smaller, private companies with low to no reporting requirements

Principles of Financial Accounting

Financial accounting is dictated by five general, overarching principles that guide companies in how to prepare their financial statements. The type of accounting method should be determined at the outset. Changes to this method can happen later but require specific actions.

The principles are the basis of all financial accounting technical guidance. These five principles relate to the accrual method of accounting.

• Revenue recognition principle – This states that revenue should be recognized when it has been earned. It dictates how much revenue should be recorded, the timing of when that revenue is reported, and circumstances in which revenue should not be reflected within a set of financial statements. 
• Cost principle – This states the basis for which costs are recorded. It dictates how much expenses should be recorded for (i.e. at transaction cost) in addition to properly recognizing expenses over time for appropriate situations (i.e. a depreciable asset is expensed over its useful life). 
• Matching principle – This states that revenue and expenses should be recorded in the same period in which both are incurred. It strives to prevent a company from recording revenue in one year with the associated cost of generating that revenue in a different year. The principle dictates the timing in which transactions are recorded.
• Full disclosure principle – Companies should provide complete, honest, and accurate information on their finances. All information relevant to their financial situation should be disclosed. To achieve this, financial statements should be prepared using financial accounting guidance that includes footnotes , schedules, or commentary that transparently report the financial position of a company. This principle also dictates the amount of information provided within financial statements.
• Objectivity principle – Accounting should be based solely on facts and objective evidence. It should be free of bias and personal opinion. While financial accounting has aspects of estimation and professional judgment, a set of financial statements should be prepared objectively and factually.

Importance of Financial Accounting

Companies engage in financial accounting for a number of important reasons.

• Creating a standard set of rules – By delineating a standard set of rules for preparing financial statements, financial accounting creates consistency across reporting periods and different companies.
• Decreasing risk – Financial accounting does this by increasing accountability. Lenders, regulatory bodies , tax authorities, and other external parties rely on financial information; financial accounting ensures that reports are prepared using acceptable methods that hold companies accountable for their performance.
• Providing insight to management – Though other methods such as managerial accounting may provide better insights, financial accounting can drive strategic concepts if a company analyzes its financial results and makes reactionary investment decisions. 
• Promoting trust in financial reporting – Independent governing bodies oversee the rules of financial accounting, making the basis of reporting independent of management and a highly reliable source of accurate information.
• Encouraging transparency – By setting rules and requirements, financial accounting forces companies to disclose certain information on how operations are going, and what risks the company is facing, painting an accurate picture of financial performance regardless of how well or poorly the company is doing.

Careers in financial accounting can include preparing financial statements, analyzing financial statements, auditing financial statements, and supporting the technology/systems that produce financial statements.

Users of Financial Accounting/Financial Statements

The entire purpose of financial accounting is to prepare financial statements, which are used by a variety of groups and often required as part of agreements with the preparing company. In addition to management using financial accounting to gain information on operations, the following groups use financial accounting reporting. 

• Investors – Before putting their money into a company, investors often seek reports prepared using financial accounting to understand how the company has been doing and set expectations about the company’s future. 
• Auditors – Companies may be required to present their financial position to auditors, who analyze the financial statements and ensure that proper financial accounting guidance has been used and the reports are free from material misstatements.
• Regulatory agencies – Public companies are required to submit financial statements to governing bodies such as the Securities and Exchange Commission. These financial statements must be prepared in accordance with financial accounting rules, and companies face fines or exchange delisting if they do not comply with reporting requirements.
• Suppliers – Vendors or suppliers may ask for financial statements as part of their credit application process. Suppliers may require a credit history or evidence of profitability, such as a Piotroski Score , before issuing or increasing credit to a requested amount.
• Banks – Lenders and other similar financial institutions will almost always require financial statements as part of the business loan process. Lenders will need to see verifiable proof via financial accounting that a company is in good operational health prior to issuing a loan. The statements may also be used for determining the cost, covenants, or interest rate of the loan.

Financial Accounting vs. Managerial Accounting

The key difference between financial and managerial accounting is that financial accounting provides information to external parties, while managerial accounting helps managers within the organization make decisions.

Managerial accounting assesses financial performance and hopes to drive smarter decision-making through internal reports that analyze operations. It is not an allowable basis for financial statements. 

Managerial accounting uses operational information in specific ways to glean information. For example, it may use cost accounting to track the variable costs, fixed costs, and overhead costs along a manufacturing process. Then, using this cost information, a company may decide to switch to a lower quality, less expensive type of raw materials.

Professional Designations for Financial Accounting

Members of financial accounting can carry several different professional designations.

• Certified Public Accountant (CPA) – The most common accounting designation demonstrating an ability to perform financial accounting within the United States is the CPA license .
• Chartered Accountant (CA) – Outside of the United States, holders of the CA license demonstrate the ability as well.
• Certified Management Accountant (CMA) – The CMA designation is more demonstrative of an ability to perform internal management functions than financial accounting. However, this license does test on financial analysis.
• Certified Internal Auditor (CIA) – Holding a CIA designation demonstrates credibility in maintaining the control environment within a company by overseeing processes and procedures related to financial accounting.

What Is an Example of Financial Accounting?

A public company’s income statement is an example of financial accounting. The company must follow specific guidance on what transactions to record. In addition, the format of the report is stipulated by governing bodies. The end result is a financial report that communicates the amount of revenue recognized in a given period. 

What Is the Main Purpose of Financial Accounting?

Financial accounting is intended to provide financial information on a company’s operating performance. Though management can analyze reports generated using financial accounting, they often find it more useful to use managerial accounting, an internally geared method of calculating financial results that is not allowable for external reports. Financial accounting is the widely accepted method of preparing financial results for external use.

Who Uses Financial Accounting?

Public companies are required to perform financial accounting as part of the preparation of their financial statement reporting. Small or private companies may also use financial accounting, but they often operate with different reporting requirements. Financial statements generated through financial accounting are used by many parties outside of a company, including lenders, government agencies, auditors, insurance agencies, and investors.

Financial accounting is the framework that sets the rules on how financial statements are prepared. The U.S. follows different accounting rules than most other countries. These guidelines dictate how a company translates its operations into a series of widely accepted and standardized financial reports. Financial accounting plays a critical part in keeping companies responsible for their performance and transparent regarding their operations.

Financial Accounting Standards Board. " About the FASB ."

U.S. Securities and Exchange Commission. " Exchange Act Reporting and Registration ."

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Course Resources

Powerpoints.

A full set of PowerPoint decks is provided for download below. All decks are tightly aligned to the modules in this course. Since they are openly licensed, you are welcome to retain, reuse, revise, remix, and redistribute as desired.

These PowerPoint files are accessible. If you do revise them, make sure to follow these  guidelines for creating accessible PowerPoints .

Use the following link to download all PowerPoint decks in a single .zip file (30.5 MB) , or download each individual deck below:

• Module 0: Personal Accounting
• Module 1: The Role of Accounting in Business
• Module 2: Accounting Principles
• Module 3: Recording Business Transactions
• Module 4: Completing the Accounting Cycle
• Module 5: Accounting for Cash
• Module 6: Receivables and Revenue
• Module 7: Merchandising Operations
• Module 8: Inventory Valuation Methods
• Module 9: Property, Plant, and Equipment
• Module 10: Other Assets
• Module 11: Current Liabilities
• Module 12: Non-Current Liabilities
• Module 13: Accounting for Corporations
• Module 14: Statement of Cash Flows
• Module 15: Financial Statement Analysis

The Accounting Cycle

• The accounting period of a business is separated into activities that help the business keep its accounting records in an orderly fashion.

Collect & verify source documents

Analyze each transaction

Journalize each transaction

Post to the ledger

Prepare a trial balance

Prepare a Worksheet

Prepare financial statements

Journalize & post closing entries

Prepare a post-closing trial balance

Step 1 – Collecting & Verifying Source Documents

• Source Document – a paper that is prepared as evidence of a business transaction.
• Invoice – lists specific information involving the buying or selling of an item on account.
• Receipt – a record of cash received by the business.
• Memorandum – a brief written message that describes a transaction that takes place within a business. (if no other source doc. exists.
• Check Stub – same information that appears on a check as well as the account balance.

Step 2 – Analyzing Business Transactions

• Analyzing information from the source documents to determine the debit and credit parts of each transaction.
• You may not be given a description of the transaction, but must find the information off of the source document.

Step 3 – Recording Business Transactions in a Journal

• Journal – a record of the transactions of a business.
• Kept in chronological order
• Journalizing – the process of recording business transactions in a journal.
• AKA Record of Original Entry – it is where transactions are first entered in the accounting system.

Step 4 – Posting to the Ledger

• Posting – the process of transferring information from the journal to individual general ledger accounts.
• General Ledger – a permanent record organized by account number.
• Shows changes in an account’s balance.

Step 5 – Prepare a Trial Balance

• Trial Balance – a list of all the account names and their current balances.
• Proving the Ledger – comparing the total of debits to the total of credits to see if they equal.

Step 6 – Prepare a Worksheet

• Work s heet – a working paper used to collect information from the ledger accounts in one place.
• Information is needed to prepare financial statements

Step 7 – Prepare Financial Statements

• Financial Statements – summarize the changes resulting from business transactions that occur during an accounting period.
• Income Statement – reports net income/loss for a specific time period.
• Statement of Owner’s Equity – summarizes changes in the owner’s capital account as a result of business transactions that occur during the period.
• Balance Sheet – a report of the balances in the permanent accounts at the end of the period.
• Statement of Cash Flows – summarizes the amount of cash taken in, sources of cash, amount paid out, uses of cash.

Step 8 – Journalize & �Post Closing Entries

• Closing Entries – journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income/loss for the period to the capital account.

Step 9 – Prepare a Post-Closing Trial Balance

• Prepared to make sure total debits equal total credits after the closing entries are posted.

What is Accounting? Definition, Objectives, Advantages, Limitation, Process

• Post last modified: 22 February 2022
• Reading time: 35 mins read
• Post category: Finance

What is Accounting?

Accounting is the art of recording, classifying, summarising and analyzing business transactions and interpreting the results thereof. In accounting, only those transactions and events are recorded which can be measured in terms of money.

The basic objective of accounting is to provide the desired information to the owner as well as to all other interested parties i.e. investors, creditors, employees, financial institutions, government etc.

In short, we can say that accounting is the language of business by which all the financial and other information are communicated to various interested parties.

Table of Content

• 1 What is Accounting?
• 2 Introduction to Accounting
• 3 Definition of Accounting
• 4 Characteristics of Accounting
• 5.1 Financial Accounting
• 5.2 Management Accounting
• 5.3 Cost Accounting
• 5.4 Tax Accounting
• 5.5 Social Accounting
• 5.6 Human Resource Accounting
• 5.7 National Accounting
• 5.8 Green Accounting
• 5.9 Creative Accounting
• 5.10 Forensic Accounting
• 6.1 Stewardship functions
• 6.2 Managerial functions
• 6.3 Statutory compliance function
• 7.1 Reliability
• 7.2 Understand ability
• 7.3 Comparability
• 8.1 Single Entry
• 8.2 Double Entry System
• 9 Concept of Accounting Process
• 10.1 Maintaining systematic records
• 10.2 Communicating the financial results
• 10.3 Meeting legal needs
• 10.4 Stewardship
• 10.5 Fixing responsibility
• 11.1 Owners/Shareholders
• 11.2 Managers
• 11.3 Prospective Investors
• 11.4 Creditors, Bankers and other Lending Institutions
• 11.5 Government
• 11.6 Employees
• 11.7 Customers
• 12.1 Helpful in the Determination of Financial Results
• 12.2 Comparison of Results
• 12.3 Assistance to Management
• 12.4 Helpful in Assessing the Tax Liability
• 12.5 Helpful in the Case of Insolvency
• 12.6 Provides Information to Interested Parties
• 12.7 Raising of Funds Become Easy
• 13.1 Recording of Monetary Items Only
• 13.2 Effect of Inflation
• 13.3 Accounting Information May be Biased
• 13.4 Conflict Between Accounting Principles
• 14.1 Identification of Transaction
• 14.2 Recording the Transaction
• 14.3 Classifying
• 14.4 Summarising
• 14.5 Presentation of Financial Information

Introduction to Accounting

Accounting is a business language which explains the various kinds of transactions during a given period of time. Accounting is used by business entities for keeping records of their money or financial transactions.

A businessman who invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period. The main object of a business house is to earn profit. Accounting is the medium of recording business activities and it is considered a language of business.

To find out the results of a business, the information relating to the cost of the products and revenues from the products is collected. Then the costs and revenues are compared to find out the profit or loss of the business. If volume of sales of the products is high and the number of transactions of the business is very high, it is impossible to keep all these transactions in the mind of a businessman.

Thus a need of recording of all these business transactions rose. The recording of business transactions or activities is done through a process of accounting.

Definition of Accounting

The Accounting definition is given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, accounting is “ the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof ” .

As per Robert N. Anthony , “ Accounting system is a means of collecting, summarizing, analyzing and reporting, in monetary terms, information about the business”.

As per Smith and Ashburne , “ Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating the results to persons who must take decisions or form judgment.”

As per R.N. Anthony “Nearly every business enterprise has accounting system, it is a means of collecting, summarising and reporting in monetary terms, information about business.”

Characteristics of Accounting

Following are the characteristics of accounting :

• Accounting is an art which it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position. Analysis and interpretation of financial data require special knowledge, experience and judgement.
• In accounting the financial transactions are recorded in the Journal. With the help of Journal, the recorded data are classified into ledger under appropriate heads. Then with the help of ledger the trial balance and financial statements are prepared.
• It records only those transactions and events which are of financial character: If a transaction has no financial character then it will not be measured in terms of money and not recorded.
• It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money.
• On account of recording of business transactions in a systematic manner, it is also called a science. First the business transactions are recorded in the primary books i.e. Journal, for classification the ledger is prepared. With the help of ledger the Trial Balance, Profit and Loss account and Balance Sheet is prepared. Profit and Loss account is prepared after a period to find the result of the business and Balance Sheet to know the financial position of the business

Divisions of Accounting

Accountants tend to specialize in various types of accounting work and this has resulted in the development of different branches of accounting. Some of the divisions of accounting are given as:

Financial Accounting

Management Accounting

Cost Accounting

Tax accounting, social accounting, human resource accounting, national accounting, green accounting, creative accounting, forensic accounting.

Accounting designed or meant for outsiders is known as financial accounting. It is concerned with the recording of business transactions and the periodic preparation of income statement, balance sheets and cash flow statement from such records.

It is concerned with the interpretation of accounting information to guide the management for future planning, decision-making, control, etc. Management accounting, therefore, serves the information needs of the insiders, e.g., owners, managers and employees.

It has been developed to ascertain the costs incurred for carrying out various business activities and to help the management to exercise strict cost control.

This branch of accounting has grown in response to the difficult tax laws such as relating to income tax, sales tax, excise duties, customs duties, etc. An accountant is required to be fully aware of various tax legislations.

This branch of accounting is also known as social reporting or social responsibility accounting. It discloses the social benefits created and the costs incurred by the enterprise. Social benefits include such facilities as medical, housing, education, canteen, provident fund and so on while the social costs may include such matters as extra hours worked by employees without payment, environment pollution, unreasonable terminations, etc.

It is concerned with the human resources of an enterprise. Accounting methods are applied to evaluate the human resources in money terms so that the society might judge the total work of the business enterprises including, its non-human assets.

It is, therefore, accounting for the people of the organisation. Unfortunately, no objectively verifiable method has been developed for universal application.

The accounting for the resources of the nation as a whole. It is generally not concerned with the accounting of individual business entities and is not based on generally accepted accounting principles. It has been developed by economists and statisticians.

The concept of green accounting is related to the calculation of national income in which standard measures of income and output are Gross National Product (GNP) Gross Domestic Product (GDP) Gross National Income (GNP) etc.

In simple words, Green Accounting is a kind of accounting that tries to take into consideration the environmental costs in the calculation of the operating income of an enterprise. Green Accounting discloses or emphasizes more clearly about the quality of economic growth in terms of sustainable development.

It is the primary duty of the persons in accounting professions, the accountants, to report a true and fair view of the financial statements, namely: the profit and loss account and the balance sheet.

Creative accounting is nothing but the manipulation of the operating results and financial position of the company, of course, within the confines (limits) of the accounting standards.

Financial scams and frauds in accounting practices have drawn attention of the users of the accounting information supplied by business enterprises. Even the well-governed multinational companies like Enron and other World companies have not escaped from the fraudulent accounting practices.

Auditors who are also qualified accountants have the increased responsibility of detecting the frauds and scams in the corporate world

Functions of Accounting

As mentioned earlier, accounting information is used by different stakeholders, especially the management, to decide the future course of action for the organisation.

There are three main functions of accounting, which are explained as follows:

Stewardship functions

Managerial functions, statutory compliance function.

These functions of accounting include the following:

• Recording, classifying and summarising the financial transactions of an organisation
• Analysing the financial data
• Representing the financial position of the organisation by displaying various results such as net profit, credit, debit, loan, etc.
• Communicating the financial information to the interested stakeholders.
• Formulating a financial policy
• Conducting planning
• Preparing budget and controlling costs
• Preventing financial errors and frauds

These functions include the following:

• Submitting financial statements such as profit and loss account, balance sheet, etc. to regulatory bodies as a legal and regulatory requirement
• Providing the bases for filing returns for both direct and in- direct taxes

Qualitative Characteristics of Accounting Information

Relevance: Financial information obtained through financial statements should be according to the objectives of the organization. The objective-oriented information helps the investors, managers and creditors to take decisions about the business. The information should be given according to the priorities and needs of each and every interested party.

Reliability

Understand ability, comparability.

Financial Information should be based on facts which can easily be verified. Financial information can be verifiable if it is based on original source documents. Source documents include cash memo, purchase invoices, sales invoices, property transfer papers and written agreements, etc.

Financial information should be presented in a simple and easy way so that the users i.e. investors, debenture holders, employees and government officials can understand it easily. It should be simple enough even for a person who is not aware about the rules and terms used in accounting. Some explanatory notes should be given so as to make the information more understandable.

The financial statements must show corresponding information for the preceding year(s) so that the users may be able to compare the financial performance, position and cash flows of different years. The measurement and display of the net financial effects of similar type of transactions must be treated in a consistent form.

Methods of Accounting

Single entry.

It is an incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared.

Double Entry System

The double entry system is based on scientific principles and is, therefore, used by most of business houses. The system recognizes the fact that every transaction has two aspects and records both aspects of each and every transaction.

Under this system, in every transaction an account is debited and other account is credited. The crux of accountancy lies in finding out which of the two accounts are affected by a particular transaction and out of these two accounts which account is to be debited and which account is to be credited.

Concept of Accounting Process

Accounting process is the complete sequence of accounting procedures which begin with the recording of business transactions from source documents in the Journal or in subsidiary books, as the case may be, and end with the preparation of two basic financial statements, namely Income Statement (or profit and loss account) and Balance Sheet. In the case of Limited Liability Companies, the Cash Flow Statement is also prepared.

The essential steps in the Accounting Process are:

• To enter the transactions in the source documents such as purchase invoice, sales invoice, cash receipts, bank pay-in-slips etc.
• To record or enter the transactions in the Journal or in subsidiary books, as the case may be.
• Classifying the transactions (i.e., the entries found in the Journal or Subsidiary Books) to post or transfer those entries in the appropriate accounts in the ledger.
• To enter the adjustments, if any, in the Journal.
• To balance the various accounts in the ledger to prepare the trial balance in order to check the arithmetical accuracy of the ledger accounts.
• To prepare the final accounts or final statements in the form of trading and profit and loss account (i.e., income statement) and Balance Sheet from the Trial Balance, at the end of the accounting period to ascertain profit or loss of the business for the accounting period and the financial position of the business at the end of the accounting period.

Objectives of Accounting

Following are the objectives of accounting :

Maintaining systematic records

Communicating the financial results, meeting legal needs, stewardship, fixing responsibility.

Business transactions are properly recorded, classified under appropriate accounts and summarized into financial statement.

Accounting is used to communicate financial information in respect of net profits (or loss), assets, liabilities etc., to the interested parties.

The provisions of various laws such as Companies Act, Income Tax and GST Acts require the submission of various statements, i.e., annual account, income tax returns and so on.

Accounting assists the management in the task of planning, control and coordination of business activities.

In the case of limited companies, the management is entrusted with the resources of the enterprise. The managers are expected to act true trustees of the funds and the accounting helps them to achieve the same.

Accounting helps in the computation of the profits of different departments of an enterprise which help in fixing the responsibility of departmental heads.

Users of Accounting Information

Owners/shareholders, prospective investors, creditors, bankers and other lending institutions.

The primary aim of accounting is to provide necessary information to the owners related to business.

In large business organizations and in corporations, there is a separation of ownership and management functions. The management of such business are more concerned with the accounting information because they are answerable to the owners.

The person who is contemplating an investment in a business will like to know about its profitability and financial position. They derive this information from the accounting reports of the concern.

Trade creditors, bankers and other lending institutions would like to be satisfied that they will be paid on time. The financial statements help them in judging such position. Banks and other lending agencies rely heavily upon accounting statements for determining the acceptability of a loan application.

The Government is interested in the financial statements of business enterprise on account of taxation, labour and corporate laws.

Employees are interested in financial statements on accounts because their wage increase and payment of bonus depend on the size of the profit earned.

Customers may also have either short-term or long-term interest in the reporting entity or long-term interest in the reporting entity and they may be satisfied with the profitability, liquidity and solvency position.

Advantages of Accounting

Following are the advantages of accounting :

Helpful in the Determination of Financial Results

Comparison of results, assistance to management, helpful in assessing the tax liability, helpful in the case of insolvency, provides information to interested parties, raising of funds become easy.

Accounting is very useful in the determination of the profit and loss of a business and showing the financial position of the business.

Accounting information when properly recorded can be used to compare the results of one year with those of earlier years so that the significant changes can be analyzed.

The accounting information helps the management to plan its future activities by preparing budgets in respect of sales, production, expenses, cash, etc. Accounting helps in the coordination of various activities in different departments by providing financial details of each department.

The managerial control is achieved by analyzing in money terms the departures from the planned activities and by taking corrective measures to improve the situation in future.

Generally, a businessman has to pay corporate tax, VAT and excise duty, etc. Therefore, it is necessary that proper accounts should be maintained to compute the tax liability of the business.

Sometimes the businessman becomes insolvent. If he has properly maintained the accounts, he will not face the problems in explaining few things in court.

Interested parties like owners, creditors, management, employees, customers, government, etc. are interested in accounting information.

It helps in raising funds from investors or financial institutions by promising investors a fixed claim (interest payments) on the cash flows generated by the assets, with a limited or no role in the day-to-day running of the business.

Limitation of Accounting

Following are the limitation of accounting :

Recording of Monetary Items Only

Effect of inflation, accounting information may be biased, conflict between accounting principles.

In accounting, only those transactions, which have monetary value, are recorded. And those transactions which do not have financial value whether those are important in business are not recorded in the accounting.

In accounting, the transactions are recorded at the historical cost. Accordingly, the assets of the business are shown at cost in the balance sheet. Thus the balance sheet prepared on the basis of historical cost ignores the price-level changes (inflation). In this way, the balance sheet of the business does not present the true and fair picture of the business.

Accounting information is not without personal influence or bias of the accountant. In measuring income, accountant has a choice between different methods of inventory valuation, deprecation methods, treatment of capital and revenue items etc. Hence, due to the lack of objectivity income arrived at may not be correct in certain cases.

In accounting, one accounting principle conflicts another. For instance, inventory should be valued on the basis of ‘least of the cost and market price’ as per the principle of conservatism.

Accounting Process

Accounting process involves the following steps or stages:

Identification of Transaction

Recording the transaction, classifying, summarising, presentation of financial information.

In accounting, only business transactions are recorded. A transaction is an event which can be expressed in terms of money and which brings a change in the financial position of a business enterprise. An event is an incident or a happening which may or may not being any change in the financial position of a business enterprise.

Therefore, all transactions are events but all events are not transactions. A transaction is a complete action, to an expected or possible future action. In every transaction, there is a movement of value from one source to another.

For example, when goods are purchased for cash, there is a movement of goods from the seller to the buyer and a movement of cash from buyer to the seller. Transactions may be external (between a business entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve a second party, e.g., depreciation charged on the machinery).

Journal is the first book of original entry in which all transactions are recorded event-wise and date-wise and presents a historical record of all monetary transactions. It may further be divided into sub-journals as well which are also known subsidiary books.

Accounting is the art of classifying business transactions. Classification means statement setting out for a period where all the similar transactions relating to a person, a thing, expense, or any other subject are groped together under appropriate heads of accounts.

Summarising is the art of making the activities of the business enterprise as classified in the ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors etc. Summarisation helps in the preparation of Profit and Loss Accounts and Balance sheet for a particular fiscal year.

Analysis and Interpretation The financial information or data as recorded in the books of an account must further be analyzed and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help the management to assess in the performance of the business operations and forming future plans also.

The end users of accounting statements must be benefited from analysis and interpretation of data as some of them are the ‘stock holders’ and other one the ‘stakeholders’. Comparison of past and present statements and reports, use of ratio analysis and trend analysis are the different tools of analysis and interpretation.

From the above discussion, one can conclude that accounting is a art which starts and includes steps right from recording of business transactions of monetary character to the communicating or reporting the results thereof to the various interested parties.

( Click on Topic to Read )

• 4 Accounting Conventions
• What Is Accounting Standards?
• What is Accounting Equation?
• What is Source Documents?
• What i s Accounting Cycle?
• Classification Of Accounts
• 3 Branches of Accounting
• What is Double Entry System of Accounting?
• What i s Journal In Accounting?
• What is Ledger In Accounting?
• What is Posting In Accounting?
• What is Trial Balance?
• What is Accounting Errors?
• What is Depreciation In Accounting?
• What is Financial Statements?
• What is Departmental Accounts?
• What is Branch Accounting?
• Accounting for Dependent Branches
• Independent Branch Accounting

Accounting for Foreign Branches

Corporate Finance

• What is Corporate Finance?
• Long Term Financing
• What is Inventory Management?
• External Sources Of Finance
• Short Term Financing
• Time Value Of Money
• Capital Assets Pricing Model (CAPM)
• What is Capital Rationing?
• What is Capital Budgeting?
• What is Cost o f Capital?
• What is Dividend?
• Dividend Theories
• What is Dividend Policy?
• What is Cash Management?
• Types of Derivatives Contract
• What is Inventory Control?
• What is Consumer Financing?
• What is Management Accounting?
• What is Financial Statement Analysis?
• Types of Accounting
• What is a Management Accountant?
• Inventory Control Techniques
• Determination Of Working Capital
• What is Cash Flow Statement?
• Determination of Working Capital

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Introduction to Financial Accounting

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INTRODUCTION TO FINANCIAL ACCOUNTING

Sep 14, 2014

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INTRODUCTION TO FINANCIAL ACCOUNTING. HISTORY AND ORIGIN OF ACCOUNTING. The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years.

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HISTORY AND ORIGIN OF ACCOUNTING The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.

EARLY ACCOUNTING IN INDIA Early references to accounting concepts are found in the Vedas: Vikraya is found in the Atharvaveda and the Nirukta denoting ‘sale’. Sulka in the Rig veda clearly means ‘price’. In the Dharma Sutras it denotes a ‘tax’.

What is Financial Accounting? • A method to communicate financial information to interested external parties. • Users include capital providers, regulators, customers, suppliers, employees, etc • Capital suppliers include debt and equity providers • Financial accounting is used for both prediction and control

ACCOUNTING & BOOKKEEPING ESSENTIALS

Accounting is a more complex concept that means reflection of the results of transactions according to the principles, standards, and statutory requirements in the financial statements and other business reports.

DEFINITION OF ACCOUNTING • Accounting refers to the process of • Recording • Classifying • Summarizing • And analyzing the information gathered or collected in monetary terms, • And thereof interpreting the results to the users who are interested in such information.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Generally Accepted Accounting Principles (GAAP)refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as Accounting Standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing , and in the preparation of financial statements.

IS ACCOUNTING A SCIENCE OR AN ART ? Definition of Science : a branch of knowledge or study dealing with a body of facts or truths systematically arranged and showing the operation of general laws: the mathematical sciences. 2. systematic knowledge of the physical or material world gained through observation and experimentation. 3. any of the branches of natural or physical science. 4. systematized knowledge in general. 5. knowledge, as of facts or principles; knowledge gained by systematic study.

Definition of Art: The expression or application of human creative skill and imagination, typically in a visual form such as painting or sculpture, producing works to be appreciated primarily for their beauty or emotional power. 2. Works produced by such skill and imagination 3. Skill, dexterity, or the power of performing certain actions, acquired by experience, study, or observation

Accounting is both an art and science. An art because it can be learnt by practice and not by mere listening to it like scientific rules. Every accountant is not same. Many are good and other make mistakes, like every person is not a great artist. It is science because it is based on many rules, concepts, conventions and assumptions. If everything goes accordingly, your balance sheets match, trial balances match and profits can be calculated correctly. But even if a single accounting concept is mishandled and transaction is entered incorrectly, it brings propagation errors. We need to go back every step to trace it, which is very exhausting. So its a science.

BOOK KEEPING Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting.

How is bookkeeping different from accounting?

DIFFERENCE ACCOUNTING VIS-À-VIS BOOK KEEPING

OBJECTIVES OF ACCOUNTING

Profitability Ascertainment: Shows true figures of profits earned my the business or losses incurred by the business enterprise, as the case may be. • Financial Position: Shows true financial position of the business, position of assets and liabilities and helps the administrators to decide for future well being • Generates Information: Accounting generates information about the financiability of the business enterprise. It provide true benchmarks for the business to survive in the long run by providing with good sources of accurate data • Forecasting: Accounting helps the business enterprises to predict the position of the business in the future and decide about the future in the present.

FUNCTIONS OF ACCOUNTING

USERS OF ACCOUNTING INFORMATION

BRANCHES OF ACCOUNTING

SYSTEM OF ACCOUNTING Single Entry System: Under this system only personal accounts with or without subsidiary books are maintained. This system has no complete record of business transactions done during a specified period. Hence neither trial balance nor final accounts can be prepared. This system is less costly.

A double-entry system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different ledger accounts. When each financial transaction is closely analyzed, it reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect” the basic principle of this system is, for every debit, there must be a corresponding credit of equal amount and for every credit, there must be a corresponding debit of equal amount.

ADVANTAGES OF ACCOUNTING • ACCOUNTING REPLACES HUMAN MEMORY • ACCOUNTING HELPS IN KNOWING PROFIT • ACCOUNTING HELPS IN KNOWING FINANCIAL POSITION OF ORGANISATION • ACCOUNTING HELPS IN KNOWING LIST OF CREDITORS AND DEBTORS • ACCOUNTING HELPS IN PAYING TAXES • ACCOUNTING HELPS IN RAISING MORE FUNDS BY SUPPLYING INFORMATION TO INVESTORS AND CREDITORS • ACCOUNTING HELPS IN PLANNING FOR EXPANSION • ACCOUNTING HELPS IN GETTING BANK LOANS

LIMITATIONS OF ACCOUNTING Records only monetary transactions. Effects of price level changes not considered Personal bias of accountant affects the accounting statements. Permits alternative treatments. Profit no real test of managerial position

ACCOUNTING AND OTHER FIELDS OF SPECIALIZATION Accounting & Sociology Accounting & Engineering

Accounting and economics: Budget planning, true economy position, greater debt security analysis, fewer risk economic trends Accounting & Business Mathematics and Statistics: Analysis of stastical information and mathematical relations through true fair accounting without window dressing Accounting & Engineering: Used in true measurement of costs of each labor and works element for better quality product , infrastructure and costing. Accounting & Sociology : Study of human wants and needs through true accounting concepts, finding out benchmarks like purchasing worth of a rupee , human development index, etc. Accounting with Law & Management: Maintaining proper law, order , and management, through and fair accounting of each necessary item whether human or financial.

What Does Cash Basis Mean?A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for).

B. Advantages of cash basis accounting It is easy to do. 2. It is objective, with few choices to make. Cash either comes in or goes out, period! C. Disadvantages of cash basis accounting 1. No attempt is made to match an expense with the revenue it generates. This means that the income statement and balance sheet may not be good pictures of recent business activity and present business conditions. 2. For example, the cash purchase of an expensive computer will all be charged in the year of purchase, even though it will last a number of years. This means that income in the year of purchase would be understated and income would be overstated in the following years. 3. When business activity involves inventory assets, cash basis accounting is not. allowed for income tax purposes by the Internal Revenue Service.

ACCRUAL BASIS OF ACCOUNTING... The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting which reports income when received and expenses when paid. Under the accrual method, companies do have some discretion as to when income and expenses are recognized, but there are rules governing the recognition. In addition, companies are required to make prudent estimates against revenuesthat are recorded but may not be received, called a bad debt expense.

The advantages and disadvantages of accrual basis accounting 1. Accrual accounting measures current income more accurately than the cash method. a. This means that the balance sheet is a more accurate estimate of financial position (value). b. Accurate, current information makes it easier to predict future income and financial position. 2. Accrual accounting is difficult to understand. a. Confusion exists because net income does not equal the period's change in cash. b. The cash balance of a company with high income may even decrease during the year. c. For example, a rapidly growing, profitable retailer may face a shortage of cash for many reasons. 1) Rapid growth often requires large inventories. New retailers often find that suppliers will not grant credit. This combination increases cash outflows. 2) Gaining market share may require a retailer to grant easy credit terms. This decreases cash inflows. 3) As a result, a very successful business may not have adequate cash.

Hybrid Basis of Accounting Mixture of Cash and Accrual Basis of Accounting. • Incomes recorded on cash basis and expense on accrual basis. • Used by professionals like Charted Accountants, Lawyers , Doctors etc., to reduce net taxable income.

BASIC ACCOUNTINGTERMS • Debtor: Person who owes money to the business • Creditor: A person to whom money is payable • Capital: Owner’s Funds. • Goods: Articles in which the business deals in. • Assets: A physical thing or right owned by business. • Equity: A claim which can be enforced against the assts of a firm. • Income: Inflows of fund. • Expenditure: Acquisition cost of asset or expenditure. • Expense: Expenditure whose benefit is enjoyed immediately.

OTHER ROLES OF ACCOUNTING

Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.

Thank you VandanaJain Assistant professor in Commerce & BBA Gccba- 42 , Chandigarh. [email protected]

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What Is Accounting? The Basics Of Accounting

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Table of Contents

What is accounting, types of accounting, ways to manage your business accounting, effective accounting practices to adopt immediately, frequently asked questions (faqs).

Accounting 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.

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.

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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 and bookkeeping services. They perform various business functions such as the preparation of financial reports, payroll and cash management.

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.

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:

Financial Accounting

This is the practice of recording and reporting financial transactions and cash flows. This type of accounting is 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).

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, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or bookkeeper. Besides, this frees up time so you can focus on running your business smoothly. Check out our recent piece on the best accounting software for small businesses .

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.

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 audits and reporting.

What is accounting in simple terms?

Accounting is the process of keeping track of your business’s financial transactions. It helps you to understand how money comes in and how it goes out.

Why is accounting important?

Accounting helps a business understand its financial position to be able to make informed decisions and manage risks.

What is the simplest accounting software?

Freshbook is one of the easiest accounting software systems to use. Its interface is very intuitive, making it very easy to learn. Another easy to use option that’s perfect for self-employed entrepreneurs who need an affordable accounting solution is Neat. Learn more about the best accounting software .

Are bookkeeping and accounting different?

Bookkeeping focuses on recording and organizing financial data, including tasks, such as invoicing, billing, payroll and reconciling transactions. Accounting is the interpretation and presentation of that financial data, including aspects such as tax returns, auditing and analyzing performance.

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Introduction to Accounting

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

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Table of Contents

Accounting: definition.

The American Institute of Certified Public Accountants (AICPA) published perhaps the most comprehensive definition of accounting:

Accounting is the art of recording, classifying, and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

Accounting: Explanation

To explain and understand the above definition clearly, let’s consider it in parts.

The first thing to note about accounting is that it is an art, not a science. It is a practical subject concerned more with doing things than theorizing about them.

Accounting is the art of recording, classifying, and summarizing transactions and events. In the first place, we maintain the records of transactions by writing various accounting books like journals and ledgers , etc.

These records are then classified into suitable headings and groups. This classification is important because all information must be seen in a proper perspective to be meaningful.

After the basic records have been suitably classified into groups, the information provided by the groups is summarized into accounting statements (e.g., statements showing the calculation of profit and loss or the business’s financial position).

The preparation of such summarized financial statements is frequently the ultimate aim of keeping records and classifying them.

Another important fact is that such records, classifications, and summaries are made for both transactions and events.

A transaction is any business dealing or activity in which a business unit (or a person) is involved that causes a change in its financial position (e.g., purchase or sale of goods).

An event, on the other hand, is an occurrence to which a business unit may not be a direct party, but may still be affected by it.

An example is the devaluation of a currency. An importer or an exporter is usually affected by devaluation without being directly involved in the decision to devalue the currency.

If an event has a financial implication for a business unit, it must make a record of such an event.

Again, the records, classifications, and summaries are made for only those transactions and events that are of a financial nature or character. All accounting records are basically financial records.

If a transaction or an event does not have a financial implication, it will not be recorded in the accounting books.

For example, placing a purchase order is a transaction but it has no financial implication until the goods are actually delivered by the supplier to the buyer.

Hence, accounting records are made only after the goods have been physically received. As a case in point, the devaluation of the US dollar may have no financial implication for a small trader who has no import or export dealings.

Therefore, in this case, no record of the event must be maintained.

All records are made in a significant manner and in terms of money. It is important that these records must be made in a significant (i.e., organized and methodical) manner in order to be of any real use to a business unit.

Again, all accounting records are made in terms of money—not in terms of quantity or weight.

While additional or subsidiary records may be kept by some businesses in terms of quantity, the basic accounting records are all kept in terms of money.

Thus, a motor vehicle account will show the value of a motor vehicle owned by a business, not its make or mileage, etc. Similarly, in the purchase account, we show only the monetary value of purchases , not the quantity, type, etc. of goods purchased.

The last part of the definition from the AICPA shown above is concerned with the interpretation of the results made available by accounting records and summaries.

Financial statements must be explained to the people concerned so that they can understand the contents and the message conveyed. This is, therefore, an important aspect of the accounting process; without it, records would have limited, if any, value.

For the purpose of interpreting and explaining the accounts, a number of tools or techniques can be utilized.

Need for Accounting

A business exists to earn a suitable return (or profit ) on the investment allocated to it. It is so because money obtained from shareholders and long-term creditors comes at a cost .

The cost for shareholders’ money is to be equated with their expectations. A business will, therefore, aim at a return that satisfies the shareholders’ expectations as well as the legal requirements of the creditors .

The expenses incurred to run a business and the income earned is recorded in accounting. Accounting converts business transactions in money terms, classifies and records transactions in the books of accounts, and summarizes transactions.

This shows the profit earned (or loss sustained) during a period. It also shows the company’s financial position (in terms of assets , liabilities , and proprietor’s interest) at the end of the period.

Without accounting, a business cannot identify how much has been spent, why it has been spent, and what results have been achieved in the form of earnings made through increasing these expenses.

Accounting, therefore, serves as the eyes and ears of a company. With accounting information, businesses can evaluate the direction they are heading in and, accordingly, determine whether the journey will lead to a happy or sad end.

Introduction to Accounting FAQs

Who needs accounting.

All business organizations are in need of accounting. Individuals, sole traders, Partnerships, companies, corporations—all cannot survive without keeping proper accounts.

What is the difference between a hobby and a business?

Hobby does not require any kind of organization or formalities at all. It is an activity carried out on a personal level. In a business, one has to maintain proper books of accounts and other records in the format laid down by law.

What is the difference between a cash book and a general journal?

Cash book shows all cash receipts and payments that take place on a day-to-day basis. It presents only cash transactions under the head cash. General Journal is a book of original entry in which all transactions are recorded at the initial stages only. It includes credit and debit entries for each transaction.

What is the difference between an asset and an expense?

An asset increases the wealth of a person, firm, or country whereas an expense reduces it. Expense is an outflow of cash or diminution in the value of an asset. Alternatively, an expense is the cost involved in earning income.

What are the different types of accounting?

There are various ways by which you can account for your money. Here are five major types: full double-entry accounting, single-entry Bookkeeping, internal control accounting, managerial accounting, and Financial Statement reporting.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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The requirement that financial statements should not be misleading. ‘Fair presentation’ is the US and International Accounting Standards equivalent of the British requirement that financial statements give a true and fair view.

From:   fair presentation   in  A Dictionary of Finance and Banking »

Subjects: Social sciences — Economics

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