Introduction to Accounting

What Is Accounting and How Does It Work?

Accounting is the practice of keeping track of a company's financial activities. Summarizing, analyzing, and reporting these transactions to oversight authorities, regulators, and tax collection entities are all part of the accounting process. Accounting financial statements are a succinct overview of financial transactions over a period of time that summaries a company's operations, financial status, and cash flows.

TAKEAWAYS IMPORTANT

• Accounting is a crucial role for decision making, cost planning, and economic performance monitoring, regardless of the size of an organization.
• A bookkeeper can handle basic accounting needs, but bigger or more complicated accounting chores should be handled by a Certified Public Accountant (CPA).
• Managerial accounting and cost accounting are two key types of accounting for firms. Managerial accounting assists management teams in making business choices, whereas cost accounting assists business owners in determining the price of a product.
• When preparing financial statements, professional accountants adhere to a set of guidelines known as the Generally Accepted Accounting Principles (GAAP).
• How Accounting Functions

Accounting is one of the most important aspects of practically any company. It could be handled by a bookkeeper or accountant in a small business or by big financial departments with dozens of staff in larger corporations. Various accounting reports, such as cost accounting and managerial accounting, are vital in assisting management in making educated company decisions.

Financial statements are brief and consolidated reports that explain a major company's operations, financial status, and cash flows over a specific time period. They are based on hundreds of individual financial transactions. As a result, all accounting certifications are the result of years of study and tough examinations, as well as a certain amount of practical accounting experience.

While a bookkeeper can do basic accounting activities, qualified accountants with qualifications such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA) in the United States are normally responsible for advanced accounting. The Chartered Accountant (CA), Certified General Accountant (CGA), and Certified Management Accountant (CMA) certifications in Canada have been merged into the Chartered Professional Accountant (CPA) designation.

Types of Accounting

Financial Accounting

Cost Accounting

Managerial Accounting

Accounting Requirements

In most circumstances, accountants in the United States prepare financial statements using generally accepted accounting standards (GAAP). GAAP is a set of norms and concepts aimed to make financial reporting more comparable and consistent across businesses. Its accounting requirements are based on double-entry accounting, which requires every accounting transaction to be recorded as both a debit and a credit in two different general ledger accounts that will be rolled up into the balance sheet and income statement.

In most other nations, the International Financial Reporting Standards (IFRS) are used, which are administered by the International Accounting Standards Board.

Accounting as an example

Imagine a company sending an invoice to one of its customers to demonstrate double-entry accounting. A double-entry accountant records a debit to accounts receivables, which goes through the balance sheet, and a credit to sales revenue, which flows through the income statement, using the double-entry method.

The accountant credits accounts receivables and debits cash when the client pays the invoice. Because all of the accounting entries are balanced against each other, double-entry accounting is also known as balancing the books. The accountant understands there must be a mistake in the general ledger if the entries aren't balanced.

Accounting in the Past

Accounting has almost as long a history as money. Accounting dates back to Mesopotamia, Egypt, and Babylonia's early civilizations. The government, for example, kept meticulous records of its finances under the Roman Empire.

Accounting as a profession, on the other hand, has only existed since the early 1800s.

Due to his contributions to the development of accounting as a profession, Luca Pacioli is referred to as "The Father of Accounting and Bookkeeping." Pacioli was an Italian mathematician and Leonardo da Vinci's buddy who produced a treatise in 1494 on the double-entry system of bookkeeping.

By 1880, the Institute of Chartered Accountants in England and Wales had fully created and recognized the modern profession of accounting. Many of the systems used by accountants today were developed at this institute. The Industrial Revolution played a significant role in the establishment of the institute. Merchants needed to keep track of their records as well as avoid insolvency.

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