In this post, we’ll discuss almost everything about accounting...basically, "what is accounting & its importance in the real world".

In addition, we’ll talk about how accounting works, the history of accounting, types of accounting, and many more.

So, if you are a complete beginner and have zero knowledge of accounting then you’ll love this article.

Read on...

Table Of Contents:

• What Is Accounting?
• Why Is Accounting So Important?
• How Accounting Works?
• History Of Accounting
• Types Of Accounting
• Requirements For Accounting
• Frequently Asked Questions
• Conclusion

What Is Accounting?

Accounting is the process of recording financial transactions in a systematic format. It helps keep track of the profits and losses of a business. It also helps keep track of the assets and liabilities of a company.

Accounting takes in raw financial data and gives us a more accurate and fruitful set of financial information that is crucial for maintaining a business or a company.

Why Is Accounting So Important?

Accounting is vital for any company or business carrying out financial transactions. Even non-profit organizations like charitable trusts and government organizations need to record their financial transactions.

Recording financial transactions in books keep you organized. You can keep track of how much profit your business has made or if it went into a loss. Without any records, you wouldn’t know these details and that could be a major problem for your business.

Accounting is important for decision-making in a company. You couldn’t make decisions without knowing the accurate information of the financial state of your company.

Knowing this you could also try out new methods to help your company grow.

Without the help of accounting your company would be in huge trouble. You wouldn’t know how you have earned or how much money you have lost. You wouldn’t be able to tell whether your company is doing well or not. All this information is necessary to run a business.

How Accounting Works?

All financial transaction entries need to be recorded into the book of accounts. This needs to be done within the accounting period. The accounting period usually refers to a year, from January to December or from April to March.

At the end of the accounting period, financial statements like Trading A/c., Profit and Loss account, and Balance sheet are prepared. These financial statements that are prepared summarize transactions of the company for the entire accounting period.

History Of Accounting

Can be traced back to ancient civilization around 7,500 B.C. The Mesopotamians use small clay-like objects as counters for keeping accounts of good. Each object represented particular quantities of different types of commodities, such as food or clothing

In India, during Chandragupta Maurya’s regime, Minister Kautilya wrote a book named ‘Arthashastra’ where in some references can be traced regarding the way of maintaining accounting records which afterward was called as “Desi Nama”.

In the year 1494, and Italian Luca De Bargo Pacioli, recognized as The Father of Accounting and Bookkeeping, introduced the Double Entry Book-keeping System.

Over the years Accounting started to develop and became more complex as the years passed. Various forms of accounting evolved over a period of time. Basically, we can say that accounting came into the picture when humans started trading commodities and kept track of it

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Types Of Accounting

1. Financial Accounting

Financial accounting, commonly termed Accounting, is a field of accounting that involves recording, classifying, summarizing, and reporting the financial transaction arising from the business operations for a period of time. Here, the data which is recorded is generally historical, meaning it’s from the past.

Financial Accounting involves generating financial statements such as income statements, balance sheets, and cash flow statements determining the financial results of the organization. These must be prepared according to Generally Accepted Accounting Principles (GAAP).

The preparation of financial statements is mainly intended to provide information to external parties such as stockholders, suppliers, banks, government agencies, and other stakeholders.

So, for the internal parties to plan for the future and make decisions, Managerial Accounting is used.

2. Managerial Accounting

Managerial Accounting is a branch of accounting that is concerned with identifying, measuring, analyzing, interpreting, and communicating the accounting information to the managers to assist them in making well-informed business decisions and pursue an organization’s goals.

So, unlike Financial Accounting which is mainly concerned with reporting a company's financial transactions to an outsider, Managerial Accounting is mainly focused on internal reporting to aid decision making.

Managerial Accounting includes budgeting and forecasting, cost analysis, cash flow analysis, financial analysis as well as trend analysis, and more.

Since managerial accounting reports are not for external users, the managerial accountants can make use of analysis and reporting techniques that may fall outside the traditional accounting standards such as Generally Accepted Accounting Principles (GAAP). So, the reports can be flexible, can be made as per the need of their intended use, and also can be prepared as needed and not necessarily on a periodic basis.

3. Cost Accounting

Cost accounting can be seen as a subcategory of managerial accounting. This is the type of accounting used internally by management to assess a company’s operations and to make fully informed decisions.

Cost accounting is most commonly used in manufacturing industries which have a lot of resources and costs to manage. So, the cost accountants are responsible for documenting, presenting, and reviewing manufacturing costs. They look at the company’s fixed and variable costs and how they affect a business and how these costs can be better managed. The information which is generated can be utilized for controlling operations with a view to maximizing efficiency and profit.

Types of cost accounting include Standard costing, Activity-based costing, Lean costing, and Marginal costing.

4, Tax Accounting

Tax accounting is a subsector of accounting that focuses on the preparation of tax returns and tax payments rather than the preparation of public financial statements. Tax accounting is governed by the Internal Revenue Code (IRC), which dictates the specific rules to be followed when preparing tax returns.

Tax Accounting is used by individuals, businesses, corporations, and other entities including non-profit entities. The purpose of tax accounting is to be able to track the taxable income of individuals and entities. For individuals tax accounting mainly focuses on income, deductions, donations, and any gains or losses on the investment. For a business, tax accounting is wider and more complex, with great scrutiny regarding how funds are spent and what is taxable and what isn’t.

Tax accountants help businesses stay in compliance with annual tax codes when they file returns each year. They also help and guide tax planning legally reducing the amount of tax owing. Usually, larger organizations will hire a tax accountant since business taxes are more complicated than individual taxes.

Tax accounting also analyzes tax-related business decisions and any other issues related to taxes.

Requirements For Accounting

The requirements for accounting are very simple. For accounting, every accountant must know 3 basic rules. They are known as the Golden Rules of Accounting.

(1) Debit the receiver and credit the giver

(2) Debit what comes in and credit what goes out

(3) Debit expenses and losses, credit income and gains

Along with these the Generally accepted accounting principles (GAAP) laid down by the U.S are also followed in India. These principles are used on a daily basis by accountants handling financial transactions for their clients.

As you can see, accounting is based on rules and principles that need to be followed. The requirements are simple and direct.

Frequently Asked Questions

1. What is a simple definition of accounting?

Accounting refers to recording values in a particular format for the continuation and smooth functioning of an organization.

2. What are the basics of accounting?

Basic accounting terms include a balance sheet, asset, liability, debit, and credit.

3. What is a cash book?

Cashbook is a record maintained by an organization that shows the flow of cash used for business for a period of time.

4. What are basic journal entries?

Journal entries are records maintained regarding each transaction done by the business in order to have clarity and certainty about business transactions.

5. What is the purpose of accounting?

The main objective of accounting is to record financial transactions in the books of accounts to identify, measure and communicate economic information.

Conclusion

Accounting is a necessity for every company and business. Even the non-profit organizations. If there are financial transactions happening in a company, accounting is required. Without it, the company will find itself in huge trouble.

Accounting can be done by professionals or even small business owners. Just get a basic idea about it, research information, follow the rules and you will be good to go.