Skip to main content

Accounting is the practice of keeping track of a company’s financial activities. The definition of accounting is summarizing, analyzing, and reporting financial transactions to oversight authorities, regulators, and tax collection entities. These actions are requirements as part of the accounting process. Businesses of varying sizes need the services of an accountant. Large corporations may have an entire department devoted to accounting.  Accounting is more than just crunching many numbers and spending the day doing math, there are many types of accountants. The business world has an increasing demand for qualified accountants since they play a critical role in organizations.

What is Accounting?

Accounting involves more than working with numbers on spreadsheets day after day. Accountants strategically provide formal recording, analysis, and communication about financial transactions in an organization or business. Accountants’ data-driven work affects every aspect of today’s business world.

Professional accountants play an essential role in making financial decisions. Their unique skill set involves a variety of tasks integral to functioning businesses. Usually, during their professional training, they choose a specialized area. Accountants can perform a wide variety of tasks, including payroll, tax planning, and reporting, financial documentation, financial planning, and producing proper records as needed.

How Accounting Works

Accounting processes are essential for almost any successful business. Smaller businesses may employ a bookkeeper or a single accountant, but larger entities often have a finance department with dozens of employees playing key roles. In addition, various types of accounting generate reports that business leaders depend on to make informed decisions for the business. 

What is the Importance of Accounting for Companies?

Accounting is essential for a company since it helps track all income and expenditures, ensures statutory compliance, and provides management, governmental bodies, and investors with the solid financial information needed for making financial decisions. Accountants generate three essential financial statements for companies, including these.

  • Income statements: contain essential information about profits and losses
  • Balance sheets: provide a clear picture of the business’s finances on any specific date
  • Cash flow statement: bridges the income statement and balance sheets to report how much cash was generated vs. what was spent in any time period

What are the Types of Accounting?

There are numerous types of accounting, but they can ‌be classified into three categories: cost, managerial, and financial accounting. Each type deals with and reports on financial information in different ways. 

1. Financial Accounting

Financial accounting focuses on providing financial data to external companies interested in the business. Investors want to know if the company is worth investing in.

2. Managerial Accounting

Managerial accounting collects and analyzes a company’s finances. This information is used to prepare financial documents for upper-level management to make well-informed business decisions.

3. Cost Accounting

Cost accounting deals with production costs and determines how much is spent on purchases and labor to create products.

What are the Accounting Principles?

The Generally Accepted Accounting Principles (GAAP) are a set of guidelines designed to be used by accountants in the US. Accountants adhere to these accounting principles across the board to ensure consistency in reporting and accounting transactions. The GAAP includes these principles.

  • Monetary Unit Principle: It is assumed that all financial transactions use US dollar amounts for inclusion in accounting records.
  • Time Period Principle: Accounting divides time periods into distinct time intervals. This may be weeks, months, quarters, fiscal, or calendar years. Identifying time periods in financial statements brings clarity for businesses and investors.
  • Economic Entity Principle: Each business is a separate entity; its activities must be separated from the owner’s financial activities.
  • Full Disclosure Principle: Relative information must be disclosed to investors or lenders.
  • Cost Principle: Adjusts costs of items based on cash or cash equivalent and makes adjustments to account for inflation.
  • Matching Principle: Business income and revenue must match their appropriate time period.
  • Going Concern Principle: Accountants must assume the intent of a business is to continue its operations into the foreseeable future.
  • Conservatism Principle: Accountants take a conservative approach when unsure how to report an item. They must report the options with a lesser value.
  • Revenue Recognition Principle: Revenue should be recognized and reported in the period in which it was earned, even if the money was not received at the time.
  • Materiality Principle: Amounts are rounded to the nearest dollar in reporting.

What are the Important Terms About Accounting?

Business owners don’t have to know a lot about accounting initially, especially if they are managing a small business. But as the business grows, so will its need for accounting. In the beginning, an entrepreneur may need to be a “jack of all trades.” A growing business will put more demands on the owner, and learning the most basic accounting terms becomes essential. Here are 10 accounting terms every business owner should know.

  • Cash Flow: the timing and amount of cash moving into and out of the business at any given time.
  • Cash-Flow Forecast: estimating the future movement of money through the organization by analyzing and comparing past cash flow statements.
  • Marginal Costs: used to determine if making more products is profitable. Calculate marginal costs by dividing the cost of production by the number of products you plan to make.
  • Income Sheet: provides details of the net profit made by a company in a period of time. 
  • Financial Statement: a collection of reports that document all the company’s financial transactions.
  • Gross and Net Profit: Gross profit is determined by subtracting the costs associated with producing the service or product. Net profit is how much money is left after all the expenses are paid.
  • Balance Sheet: records the financial history of a company and categorizes them as assets, liabilities, or owner equity.
  • Accrual Accounting: method of tracking revenue and expenses based on when they occurred rather than when money actually changes hands.
  • Burn Rate: how long a company can cover operating costs using cash on hand if they don’t turn a profit.
  • Break-Even Analysis: the point when the income matches the expense for a product or service.

What is the Accounting Equation?

An accounting equation is a straightforward number on a business’s balance sheet. It states that the assets of the company equal the sum of its shareholders’ equity and its liabilities. This sole number is the foundation for the double-entry accounting system. One of the biggest benefits of the accounting equation is that it gives you an easy way to verify your bookkeeping accuracy.

What is the Accounting Cycle?

There are eight steps to the accounting cycle which is a collective process of steps. These steps use a specific process to identify, analyze, and record accounting events in a company. The process helps business owners understand financial accounting more easily. The cycle usually takes a fiscal or calendar year to complete, but it may be done in a single period such as quarterly. Today, modern accounting software automates the accounting cycle.

What are the Requirements for Accounting?

There are no specific requirements for accounting set forth by the government. However, each state sets its minimum requirements. Some accounting positions only require an associate degree, but most careers in accounting require a minimum of a bachelor’s degree. Employers often prefer a candidate who has earned a master’s degree in accounting. Many accountants choose to pursue certification. Only a CPA is allowed to file reports with the SEC (Security and Exchange Commission). 

What are the Examples of Accounting?

Accounting doesn’t cease when a journal entry is recorded. The accounting process provided end-users with helpful financial information. Once financial information is compiled, it may be used in a variety of forms.

Some examples of accounting include:

  • Financial reporting: creating financial statements for internal and external purposes including balance sheets, income statements, etc.
  • Recording transactions: whether it is revenue coming in, or payments going out, every financial transaction needs to be reported.
  • Budgets: accountants often determine and manage budgets for businesses
  • Advising: this can take many forms, from advising on accounting systems to business expenses, and more.
  • Tax planning: accountants plan, advise and report tax information.
  • Auditing: financial statements for organizations and companies often need to be audited.
  • General business advice: accounting experts recommend fixes to cash flow problems, setting proper spending limits, and many other tasks to protect the financial interest of a company.

Who is the Person in Charge of Accounting in the Company?

Accountants are professionals who are responsible for keeping, interpreting, and reporting financial records for a company. Most of the time, an accountant performs multiple roles. They handle many finance-related tasks. The type of work accountants end up doing depends on the industry and the type of accounting being performed.

What are the Responsibilities of an Accountant?

An accountant’s daily duties may vary depending on the organization and industry. But some of the most common responsibilities of accountants include:

  • Ensuring financial documents are accurate and in compliance with the relevant regulations and laws
  • Preparing  and maintaining financial reports
  • Preparing tax returns and ensuring taxes are paid on time
  • Evaluating all of an organization’s financial operations
  • Recommending best practices, strategies, and solutions to help the organization run more efficiently and increase profitability
  • Providing guidance on profit maximization, revenue enhancement, and cost reduction
  • Forecasting 
  • Risk analysis assessment

What are the Skills Required for Accounting?

There are a variety of accounting careers and many different roles for accountants, such as forensic accountants, personal finance advisors, actuaries, and financial analysts. The skills required for various capacities may vary.

However, minimally, some skills for accountants can list as below:

  • Knowledge of Accounting Practices: Accountants should understand the Generally Accepted Accounting Principles and the regulatory standards related to both corporate and public finances.
  • Accounting Software Proficiency: An accountant’s job will require that they utilize common account reconciliation and spreadsheet software. They will also need to know how to use other types of software for financial analysis and reporting. Knowing tax software is essential even if accountants are not preparing tax returns.
  • Preparing Financial Statements: Accountants must know how to create financial statements, including income statements, cash flow statements, and balance sheets.
  • Understanding General Business Practices: An accountant often works with employees in other departments, so having a general idea of the best business practices is beneficial.
  • Analyzing Data: Financial data is an organization’s greatest asset. Accountants need to ‌compile and analyze financial data.

What are the Best Accounting Companies?

Some accounting firms are known by name even if they don’t use accounting services or don’t own a business. Some of the best accounting companies have worked hard to become established and known. Here are the top five accounting firms in 2022:

  • Deloitte employs over 56,000 people who work out of their 80-plus offices across the US. Their headquarters are in New York.
  • PwC has an annual revenue of around $10 million. The firm has around 35,000 employees across the US. The accounting company’s headquarters are in New York. They recently launched a collaboration with Microsoft with plans to come up with a portfolio of services, mostly pertaining to taxes.
  • Ernst & Young brings in more than $8.2 million in revenue each year. The accounting firm employs over 30,000.
  • KPMG employs over 25,000 who work in their 90 offices across the US. The firm gained Thomson Reuters and works closely with BlackLine systems, which is a financial solutions developer.
  • McGladrey employs a sound 7,000 people who work in their 75 offices scattered across the US. Their headquarters are located in Chicago, Illinois and their staff works diligently to develop firm-specific apps.

What is the Best Accounting Software?

Accounting software is an essential part of small and large businesses alike. It adds value to a company by keeping track of accounts receivable and payable, helping prepare for tax season, and providing insight into profitability. The many different types of account software programs available provide various capabilities and have varying prices. Choosing software programs for businesses often comes down to how many employees they have and what features would be the most beneficial for the company’s financial setup.

Here are the top five best accounting software programs:

  • Quickbooks Online. Most small businesses use Quickbooks Online. It provides a comprehensive suite of features and functions. But it also has a plethora of online training resources. The program’s accounting features are accessed through a single dashboard to make bookkeeping tasks fluid and efficient.
  • Xero. For businesses that need basic accounting software, Xero is a great fit. It integrates with third-party payroll services and many payment programs such as Stripe. 
  • FreshBooks. Service-based businesses favor FreshBooks. The program offers more invoice customization options and it can manage most of the basic bookkeeping tasks for a company. Its software solutions make it easy for service-based operations to send proposals, track projects and receive payments online.
  • Wave. For small businesses that don’t need a payroll solution, Wave is a good option. The accounting software platform provides numerous invoicing features. An accountant can pull the needed reports from Wave to prepare taxes for the business.
  • Zoho Books. For businesses that need automated bookkeeping tasks, Zoho Books is great. The software has a large suite of features and integrates easily with other programs and services. Zoho is the most comprehensive accounting software program. It can be used for project management, CRM, inventory management, and more.

What is the History of Accounting?

The history of accounting has been traced back to ancient Mesopotamia. It occurred about the same time as counting, money, and writing developments. Ancient Egyptians and Babylonians used the earliest auditing systems. By the time the Roman Empire came into the picture, governments had dealt with detailed financial information. 

During the Mauryan Empire, Chanakya penned a book that contained aspects of detailed accounting kept for a Sovereign State. But the “father of accounting” Italian Luca Pacioli published the first papers on double-entry bookkeeping while introducing the field to Italy. 

Around the 4th and 3rd millennium BC, intricate records were kept on clay tablets. During the 1st millennium BC, commerce and business began to expand the role of the accountant. Phoenicians invented the phonetic alphabet, which is now thought to have been for the purpose of bookkeeping. 

So, bookkeeping has been around for ages. Today’s accountant profession originated in the nineteenth century in Scotland. Historically, accountants belonged to associations with solicitors who were known to offer their clients accounting services. Early accounting practices were much like forensic accounting today. It soon transitioned into a recognized profession during the nineteenth century.