Accounting Definition

Accounting is the backbone of all businesses, large and small. Accounting is a system for recording, analyzing, verifying, and reporting the results of financial transactions. In a nutshell, accounting’s business definition is a method of tracking income and expenses. Governmental agencies, tax authorities, and others require businesses to report their financial information. A system of accounting is what enables companies to do so.

What is accounting?

Accounting is the process of tracking financial information: transactions, taxes, costs, everything. A business owner generally needs to keep a detailed record of all money coming in and going out of their business. This helps provide a complete picture of the company’s assets, liabilities, and value.

A general ledger is an integral part of accounting. A general ledger is where a business owner or bookkeeper records all business transactions and anything involving the business’s money. It’s also helpful to keep separate records of debits and assets. This is double-entry bookkeeping.  

Who handles accounting?

Many business owners handle their own accounting at the start, or they’ll hire a bookkeeper. But as the company finances get more complicated, it can be prudent to hire a licensed professional, such as a Certified Public Accountant (CPA) or a Certified Management Accountant (CMA).

Types of Accounting

There are several types of accounting, such as financial, managerial, and cost accounting.

Financial Accounting

One type of accounting is financial accounting. In financial accounting, a professional prepares financial statements showing the company’s financial performance. But the intention of this type of accounting is to provide information about company finances for people outside the company like investors, suppliers, and creditors. 

Managerial Accounting

Managerial accounting is the opposite of financial accounting. In managerial accounting, an accountant will prepare financial statements to be used and studied by people working inside the company. 

Cost Accounting

Cost accounting is part of managerial accounting. Unlike managerial accounting, however, cost accounting only focuses on the costs of the business, including how to reduce costs.  

Accounting Benefits

Accounting is critical to a business’s success. Investors and lenders want to know that an entrepreneur is accurately tracking their company’s finances. One of the biggest benefits of accounting is that it helps business owners keep a clear picture of their costs and income, making it easier to inform third parties about their financial status. 

Ongoing, current, and accurate accounting also makes it a little easier to file taxes quickly and accurately with the Internal Revenue Service (IRS). Many businesses benefit from hiring an accountant who can help with ongoing bookkeeping and tax preparation.

Accounting Considerations

There are several things to consider when it comes to accounting. First, a business likely would benefit from speaking with a bookkeeper or accountant who is a professional or certified as a CPA or CMA. Even though bookkeeping may seem easy, there are complexities that these professionals understand. A deep analysis of their companies’ finances can help entrepreneurs grow and plan for the future.

Another thing to consider is that most accounting professionals use the Generally Accepted Accounting Principles (GAAP). These are accounting standards and procedures set by the Financial Accounting Standards Board. Public companies are required to follow these procedures. However, many non-public companies do so, too. Banks, lenders, and investors may wish for a business to follow these standards to provide capital. 

Recommended: Accounting and tax filing

Other Names for Accounting

Some people use the terms accounting and bookkeeping interchangeably. And while the two terms are similar, it’s fair to say that accounting is a much more detailed practice than simple bookkeeping.

Accounting Examples

Here’s an accounting example from a general ledger. When a business owner buys a new computer for their company for $1000, they enter -$1000 into their records. If they sell a product for $100, they will record it in their general ledger as a +$100 entry. They’ll also likely maintain separate books for assets and liabilities. This is part of the GAAP. However, the general ledger should contain every financial transaction for the business.   

Summary: Accounting Definition

Accounting is the process of tracking and analyzing a business’s costs and revenues. Accounting also includes preparing financial statements for insiders and outsiders to evaluate the business’ strengths and weaknesses.

Related: Accounting 101: For Freelancers and Self-Employed

ZenBusiness Can Help

ZenBusiness offers many accounting resources, including a more comprehensive explanation of accounting principles. Plus, for entrepreneurs who need to start their company before diving into accounting, ZenBusiness is a valuable resource. They offer business formation services that include a free accounting consultation.