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. You’ll need to keep a detailed record of all money coming in and going out of your business. This will give you a complete picture of your company’s assets, liabilities, and value.

A general ledger is an integral part of accounting. A general ledger is where you record all business transactions and anything involving your business’ money. You’ll also keep separate records of debits and assets. This is double-entry bookkeeping.  

Who Handles Accounting?

A bookkeeper may be able to handle your accounting. In the U.S., you can also hire a Certified Public Accountant (CPA) or a Certified Management Accountant (CMA) for more thorough accounting. 

Types of Accounting

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

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 your business’s success. Investors and lenders want to know that you are accurately tracking your finances. Accounting’s benefits include tracking your business costs and income and informing third parties about your financial status. 

Ongoing, current, and accurate accounting has advantages that include your business’s ability to quickly and accurately file taxes with the Internal Revenue Service (IRS). Your business would 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 professionals understand. A deep analysis of your business’ finances can help you 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

Other names for accounting include bookkeeping. However, as you can see from above, accounting encompasses much more than just bookkeeping.

Accounting Examples

Let’s look at an accounting example from a general ledger. When you buy a new computer for your company for $1000, you will enter -$1000 from your records. If you sell a product for $100, you will add this into your general ledger as +$100. You likely will also maintain separate books for assets and liabilities. This is part of the GAAP. However, the general ledger should contain every financial transaction for your 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

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