What is Accounting?
Accounting is a process of recording, maintaining, analyzing and understanding, grouping, summarizing and reporting financial transaction which takes place while conducting the business activities. Booking keeping and accounting are often interchangeably used but there is a significant difference between both, as booking keeping is the first step. Therefore it can be said that accounting is a broad subject that covers the concept of bookkeeping viz. recording and maintaining financial transactions.
Objectives of Accounting
Objectives are in lines along with the important functions, a few are enlisted below,
- Maintaining financial records
- To help in the preparation of financial statements
- To help in strategic decision making
- To help in the calculation of taxes
- To help in formulating reports for management
- To help in proving data to all stakeholders
Types of Accounting
There are different branches of accounting, each used for a different purpose. The various systems help in gathering data and recording them in a systematic manner which helps in the preparation of reports which aids in business understanding and decision making.
Among others, the 2 major classification is as follows:
#1 – Financial Accounting
- This is involved in recording, maintaining, summarizing and presenting financial transactions of a business in a systematic manner. The systematic manner being various policies and frameworks laid down by accounting body which aids in understanding and analyzing financial statements. Examples are generally accepted accounting policies (GAAP), International financial reporting standards (IFRS), Indian Standards (IND AS), etc.
- The knowledge of the above-mentioned topics and other related topics is essential for financial accounting. Among others functions the primary function of financial accounting is to prepare a balance sheet, profit, and loss, statement of changes in cash flow and statement of changes in equity. This information aids the stakeholders of the company to understand the company’s performance.
#2 – Management Accounting
- It serves to various aspects of a business namely decision making, planning, risk management, performance evaluation, etc. therefore we can define management accounting as a process of collecting, analyzing and understanding the financial information of a business and to making logical predictions about how the business is performing and what should be the future course of actions.
- It helps in making short term decisions and also making long term plans for the company like (e.g.) making the decision about setting up additional infrastructure for increasing the production capacity of the company. The idea behind management accounting is to submit reports to the management on a timely basis to aid them in having up to date knowledge about the functioning of the business.
One can find N number of terms, acronyms, abbreviations under accounting, but to have a basic knowledge about accounting here are certain terms which everyone should know to run a business.
- Assets – Assets include current and fixed asset; current assets are the once which is or can be easily converted into cash within a period of one year, whereas fixed assets are the ones which provide long term benefit to the company for e.g. machinery, real estate, investments, etc.
- Liabilities – Liabilities are financial obligations created by a company during the conduct of business. Liabilities that are to be settled within a period of one year can be classified as current liabilities and others will be classified as long term liabilities.
- Balance Sheet – The Balance sheet is a financial report of assets and liabilities of an entity as on a particular date.
- Debit – In these terms, a debit transaction is an increase in asset or expense or a decrease in a liability or equity.
- Credit – In these terms, a credit transaction is an increase in liability or equity or a decrease in an asset or expense.
Importance of Accounting
This is an essential element for business as it aids in the smooth and effective managing of various business functions. Listed below are certainly important aspects of accounting,
#1 – Recordkeeping
It comes as the first step of accounting viz. bookkeeping, without having proper records in place no company can have a proper understating of there business and in turn, cannot take appropriate measures for the effective working of the business.
#2 – Aids in Preparing Financial Statements
All businesses are required to provide their financial statements to various authorities like the registrar of companies, stock exchanges, SEBI, tax authorities, etc. so all the recording, maintaining and summarizing of the financial information aids in preparation of financial statements.
#3 – Aids to Comply with the Statutory Requirement
As discussed above a business is required to comply with various laws and regulations. It helps by providing essential information for making reports which are to be submitted which the authorities and also provides numbers for various calculation like tax.
#4 – Aids in Preparing Budgets and Forecasts
Budgets and forecast are based on historical financial information maintained by the company which helps in the proper functioning of business
#5 – Aids in Decision Making
As understood earlier under this topic that assisting the management to make important decisions is one of the primary functions of management accounting.
Apart from the items listed above, there are many other important functions of accounting like informing the investors, act as an aid to banks and other lenders, managing cash flow, etc.
After having been read with the meaning, types, importance and objectives of accounting we understand that it assists in numerous ways to the varied functions of the business and plays a vital role in keeping and maintaining proper records in the current dynamic and fast-moving business environment.
This has been a guide to What is Accounting & its Definition. Here we discuss the basic terms of accounting, types along with importance and objectives. You can learn more about from the following articles –