Accounting is an essential part of the financial functionality of organizations, whether they are small businesses, multi-nationals, private, or public. Furthermore, accounting is vital on a personal level and all people need to have at least a base level understanding of accounting. Sure, accountants can do all the heavy lifting, but personal knowledge can go a long way.
Armed with a root knowledge of accounting, you can apply the basics to your personal life and have a deeper understanding of common terminology and practices used by businesses. With the resource list below, you can grasp the basics of accounting and how to track it alongside your personal finance.
What is Accounting?
Accounting is perhaps the most important financial cog in the gears that keep a business moving. Most smaller businesses typically outsource accounting to a small firm or independent accountant. Major organizations will usually have a dedicated finance department that handles their bookkeeping internally.
Either way, data gathered by accounting can help managers and executives make financial decisions around their business and maintain compliance with regulations.
Importance of Accounting
- Bookkeepers can help small businesses handle basic accounting, but large accounting projects require a Certified Public Accountant (CPA).
- Cost accounting and managerial accounting are the most common types of accounting. The former allows businesses to decide how much their products or services should cost, while the latter allows organizations to make informed business decisions.
- Accounting is an essential part of organizational finance, no matter the size of the business.
- Businesses can leverage accounting to help measure economic performance, make financial decisions, and plan costs.
- All professional accountants should work to the Generally Accepted Accounting Principles (GAAP), a set of standards designed to create uniformity in the industry.
Types of Accounting
Managerial Accounting – Companies use managerial accounting to form timely financial statements, that are split into interim (monthly or quarterly) and annual periods. The financial statement will comprise cash flow information, balance sheets, and an income statement. Business managers can make decisions based on this data about the ongoing operation of the organization. Managerial accountants will also perform other accounting tasks, such as financial forecasting, budgeting, and more.
As the name suggests, managerial accounting encompasses all financial information that will be beneficial to managers. Company accounts are audited each year by an independent third-party CPA firm and in many cases, the audits are mandatory under law.
Cost Accounting – While managerial accounting allows managers to make decisions about the financial health of a business, cost accounting enables them to make informed decisions on cost. Accounting for costs deals with the financial outlay needed to produce a product or service offered by the organization. Managers and executives can use costs accounting reports to weigh up the cost of production and decide how much a product or service should cost.
Financial Accounting – Similar to managerial accounting, financial accounting handles interim and annual financial data reports. It is also subject to external CPA auditing.