What Exactly is Accounting?
My blogs are designed to teach basic accounting and financial concepts that everyday people can apply to their financial and business lives. Each day I will explain an accounting or financial concept in general terms. I will start with easy topics, and move on to more complex topics over time.
My first topic is “What Exactly Is Accounting.”
People often use the word “Accounting” in everyday conversation, meaning many things, but What Exactly Is Accounting? Without trying to sound boring, accounting is:
- A general term used to describe the recording of financial transactions of a business or organization, plus,
- The process of storing, organizing, retrieving, summarizing, and communicating this information so it can be useful to the business or organization.
Accountants are individuals who have the formal education and experience to carry out these processes.
It is important to note that there are two parts to accounting:
- the recording of financial information, and
- the use and communication of this information.
Accounting is known as the “language of business,” or the “basis for business decisions.”
Accounting generally has two purposes: 1) Financial accounting and 2) Managerial accounting.
Financial accounting relays information to outsiders. It focuses on providing general purpose financial statements, such as a balance sheet and income statement, to interested outsiders such as stockholders, lenders, financial analysts, industry bodies and government. These statements are normally prepared in accordance with Generally Accepted Accounting Principles, or GAAP. The main reason for preparing statements according to GAAP is so that they can be easily compared to other statements and industry standards. I will discuss these accounting principles in a later blog.
Managerial accounting is used to assist management. It focuses on providing statements and reports that assist management in running their company. Examples of management accounting reports include budgeting, cost analysis, break-even analysis, financial projections and capital reports.
For years, accounting information was recorded by pen or pencil on complicated ledgers. Today more and more accounting is performed on computers using computerized software applications. Also, cloud-based accounting applications are now becoming more popular.
I hope you will enjoy my blogs and find them useful. Tomorrow’s topic will be “The History of Double Entry Bookkeeping.” Please drop by.
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