Accounting or accountancy is the production and transmission of information about an organization to the people that require it, under the form of financial statements about economic resources. The information must be relevant and faithfully represented. There are three divisions of accountancy applied to business entities: auditing, accounting and bookkeeping.

What is Accounting? What is Accounting pictures

But what is accounting used for? Accounting is used for recording the financial transactions, storing, summarizing, sorting, retrieving them and presenting the information in analysis and reports. A part of the information originates from recorded transactions and some is based on assumptions. To maintain the company’s health, the management must be provided with information. The reports and analyses remain only inside the organization and are not distributed outside of it. This area is called management accounting and consists of budgets, estimating selling prices and standards for controlling operations.

Another area of accounting aims to present people outside the company with information under the form of general-purpose statements such as income statements and balance sheets. This field is called financial accounting and it has more rules and is more structured than management accounting, because the users have diverse needs. Information is passed on to potential and present shareholders, creditors like banks, government agencies, economists and financial analysts. The data is prepared in accordance with the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).

Many business owners don’t know what is accounting and why it is important to the survival of a company. Every enterprise has its own type of accounting that deals with credit, taxes, assets, receivables and payroll. Transactions are recorded as credits or debits and always balance in the accounting equations so the success of the company can be determined. The basic book keeping is based on the recoding of daily transactions. These reports can be easily generated with the use of computers and they determine is the company is financially stable and if strategy adjustments are needed. There are many types of reports, such as balance sheets, retained equity, statement of process and loss and assets and liabilities reports.

Double-entry accounting is a system of balances and checks that uses five account types to record transactions. Sub-types of the accounts can be used, but all operations are recorded using these five types: assets, liabilities, equity, revenue and expenses. But what is accounting without the accounting equation? The accounting equation determines the relationship between the accounts and represents the foundation of the double-entry bookkeeping system.

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