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Accounting refers to the art of measurement, analysis, and reporting of financial and other non-financial information about corporations and organizations. It is also known as cost accounting, financial accounting, or bookkeeping. It involves the collection, recording, and interpretation of data about the financial information of a company. Information recorded in the books of account provides information about the financial condition, assets, liabilities, and taxes of a company. Accounting also helps in planning and organizing the allocation of resources of a company.
Basic accounting comprises the process of receiving, preparing, reporting, and issuing receipts and payments. The purpose of basic accounting is to manage financial transactions that are necessary for the financial well being of a firm. A company’s financial statements or accounting records provide managers and leaders with essential information needed to evaluate the performance of the company and plan its future.
Basic accounting consists of four primary activities: recording of financial transactions, collection of data related to these transactions, regulation of accountancy practices, and interpretation of financial statements. The recording of financial transactions include collecting and recording loans and other assets; valuing assets and valuing other liabilities; and creating and maintaining inventory. Collection of data related to these transactions is performed by accountants, who prepare reports according to the details recorded. Regulation of accountancy practices includes principles, rules, and guidelines necessary to ensure that the activities of accountants are conducted in an orderly way so as to meet the requirements of the legal framework in which they operate.
Interpretation of financial statements describes the way in which an individual or group of accountants arrive at the results of an accounting transaction or a series of transactions. Accounting interpretation uses several types of information, including accounting tables, handbooks, guides, and manuals. Auditors and other people who review accounting documents to verify the accuracy of the recorded financial statements. They compare the recorded values with those that would have been obtained by using manual methods. Accounting standards allow accountants to use internal controls and external control measures to ensure the reliability of the financial reports that they produce and deliver. Manuals and accounting books provide procedures to accountants that enable them to record, prepare, execute, and report accounting transactions.
The major types of accounting are single-entry, double-entry, and mixed-entry accounting. Single-entry or simple accounting records only the value of an asset at a specific time. A double-entry bookkeeping system shows account activity over a period of time and at different points of the system. Mixed-entry accounts show the balances of balances at various points in time determined by specific events, such as buy/sell transactions, receivables/payments, and income taxes.
As you can see from the vocabulary listed above, the process of accounting can be a complex one for small business owners. Fortunately, many accounting software companies provide excellent tools for simplifying the process. Typically, these software systems have been designed for businesses of all sizes, but some even offer free trials that will help even the smallest business to improve its procedures. You may also want to consider referring to the “About” and “Contact” sections of a company’s web site for additional information on accounting terminology and practices. Because every business operates slightly differently, it is likely that the accounting terminology used by your business will be different from those used by other businesses.
