Accounting
Process of reporting financial statements to the end-users that are related to the organization
What is Accounting?
Accounting is the process of identifying, measuring, collecting, recording, classifying, analyzing, summarizing, and reporting financial statements to the end-users that are related to the organization.
Some other Definitions
Weygandt, Kieso, and Kimmel defined it as "An information system that identifies records and communicates the economic events of an organization to interested users."
Bierman and Drebin stated, "It may be defined as identifying, measuring, recording, and communicating financial information."
According to the AICPA (American Institute of Certified Public Accountants), "It is the art of recording, classifying and summarizing in a significant manner and terms of money, transactions, and events, which are, in part at least, of a financial character and interpreting the result thereof."
History
Major events that took place in history:
- 2500 BCE - Evidence is found in ancient civilizations such as Egyptians, Greeks, and Romans, do have accounting systems to keep records.
- 423 BCE - Creation of auditing as a profession to double-check the warehouses, i.e., what comes in and goes out.
- 1200 - The first requirement for firms to do accounting around Italy.
- 1494 - Luca Pacioli generated terms like 'debit,' ' credit,' and many more. He is known as the 'father of accounting.'
- 1900 - Double entry methods were developed during the industrial revolution and created the CPA (certified public accountant) post.
- 1940 - GAAP was created and applied.
- 1995 - Created several automated systems like peachtree etc.
Bartering was the primary method of exchanging money during the Middle Ages. Still, as Europe transitioned to a monetary economy in the 13th century, merchants began relying on this to track many transactions.
This was when double-entry began, in which the accountant entered a debit and credit value for each transaction. It was employed as an ad-hoc ordering system by merchants at the time.
It gave them access to real-time data about their enterprises, which they could use to make decisions about how to expand their firms as they saw fit. It established the basis for how we use and comprehend it today.
Accountants must now adhere to its rules, auditing regulations, and ethical norms. Accountants and their peers are in charge of the economic monetary ebb and flow. They are not the only ones to blame, but they play a significant role.
Throughout their lives, and frequently in their everyday actions, every business, organization, corporation, government, and individual must utilize at least basic accounting principles.
It's a vital aspect of the company that has evolved through thousands of years into what we now call modern accounting.
How does Accounting work?
It is one of the most important functions for each kind of business: a bookkeeper or accountant at a small firm or even a bigger company.
It is a tool that will help you "account for" what your business has done, is doing, and hopes to do in the future.
The reports and facts generated by practicing it are critical in helping the management make an illuminated business decision.
The financial statements that summarize and analyze a large company's operations, financial position, and cash flows over a particular period are concise, concrete, and consolidated reports based on thousands of other individual financial transactions.
As a result, all the designations in the accounts department are the collective progress of years of study and precise examinations and experiments combined with a minimum number of years of practice.
A bookkeeper can look at primary functions in an organization.
Advanced accounting is usually handled by qualified employees such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA), Certified Management Accountant (CMA), Chartered Accountant (CA), and Certified General Accountant (CGA).
Features & Characteristics Of Accounting
A few of the features are:
1. Identification of financial transactions
Identifying is determining which transactions and events are to be recorded. The process involves identifying the financial transactions that bring change to the firm's resources.
For example, the purchase of raw materials or the sale of finished goods these transactions are identified with the help of bills and receipts as evidence of the transaction.
2. Measuring the identified transactions
We are measuring the transactions and events in standard measurement units, i.e., the currency (money) of the country.
For example, the purchase of raw materials, say 10 tonnes of steel for $ 25,000 and 1000 bags of cement for $ 275,000.
3. Recording
One of the primary functions is to record every financial transaction. In addition, it lays out the guidelines for recording the transaction in a detailed and systematic manner, which the firms can use in the future.
The recording is chronological and can be done by someone who knows the basics and laws of accounts.
Grouping entries do the recording under a single head, making it easy to classify all financial transactions.
For example, journalizing the transactions into various books such as purchase journals, sales journals, cash or bank journals, etc.
4. Classification
Another feature is to classify all financial transactions into different titles or categories. These categories are arranged according to their similarities in one book.
For example, all the payments received will show the receipts in the cash or memo book.
It assists in classifying all similar transactions under one heading, which helps find the transactions much easier. For example, the book in which the opening of the accounts is completed is called a ledger.
The process of classifying the transactions and putting them into a ledger is known as posting.
5. Summaries
It is well known for providing summaries and conclusions of related and complex financial statements such as statements of cash flow, fund flow, and balance sheets.
These are concluded and presented to the stakeholders and the public.
These statements and conclusions are advantageous for investors in making investing decisions.
A statement such as a profit and loss statement and balance sheet is presented as the company's mirror, and the summaries are taken as critical statements.
6. Validation
The organization's statements are prepared by a certified auditor for the department or even a bookkeeper of their company and can be audited and confirm their validity.
Each system entry is related to the financial matters of the company.
7. Interpretation
Any well-informed person can interpret a summary or conclusion of the financial statement. The interpretation is general and does not vary from person to person or auditor to auditor.
The interpretation can be analyzed and summarized, and the person can find out about the industry's performance and whether the industry's financial position is good or bad.
Is accounting a science or an art?
It is both an art as well as a science. It is an art as it records, classifies, and summarizes the financial transactions that help in understanding the profitability and financial status of the business.
The interpretations are based on the individual's knowledge and skills.
The word “Art” means a different range of human activities and studies of these activities.
Art is using the techniques or skills of any field. It is the study of the application of techniques and methods.
Art is the study of applying the scientific method to practical use. It is an art as the standard rules and principles are involved in an organization's bookkeeping.
Ideas, opinions, and thoughts about whether it is an art or science differ from accountant to accountant.
In science, procedures or methods are not changed. These are rigid; on the other hand, some methods and processes are being followed by accountants laid by IFRS (International Financial Reporting Standards).
It is also a science, structured knowledge based on certain fundamental principles. Specific rules and regulations are followed and are developed by experiments over time.
A statutory body supervises and proposes guidelines and standards that must be followed while performing accounting and maintenance of books.
Types Of Accounting
Some of the types are:
1. Financial Accounting
It is considered within the process of compiling information for financial reports for external reporting and stakeholders.
Financial accountants work with their employees, colleagues, and managers to strategize financial plans and how a company can be more profitable.
It is concerned with preparing financial statements, i.e., the Profit and loss statement and the Balance sheet, and interpreting for the users of information.
This keeps track of documents and aids in a company's financial planning. Most of their material is intended for internal stakeholders rather than the general public, i.e., management.
The managers examine and establish a budget to meet the organization's short- and long-term objectives. In addition, managerial accountants are responsible for reviewing past performance to forecast future results.
It mainly deals with money, costs, and budgets.
It can be seen as a sub-category of managerial accounting. It oversees all variable and fixed costs to see if output aligns with the cost to produce a product.
It helps managers to decide on future decisions based on the financial forecast and the progress of production. It is concerned with how unit costs are calculated and can vary between industries and even similar businesses or how to allocate overhead.
Direct materials and direct labor are easily tracked, but indirect costs—such as the cost of the machinery, building, utilities, shared staff, etc.— can be allocated in different ways.
4. Auditing
The act of a corporation sending financial documents to a third party for economic feedback is known as external auditing. In this case, a third party is a reputable source for determining whether a company's financial statement follows GAAP.
A Certified Public Accountant performs external auditing (CPA). The efficacy of internal processes is determined by internal auditing.
5. Accounting For taxation
Businesses filing their tax records each year helps them stay in line with the Internal Revenue Code.
It also helps businesses plan for future tax returns, such as avoiding particular tax loads and comprehending the consequences of specific tax decisions.
6. Information systems for accounting
Accounting information systems (AIS) are the systems that a business uses to gather, store, and process financial and data related to accounts.
Many AIS are now developed to interact with other departments, such as connecting Human Resources' hiring process to a newly hired employee's payroll function. This information flow-through procedure reduces the need for manual data entry.
7. For forensic purposes
It is used to look into a person's or a company's financial records.
This purpose is to gather all available data and account for all transactions in financial statements accurately and comprehensively. It comes in handy when dealing with legal matters, including fraud, claims, and disagreements.
8. For the general public
Businesses that advise clients based on their needs are referred to as public accounting.
Auditing, assisting with tax returns, consulting on methods customized to install technology or computer systems, and providing legal counsel are all possibilities.
Objectives Of Accounting
Some of the objectives are:
1. Maintaining Systematic Records:
Its primary goal is to preserve a systematic financial transaction record that allows users to understand day-to-day activities to understand the overall organization better.
2. To Safeguard Business Assets:
It safeguards company assets from unjustifiable and unwarranted use. The above information assists the business owner in ensuring that the money of the company is not held idle or underutilized.
3. Calculate Profit:
Another goal is to determine the net profit or loss incurred as a result of conducting business, which is accomplished by maintaining a proper record of all books of accounts concerning revenues and expenses for a given period.
4. Determining your financial situation:
Also allows a business owner to understand his financial situation. The Balance Sheet or Position Statement accomplishes this goal. A balance sheet is a statement of a company's assets and liabilities as of a specific date. It is a method for determining the financial health of a company.
Functions of Accounting
Some of the functions are:
1. Keeping meticulous records
It enables businesses to keep track of their day-to-day financial operations, such as supplier purchases, product sales, receipts, and payments, in an accurate and up-to-date manner.
2. Monitoring financial transactions
It may track multiple financial transactions related to payments due to the company to ensure it receives the revenue and remains profitable.
3. Making payments on bills
It entails double-checking invoices for accuracy, arranging payment deadlines, and paying the bills that the company owes to numerous vendors and suppliers.
4. Writing financial reports
It involves repairing detailed quarterly and annual financial reports about the company's assets, profits, and losses for internal and external stakeholders.
5. Maintaining fiscal history
It assists with creating, documenting, and storing the fiscal history of the company's transactions and making it available for audits and assessments.
6. Obtaining business objectives
An accountant can use financial data to develop and implement comprehensive economic policies and plans that help the company achieve its objectives.
7. Budget preparation
The accounts department may use financial data from the company to prepare the overall department and project budgets.
8. Creating financial forecasts
It entails examining the company's present financial resources, predicted revenues, and business goals and then predicting future business expansion and growth by utilizing this information.
9. Financial auditing
Accountants can conduct financial audits of a corporation and find any inconsistencies in evaluating financial resources.
It can be used to identify a company's financial flaws and strengths, determine how to counteract deficiencies and strengthen forces, and apply relevant measures.
10. Examining performance
It entails conducting frequent financial evaluations of the company's departments to analyze their performance and make changes to decrease waste, boost productivity, and cut expenses.
11. Observance of legal obligations
Accountants ensure that the company follows industry and government taxation, financial reporting, and employee wage standards, regulations, and policies and take corrective measures.
12. Ensuring vigilance against fraud
It includes implementing strong security measures to protect the company assets against data breaches and internal and external fraud.
Advantages of Accounting
Some of the advantages are:
1. Maintenance of business records:
It records all the financial transactions occurring in the respective year in the books of accounts.
2. Preparation of financial statements:
Financial statements like Trading and Profit and Loss Account and Balance Sheet can be prepared quickly if transactions are correctly recorded.
3. Comparison of results:
It facilitates the comparison of the financial results of one year with another year and with other firms in the same industry.
4. Decision making:
The information enables management to plan its future activities, make budgets, and coordinate various activities in various departments.
5. Evidence in legal matters:
The proper and systematic records of financial transactions act as evidence in a court of law.
6. Provides information to related parties:
It quickly makes the organization's financial information available to stakeholders like owners, creditors, employees, customers, government, etc.
7. Helps in taxation matters:
Various tax authorities, like income and indirect taxes, depend on the accounts maintained by the management for the settlement of taxation matters.
Accounting information can be utilized to evaluate an entity’s business properly.
9. Replacement of memory:
Proper recording of transactions replaces the need to remember transactions.
Limitations Of Accounting
Some of the limitations are:
1. It is not fully exact:
Although all transactions are recorded based on evidence, some are also made to ascertain profit and loss.
2. It does not indicate the realizable value:
The Balance sheet does not show the amount of cash the firm may realize by selling all the assets.
3. Ignores the qualitative elements:
It is confined to monetary matters only, ignoring qualitative elements such as quality of staff, industrial relations, public relations, etc.
4. Ignores the effect of price level changes:
All the statements in accounts are based on historical costs. Therefore, price level changes are not considered when preparing financial statements.
5. May lead to window dressing
The organization may manipulate the accounts to conceal vital facts and present the financial statements in such a way as to show a better position than what it is.
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