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This information is then used to make important decisions about the business.
Accurateaccountingenables a business to plan better financial strategies for business growth, secure investment, and meet regulatory compliance.
It also helps you understand what changes to make to reduce expenses and increase profitability.
Why Is Accounting Important?
During the reign of Emperor Augustus, in-depth financial data was accessible to the Roman Empire.
In the medieval world, many accounting concepts similar to todays appear to have originated from the Middle East.
Double-entry bookkeeping by the Jewish communities is an example.
In 1494, Luca Pacioli, an Italian mathematician, first published a book on double-entry bookkeeping.
In the 19th century,accountingstarted becoming a profession.
Most organizations present financial statements annually to an external auditor for review and compliance.
Companies also send theiraccountinginformation to lenders or investors to let them measure business performance and secure funding.
Managerial Accounting
The data used is similar in managerial and financialaccounting.
However, managerialaccountinghelps an organizations internal staff or management team make informed business decisions.
It includes differentaccountingaspects like financial analysis, budgeting, planning, and forecasting.
Unlike financial accounts, which organizations usually do once a year, managerialaccountingcan happen once every month or quarter.
It helps the management review reports and make better strategies.
It also includes labor costs, money spent on equipment and tools, etc.
This will help you price your product well.
you’ve got the option to also conduct a cost-benefit analysis to understand whether the product is profitable.
Read accounting types, tips and tricks.
Tax Accounting
Tax accountants help you handle tax processes, including filing taxes and returns correctly.
This ensures you pay the required taxes on time to the applicable authority.
Taxaccountinginvolves various taxation rules to meet the requirements of the local, state, and federal authorities.
Forensic Accounting
Forensicaccountingis analyzing thefinancial recordsof a business or individual to look for any proof of crimes.
It needs skills like investigation, auditing, andaccounting.
Organizations like law enforcement agencies, banks, insurance service providers, etc.
hire forensic accountants to find proof of crimes like financial fraud fromfinancial recordsand present them in court cases.
It aims to ensure consistency inaccountingand ease of conducting business across the globe.
It ensures that yourbalance sheetstays balanced, which means each debit side entry has a corresponding credit side entry.
Accountingequation:
Total company assets = company liabilities + shareholders equity
Learn equationand its applications.
Accruals
Accruals inaccountingare all expenses or revenues influencing an organizations net income registered on its income statement.
Liabilities and non-cash assets are covered by accruals, which is why accruals also impact the organizationsbalance sheet.
Accrual accounts examples:Accounts receivableand payable, accrued tax liabilities and interest earned, etc.
Consistency
According to the consistency concept, a business should continue using a singleaccountingmethod consistently.
This brings better clarity and accuracy tofinancial records.
Auditors also benefit from this concept while comparing the results from twoaccountingperiods.
You shouldnt change theaccountingmethod in different statements.
Organizations use financial statements to analyze their financial positions and make decisions accordingly.
Also, the amounts of credit and debit must be equal to ensure zeroaccountingerrors.
Revenue
The amount of money a business earns by selling its products/services is revenue.
In an income statement, revenue is termed as sales.
Here, expense is the companys operational cost.
It includes employee wages, equipment costs, factory leases, supplier payments, power costs, etc.
A debit happens when you pay money or spend from an account.
Debits are entered on the ledgers left in a double-entry bookkeeping system.
Debit has Latin origins, derived from the word debitum, meaning something thats due.
Its usually abbreviated as dr for debtor.
Credit
Opposite to debits, credits balance debits.
A credit in a financial record either causes an increase in liabilities or a decrease in assets.
Credits are entered on the ledgers right in the double-entry bookkeeping system.
Its usually abbreviated as cr for creditor.
Example for credit and debit: Suppose you purchase a software software for $100 for your business.
Depreciation
Theaccountingpractice that lets a business spread its physical assets costs over anaccountingperiod is called depreciation.
It helps you understand the value of your assets over a given time and is done foraccountingand taxation.
Organizations do it frequently, aiming to move the asset costs from balance sheets to income statements.
It will help the business write-off the machinerys value over the reporting period.
Accounting Best Practices
The following are standardaccountingbest practices followed by the majority of businesses and accountants.
It will help you validate transactions and runaccountingprocesses smoothly without discrepancies like fraud, inaccuracies, and errors.
These tools will help you review and updatefinancial recordsquickly and offer analytics to make betteraccountingstrategies.
A good practice is to segregate duties based on an employees role and access permissions.
A single person should not have complete authority over a given process.
It helps detectaccountingerrors and fraud.
Keeping your records correct and properly organized helps when applying for loans, securing investments, and filing taxes.
Ensure Compliance with Accounting Standards
Know theaccountingrules and regulations applicable in your region and comply with them.
Manage Cash Flow Effectively
Analyze how cash is flowing in and out of your organization.
Detect areas where you could optimize cash flow and save money without compromising operational quality.
Doing this will help you figure out what projects were financially successful and adjust financial decisions accordingly.
Budget and Forecast
Find out your businesss current financial stability to predict your future requirements.
Instead of dealing with unexpected costs in the future, start planning your budget.
Keep your budgeting realistic, considering cash flow in the present and future.
They will process timely, accurate payrolls for you with compliance.
Leveraging technology will enhance youraccountingprocess efficiency and reduce risks and potential errors.
Maintain a Paperless Office
Maintaining a paperless office will prevent a lot of paperwork and errors.
It will also be easier for you to track and update records and keep up with changing compliance requirements.
It provides a framework for every employee regarding operations, terms and conditions, payments, and so on.
This eliminates confusion and guesswork and streamlines processes.
Keep learning and trying new methods and tools and optimize youraccountingprocesses.
Accounting Standards
Accountingstandards can vary from one country to another.
In the US, accountants mostly follow Generally AcceptedAccountingPrinciples (GAAP) if you prepare afinancial statement.
GAAP involves certainaccountingprinciples and standards to enhance financial reports consistency and comparability across various industries.
Also, the Internal Revenue Service (IRS) governs tax returns in the US.
QuickBooks,FreshBooks, Xero and Wave arepopular accounting softwarefor small businesses, freelancers, consultants and self-employed.
It supports multi-currency and integrates with banks and digital wallet like PayPal.
Wave simplifies financial management with easy payment tracking and reminders for overdue invoices.
It streamlines bookkeeping by integrating with accounting software and offers recurring billing.
Xero leverage Gusto for payroll processing.
FreshBooks is ideal for service-based businesses who need to track spent time and send invoices to receive payments.
It is a beginner-friendly accounting and bookkeeping software.
Is Accounting a Good Career to Learn?
As of May 2023, the median yearly wage for auditors and accountants was $79,880.
What is the Difference Between Bookkeeping and Accounting?
The following table explains the differences betweenbookkeepingandaccounting.
