Accounting is that the process of recording, classifying, reporting, and analyzing money. Accountants capture and record all the transactions, operations, and activities that have financial consequences for a business. Accountants are involved in other activities in finance that impact a business, like weighing the costs of recent ventures, participating in strategies for mergers and acquisitions, quality management, tracking financial performance, as well as tax strategy.
While the accounting requirements of companies vary, all organizations need the simplest way to stay track of the flow of cash within them. The responsibilities of the finance and accounting functional area within a company or of its chief money handler (CFO) include:
✔ Facilitating operations—payroll, purchasing, cash collections, cash disbursements.
✔ Management control—measuring actual performance against goals and expectations.
✔ Management decision making—analyzing cash position to make decisions.
✔ External financial reports—financial statements prepared according to generally accepted accounting principles (GAAP) and available for audit.
✔ Tax returns—federal and state income taxes; property, sales, and payroll taxes.
Accounting and finance aren’t intuitive. Many small businesses hire accountants to line up and manage their books. Other companies use accounting software like QuickBooks. Accounting involves periodic reporting of economic data and includes:
✔ Business transactions. Businesses keep a daily record of transactions in sales journals, cash-receipt journals, or cashdisbursement journals.
✔ Debits and credits to a book. An up-to-date general ledger shows current information about accounts payable, accounts receivable, owners’ equity, and other accounts.
✔ Making adjustments to the final ledger. General-ledger adjustments let businesses account for items that don’t get recorded in daily journals, like bad debts and accrued interest or taxes. By adjusting entries, businesses can match revenues with expenses within each accounting period.
✔ Closing the books. in spite of everything revenues and expenses are accounted for, any profit gets posted within the owners’ equity account. Revenue and expense accounts are always dropped at a zero balance before a brand new accounting cycle begins.
✔ Preparing financial statements. At the top of a period, businesses prepare financial reports—income statements, statements of capital, balance sheets, cash-flow statements, and other reports—that summarize all the financial activity for that period.