What is Accounting?
It is the process of recording, organizing, and comprehending business financial data.
It can be thought of as a large machine into which you put raw financial data- records of all your business expenses, taxes, estimates, and so on – and then spits out an easy-to-understand statement about your business financial condition.
Accounting shows you if you are making a profit, how much cash you have on hand, how much the company’s assets and liabilities are worth, and which aspects of the business are profitable.
Accounting vs. Bookkeeping
In many ways, bookkeeping and accounting are similar. People examine bookkeeping to be a part of accounting. However, suppose you want to distinguish them. In that case, bookkeeping is the process of recording and categorizing financial transitions. At the same time, It puts the financial data to good use through analysis, policy, and tax planning.
The Accounting Cycle
It starts when you open a business transaction-any activity or event including your company’s money- into your ledger.
Bookkeeping involves record track of business transactions in this way. And bookkeeping is the first step in the “accounting cycle,” which is a process that takes in raw financial data and produces reliable and consistent financial reports.
There are six main steps in the accounting cycle:
- Analyze and keep track of transactions (looking over invoices, bank statements, etc.)
- Create a ledger entry for each transaction (accounting to the rules of double-entry accounting)
- Prepare an unadjusted trial balance (this entails listing and calculating the balances of all the company’s accounts).
- At the end of the cycle, prepare to adjust entries.
- Make a corrected trial balance.
- Financial statements should generate.
Since software automates most of these rules and processes, we’ll skip over the accounting cycle’s nitty details and focus on the final product: financial statements.
Financial statements are summaries of the business financial results.
The cash flow statement, The income statement, and balance sheet are the three primary financial statements. They work together to show you where the company’s money is and how it got there.
Consider yourself a freelance surf instructor who charges clients for lessons. Financial statements would show you, which months were the most profitable? how much money was spent on materials? and show what is the overall value of the company.
Financial statements can be easily produced using accounting software or by hiring a bookkeeper.
GAAP (Generally Accepted Accounting Principles)
Every business is different, but we need a common language to identify them to make meaningful financial comparisons. GAAP is a set of laws and procedures that all business accountants must follow when adjusting financial statements.
No regulations are implementing GAAP, set by a non-governmental organization called the financial accounting standards board. However, most lenders and business partners in the United States will expect you to follow GAAP (If you live in Canada, you’ll use the International Financial Reporting Guidelines (IFRS).)
What is The different types of accounting
Every year, the company can produce financial statements that people outside of your company will use to learn more about its financial health-people including investors, lenders, government agencies, auditors, potential customers, and so on.
Financial accounting is the method of preparing a company’s annual financial statements in this form.
Managerial accounting is similar to financial accounting, although there are two main differences:
- The financial statements produced by managerial accounting are only for internal use.
- They’re released on a much more frequent schedule, usually quarterly or monthly..
If the company expands to the point that you need to hire a full-time accountant, managerial accounting can consume the majority of their time. You’ll pay them to generate information on the company’s financial health on a regular basis and to assist you in interpreting those reports.
When your accountant gives you advice about how to get the most out of our tax return, this is known as tax accounting.
The internal revenue service (IRS) oversees tax accounting, and the IRS requires that you obey the internal revenue Code (IRC).
The aim of tax accounting is to ensure that you do not pay more tax than the IRS requires.
When you’re trying to find out how to raise your margin or whether raising rates is a smart idea, you’re doing cost accounting.
Cost accounting includes analyzing all costs associated with generating an output (whether a tangible product or a service) in order to make better pricing, spending, and inventory decisions.
Managers use cost accounting reports to make informed business decisions, and cost accounting feeds into financial accounting because costing data is often required when preparing a balance sheet.
Credit accounting includes analysing all of a company’s outstanding bills and liabilities and ensuring that the company’s cash isn’t continually being used to pay them.
Since it normally means telling someone something they don’t want to hear, credit accounting is one of the most challenging types of accounting to master (like your accountant telling you that you should be borrowing less.)
Why is accounting essential for a small business?
It helps in development planning
Every great journey begins with the use of a map. When it comes to business growth, setting targets is important. What do you think your earnings will be in a year? Let’s say it’s five years from now.
Financial statements allow you to accurately assess how rapidly your company is growing. It’s easy to fall back on simple indicators like “sales growth” when you don’t have reliable financial statements. But these don’t give you the whole picture.
Is it true that the cost of goods sold has increased? Are the margins getting thinner?Are the growth goals achievable? Without financial statements, you won’t be able to get an objective answer.
It is important for securing a loan.
Up-to-date financial statements reveal where the company is. You’ll need them if you want to take out a loan to fund your small business.
Let’s assume you want to apply for a loan from one of the major banks from the Small Business Administration (SBA). On average, you’ll need three years of financial statements and a one-year cash flow forecast. You won’t be able to deliver any of these if you don’t have an accounting system in place.
You’ll need accounting if you want to attract investors or sell your business.
You may not be looking for customers or considering selling your business right now. However, it’s a good idea to keep your options open. And right now, the only way to do that is to set up a proper accounting system.
Potential investors or buyers will look for accounting reports that prove the business is profitable and growing. These records should be used by a CPA.
It helps you in receiving payment.
Accounts receivable (AR) appears on your balance sheet when a customer owes you money. Your accountant or accounting programme will prepare this for you.
The balance sheet shows how much of your AR you’ve already pocketed and how much is still owed to you at the end of the month.
You can keep track of how well you’re receiving payments by looking at your balance sheet. Then you can improve customer follow-up-to ensure that you get your hands on the money you’ve received when you need it.
It helps you in paying the correct amount of revenue (and not a dollar more)
The IRS will fine you if you do not pay your entire tax bill. However, they will not award you a gold star for overpaying.
If your company receives big tax refunds on a regular basis, you’re paying too much in taxes.
Remember : a tax refund isn’t free money from the IRS. it’s money that the government has when you might have put it to better use in your company.
Miscalculated quarterly projected tax payments often result in refunds. You must correctly forecast your income in order to measure quarterly projected tax payments. It’s nearly impossible to do so without precise financial reports produced by precise accounting.
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