Accounting is a process designed to capture the economic impact of daily transactions. Every day, many events and activities occur in an entity, these events and activities are in the normal course of business; However, each of these events may or may not have an economic impact. Events or activities that have an effect on the accounting equation are accounting events.
What is Accounting?
Accounting is the process of transforming financial information associated with economic activity into usable financial information. Accounting is the art of recording, summarizing, reporting and analyzing financial transactions. An accounting system can be a simple utilitarian check register or, as with modern automated enterprise resource planning systems, it can be a comprehensive record of all business activity, providing details of every aspect of the business, allowing analysis of business trends and insight into future prospects.
The American Institute of Certified Public Accountants (AICPA)
Accounting is “the art of recording, classifying and summarizing in a meaningful and monetary way, transactions and events which are, in part at least, of a financial character, and of interpreting the results thereof. “.
The output of the accounting process is a group of financial statements that reflect the financial condition, liquidity, and profitability of an organization. Periodically, financial statements are prepared to reveal the financial position and results of operations. These financial statements are the result of the accounting process and become an input into the analytical and decision-making activities of business owners, investors, managers, creditors and government regulators.
These financial statements or reports are shared with stakeholders (interested parties) who analyze, interpret and use this accounting information for their own purposes. This information helps users in their analysis and decision making for various purposes such as investing or understanding and improving the current business. Automated accounting is an information system that provides reports to stakeholders about the economic activities and conditions of a business.
The etymology of the word accountant:
The word “Comptable” is derived from the French word Compter, which originates from the Latin word Computer. The word was formerly written in English as “Accountant”, but over time the word, which was always pronounced with the “p” dropped, was gradually changed in both pronunciation and spelling. to take its current form of “Accountant”.
What is the role of accounting in business?
As stated earlier, accounting provides information that managers can use to run the business effectively and efficiently. Also, accounting provides information to other stakeholders to use in evaluating the economic performance and condition of the business. Accounting is generally referred to as the “language of business”. Indeed, accounting is the medium through which business information is communicated to stakeholders.
For example, accounting reports summarizing the profitability of a new product help management decide whether to continue selling the product. Similarly, financial analysts use accounting reports to decide whether or not to recommend the purchase of Company stock. Banks use accounting reports to determine how much credit to extend to the business and suppliers, on the other hand, use accounting reports to decide whether or not to offer credit to the business for the purchase of supplies and raw materials. Governments and other statutory bodies use accounting reports to calculate and assess taxes appropriately.
Accounting work is usually done by the accounting department, headed by an accounting manager, controller, controller, or similar title. These people record all transactions that occur in the course of business and then prepare reports that help company management and outside stakeholders understand the financial impact of those transactions.
Accounts maintain accounting software, process all documentation of transactions that have taken place, and record them in the company’s general ledger. From all these transaction records, accountants are able to prepare a variety of reports. Some are intended for people outside the company, such as government, bankers, investors and shareholders, and others are important reports for managing the efficiency of the company. Accountants prepare financial reports that managers use to understand their company’s financial past and make decisions about its financial future. Automated accounting programs typically produce a variety of reports and we will discuss these detailed reports in later subsections that pertain to the general ledger.
Accounting is the practice of recording transactions. Accountants tend to focus on the details, record transactions in an efficient and organized manner, and they may or may not see the big picture. Accountants use the work done by bookkeepers to produce and analyze financial reports. Although accounting follows the same principles and rules as accounting, accounting converts them into meaningful financial information that captures all the details necessary to meet business needs – management, financial reporting, projections, analysis, and tax reporting. Effective accounting practices in a business will create a financial reporting system that gives a complete picture of the business.