What is Accounting?July 8, 2021 2021-07-23 12:09
What is Accounting?
Definition of Accounting
Accounting is an art of recording keeping. To do the accounting the first and foremost step is to identify the events and the transactions. These events and transactions should form part of the finance of the company. These are recorded in the books of accounts under proper heads. This entire process is collectively called accounting. Accounting is also an art of classifying and summarising all significant financial events that occurred in the business.
What is Accounting?
Accounting is record keeping of all financial events and transactions occurring in the business. The accounting also summarises and classifies the records and posts the items in their respective heads while preparing the books of accounts. The first step in any accounting process is to identify the events and transactions so that the posting of that event or transaction is always done in a correct way. The events and transactions are to measure in terms of money. The important aspects of accounting comprise recording, summarising, classifying, analyzing, interpreting, and communicating. The recording and classifying is done to generate the financial information in the trial balance itself. While other aspects such as summarising, analyzing, interpreting and communicating, etc are being used in the later stage of accounting.
Examples of Financial Accounting
A man is running a small business of retail garments and for that, he invested $2000. In the initial stage, he purchased garments worth $650 and sells the products for $800. He has paid rent for his shop which amounted to $20. Therefore these are few transactions which took place in this month. Let us find out his surplus for this month.
Goods sold- (Goods purchased+ Rent paid during the month) i.e. 800- (650+20) = 130
Here in this case this man earns a surplus of $130 this month after paying rent.
The surplus/profit which he earns is called an event. The rent paid, purchase, and sale of goods is known as transactions. After doing this he will then move to analyzing and summarising his entire month’s transaction.
Importance of Accounting
Accounting helps the business to systematically record all the transactions relevant for them in the proper books of accounts. This is also called bookkeeping.
- Accounting helps to ascertain the results of the recorded business transactions.
- Accounting also helps to ascertain the financial position of the business. The financial position of the business helps the businessman to make certain improvements and therefore the steps to improvement can be made easily.
- The accounting provides with all the relevant information of the business and thus it can help the businessman to take some important decisions by looking at the present financial condition. The balance sheet is prepared with the help of accounts which is done by the accountant and then the accountant makes the balance sheet. The balance sheet is the indicator of the exact financial condition of the business.
- Accounting also helps the businessman to know about their solvency and the degree of risk they can take to uplift their business.
- The financial reports are made which helps the organization to make investment decisions before the month close so that the proper assessment of the finances can be done beforehand.
How Accountants Work?
- Accountants work in a very efficient manner to manage all the financial transactions in the business.
- The accountant prepares the budgetary forecast so that the company can take decisions prior.
- The accountants prepare the balance sheet of the company so that the financial position of the company can be judged.
- All the fixed, as well as variable components, are taken care of by the accountants.
- The accountants also help to realize the financial statements on time so that the management of the big companies can make decisions and prepare some plans to uplift the condition of the company.
- The accountants are also responsible for the reconciliation of all the payments as well as receivables from their clients.
- The accountants also handle all the monthly and yearly closings for the company.
- The accountants are also responsible for the auditing of the financial documents and transaction-related with finance.
Types of Accounts
- Personal Account- As the name suggests the personal account is related to individuals, companies, or firms. The personal account can be of three type’s i.e. natural persons, artificial accounts, representative accounts.
- Real Account- Real account is related to the properties and assets. Real accounts are tangible as well intangible.
- Nominal Account- The nominal accounts are related to income, expenses, losses, and profits.
Rules of Accounting
The accounting rules are as follows:-
- Personal account- Debit the receiver and Credit the giver.
- Real account- Debit what comes in and Credit what comes out.
- Nominal account- Debit all expenses and Credit all incomes and gains.
Accounting matters for Your Start-Up
Accounting is an essential art of analyzing the financial condition of the individual or the business as a whole. The accountant helps the start-up businessman to analyze the opportunities that are coming in near future. If the businessman prepares the accounts then they will get an idea about the risk and rewards in their business and thus they will be able to do all the analysis based upon which the decision regarding the growth of the business can be considered. Considering accounting as one of the important functions performed in the business the accountants should use their keen knowledge to prepare the accounts. Accounting offers the entrepreneurs a clear picture of their financial condition and also it helps them to set their limits to take any risk in the business. The businessman should make proper books of accounts to maintain and file the tax returns and other legal matters on time. The proper accounts maintaining also helps the businessmen to solve some complicated legal issues because of the proper maintaining the papers are all arranged and the expenses and the incomes are properly vouched. If the accounts are prepared in a correct way then there will be no problem at the time of audits as well.