What is accounting?
Accounting is recording, summarising, and sorting transactions and presenting them to related stakeholders. Accounting is also a field of education that teaches us how to perform all these tasks. Accounting of a small company can be handled by bookkeepers or accountants but the larger companies need a bunch of people to prepare their reports.
History of Accounting
Modern accounting is around since the 19th century but the history of accounting begins at the time money is used. The presence of accounting can be found in the civilizations of Mesopotamia, Egypt, and Babylon.
Luca Pacioli is the father of accounting and bookkeeping. He wrote a book in 1494 showing how to record accounts according to the double-entry bookkeeping system. Modern bookkeeping begins1880 with the Institute of Chartered Accountants in England and Wales. This institute developed different standards and recognized accounting as a profession.
What are the types of accounting?
A company might need accountants for serving special tasks to the company. Some accountants are connected with bookkeeping, tax, and cost and sometimes they are with management decision-making. Accounting can be divided into 3 categories.
Financial accounting is related to the production of financial statements and reporting them to the stakeholders. Financial accounting is monitored by GAAP and IFRS. CPA firms audit the financial statements. It’s mandatory for publicly traded companies.
Managerial accounting works for managing the business. I generate reports to take internal decisions and forecast the future. Managerial accounting isn’t bound by regulations and it’s not mandatory to prepare reports according to the legislation though it’s needed to prepare budgets and see the future.
Cost accounting helps a business to cut costs and increase its profit without increasing the price. In the free market economy, we can’t increase prices more than our competitors. So to make a profit we must manage our costs. This is the place where cost accounting is needed.
Tax accountants strictly follow the rules and regulations that are prescribed by the federal, state, or local levels based on what return is being filed. Tax accountants take decisions and make strategies to decrease the tax liabilities of the company.
Three Aspects of Accounting
- Record Keeping
- Transaction Tracking
- Financial Reporting
There are a set of accounting standards that should be followed while keeping records. The recording process has now become easy with accounting software like QuickBooks or Zero.
All the transactions should be tracked by a separate process of tracking. Transactions like purchase sales need to be handled separately. The accountant should keep the source documents this process costs most of the time of an accountant.
Financial reporting includes reporting of balance sheet, income statement and statement of cash flows. Financial reporting must follow certine rules according to GAAP and IFRS. All the reports of a publicly treaded company should be varified by a CPA firm inb USA.