A business owner has so many responsibilities. This is especially true for budding entrepreneurs. One of the most important responsibilities that a lot of these business owners have is business accounting. If you are in this category and are tasked with handling your company accounting, it is only normal that you want to learn more about this aspect of your business. One question you may constantly have is, “what is accounting in business?”.
Thankfully, this article will answer this question.
You will learn the accurate meaning of business accounting and every other important thing you should know about accounting.
Read on.
Meaning of Accounting in Business – What is Accounting in Business
Accounting refers to how a business records and organizes its financial data.
It is the process of recording, organizing, and understanding financial information to ensure that every party involved in a business knows and understands its finances.
It covers all aspects of a company’s financial transactions, cash flow, and performance.
A company’s accounting process has to be detailed and should include a summary and analysis of the company’s financial transactions.
This is the only way to make proper records for regulators, tax collection agencies, etc.
Important Accounting Concepts Explained- What is Accounting in Business
Financial Statements
Financial statements are the documents used in accounting to summarise a company’s financial transactions during a particular period.
They typically summarize a business’s financial performance.
Any shareholder or stakeholder of the company can use the financial statement to assess the company’s financial standing and performance.
You can tell from a company’s accounting records whether it is making profits, its assets and liabilities values, its cash flow, and so on.
Therefore, this document has to be as transparent, accurate, and reliable as possible.
There are three main kinds of financial statements; balance sheet, cash flow statement, and income statement.
These documents allow you to learn about a company’s profitable months, losses, overhead, direct costs, and value.
Bookkeeping Vs Accounting – What is Accounting in Business
Bookkeeping is one topic that will come up when talking about accounting.
So, you may be wondering what it is and how it differs from accounting.
Bookkeeping is not so different from accounting as it is one of the processes involved in it.
Both bookkeeping and accounting are concerned with recording and organizing a company’s financial transactions.
However, there is a major difference between them despite this similarity.
Bookkeeping is all about recording a business’s daily financial operations and transactions.
Accounting, on the other hand, uses the data gathered via bookkeeping.
Accounting properly analyzes the data, so anyone who reviews the record can have a clear insight into the company’s financial position.
Companies can also use their accounting information to strategize and plan other financial decisions, including taxes.
Accrual Vs. Cash – What is Accounting in Business
Business accounting can either be on an accrual or cash basis.
The major difference between them is the timing.
If you are new to accounting, you’d have an easier time doing it via the cash basis because it is accounting in its most basic form.
On this basis, you would record your transactions only when money goes from the sender and lands in the hands of the receiver.
That is when cash changes hands.
For example, let’s say you get an invoice on the 20th, but you do not pay the invoice until the 25th.
While the transaction was completed on the 20th, your record will be according to the payment date, which is on the 25th.
The accrual basis, on the other hand, is more complex.
This is because you have to record every transaction you make twice.
The first time would be when you make the transaction and the second is when you pay or receive payment for the transaction.
Let’s still use the above illustration to demonstrate the accrual basis.
In this case, you would record the transaction on the 20th, which is the day the transaction occurred and then re-record it on the 25th when you paid for the transaction.
You would also make both entries as two different transactions.
Whichever form of accounting you decide to use for your business depends on your company’s finances.
If you run a small business, you will find the cash method more fitting for your accounting needs.
The cash method is easier, while the accrual gives more insights and is perfect for business owners who pay close attention to details.
Generally Accepted Accounting Principles (GAAP)– What is Accounting in Business
No two companies are the same.
Even companies within the same industry would differ in size, operating techniques, etc.
However, when financially comparing companies, there has to be a middle ground where all types of businesses can be put on the same scale, and there’d be an accurate result.
This is why there are generally accepted accounting principles (GAAP).
GAAP refers to the procedures and standards accountants or anyone handling a company’s accounting must follow when preparing their financial statements.
A non-governmental agency, the Financial Accounting Standards, sets these procedures and standards.
While a lot of business partners, investors, and lenders require that a company follow the GAAP, these procedures and standards aren’t enforced by the laws.
So, you won’t encounter any legal issues if you do not follow the GAAP.
Types of Accounting – What is Accounting in Business
Below are 5 major types of accounting in business.
Financial Accounting
This kind of accounting is used to create annual financial statements that people can use to learn about a company’s financial position and profitability.
From time to time, people outside your business, such as auditors, lenders, investors, and government agencies, would need to learn about your company’s financial progress.
In this situation, you need to use financial accounting to make a financial statement showing them all they need to know.
Managerial Accounting
This type of accounting and financial accounting are similar.
But there are two major differences between them.
Firstly, the statements managerial accounting produces are only used internally.
And unlike financial accounting, statements for managerial accounting are more frequently generated.
Usually, this account is done monthly or quarterly, and it takes up the time of most accountants in most organizations.
This is because the company needs them to regularly produce statements that will help them determine the financial health of the company.
Cost Accounting
Companies looking to figure out how to change their pricing would do so using cost accounting.
This means that if you want to increase your company’s profit margin or decide on how viable it will be to raise your prices, you need to do cost accounting.
This type of accounting typically involves analyzing the costs of producing a service or product.
Analyzing this cost will allow you to make good decisions about your company’s inventory, spending, and pricing.
Cost accounting is also important for managerial accounting.
It helps managers to make more informed business decisions.
Lastly, it relates to financial accounting because you need costing information when compiling balance sheets.
Tax Accounting
This is important for businesses because it lets them keep proper tax accounts.
Companies keep this account to ensure they do not pay more taxes than the internal revenue service, IRS requires.
For instance, an accountant can recommend ways to get out more from your tax return after doing your tax accounting.
The IRS is very interested in a company’s tax accounting.
They regulate it and expect that every company follows the Internal Revenue Code when doing this account.
Credit Accounting
Finally, there’s credit accounting; its major concern is analyzing a business’s liabilities and unpaid bills.
Companies do this accounting to ensure that the company’s money is not always tied up for debt payments.
This is among the hardest accounts because of the subject matter’s sensitivity.
However, while having conversations about debts and unpaid bills is not easy, it is something that you have to do.
It’s better to face issues like this head-on rather than letting them grow into something more.
The Accounting Process – What is Accounting in Business
The process involved in recording and analyzing a company’s financial transactions and performance can be quite tedious and complex.
However, it becomes less complex once you get the hang of it.
Accounting starts with bookkeeping which involves recording all the transactions a business makes.
These business transactions will be recorded in the general ledger.
Accountants call bookkeeping the first stage in the “accounting cycle”.
The accounting cycle is the process of recording transaction data and using the data to generate consistent and accurate financial reports.
This cycle has 6 major stages or steps.
Let’s take a closer look at the steps below.
Recording
The first step involves recording all the transactions the business engages in.
To do this, you would have to collect invoices, receipts, credit, and bank statements of all your business transactions.
Make Journal Entries on the Ledger
The next step is transferring the transaction details to your ledger.
Your journal entries should be made up of 3 aspects of the transaction; when the transaction happened, why it happened, and how much was spent.
Some companies use single-entry accounting.
With this, you would only have to enter the revenue or expense.
However, double-entry accounting is more common.
In this account, you would record every transaction into two accounts; debit and credit.
Make the First Trial Balance Draft
At this point, the reporting period should be over.
Now, you would have to list your company’s accounts and determine their balances.
This is your first draft.
While it has to be accurate, you would still have to re-edit it later.
Make Adjusting Entries
Next, update the entries you have made already by adjusting entries.
For instance, if a loyal customer has issues paying their invoice, you can make it easier for them to pay by offering a discount.
In this case, you would have to update your entry about that particular invoice.
But you can’t just change the entry you have already made.
Instead, you would enter the change (the discount you gave the client) as an adjusting entry.
Adjust your Trial Balance
Now that you have made your adjusting entries, you will have an accurate record of your transactions.
This means that you should have an up-to-date trial balance at this point.
A trial balance is the data you would now use to make your financial statements which is the last step in the cycle.
Make the Financial Statements
Finally, the last step in the cycle is converting all the information you have collected into financial statements.
Doing this involves summarizing the financial data into concise reports that anyone can easily review.
Importance of Accounting for Small Businesses – What is Accounting in Business
You may be thinking, since you run a small business, you can always do without accounting.
But you could not be more wrong.
Accounting is a crucial aspect of any business, regardless of its size.
Your needs may be small, but it doesn’t mean you should ignore them.
Below are some reasons why accounting is important for every small business.
Helps you Make Good Growth Plans
You can’t run a successful business if you do not have plans and goals that will serve as a roadmap for your success journey.
You have to plan your company’s growth and set goals to help you reach the aspired growth level.
Keeping accounts of your financial processes is among the best ways to understand your company’s finances.
And with this understanding, you can properly plan your company’s growth.
The data you get from accounting will help you assess your company’s development.
This way, you can use this analysis to plan and make informed decisions for your business.
If you do not have an accurate report of your business’s financial processes, there’s no way you’d have a full picture of how your business is going.
Let alone being able to make plans.
It will help you Attract Investors
While you may have plans for your business that do not involve getting investors, you do not know the direction your business will go.
This is why you need to leave every chance to get investors open, and you also need to have a sound accounting system.
If you bring in investors at any point in your business, they will be interested in your accounts.
This is the only way they can vet your business and know it is profitable.
Helps you Avoid Tax-Related Issues
Taxes are one thing that will always be constant in your business.
And it will only keep growing as your company grows.
This means you would have a harder time keeping track of your taxes and tax reporting obligations.
If you fail to track your taxes properly, you may have issues with the internal revenue service, IRS.
Accounting can help you avoid all of these.
Doing this process properly would give you accurate and up-to-date financial records.
This will reduce the chances of you breaking any tax law.
Helps you Secure Loans
If you decide to fund your business with loans, you need current and accurate financial statements.
Most lenders will want to know your company’s finances before they approve your loan.
For example, one of the requirements for an SBA loan is your financial statements for at least three years.
You would also need to produce other documents like your cash flow projection.
You can’t get any of these requirements if you do not already have a good accounting system.
Aids Proper Debt Management
While accounting can help you secure loans, it can also help ensure you properly manage your debts and unpaid bills.
Let’s say you have debts from different sources like loans, credit cards, etc.
You would typically have to go through different accounts to determine what you still owe.
But you will eliminate this issue by keeping an accurate balance sheet.
This document will show you all the debts you owe without you having to go through different accounts.
It will also contain your company’s bank balance.
So, you would be looking at both your debts and how much you currently have.
This way, you can review your debts and ensure you have enough money to pay them off.
And if you do not, you can make plans to help you pay them off.
This way, you will handle your debts more efficiently and most likely won’t let everything go out of control.
Conclusion on What is Accounting in Business
Accounting is all about recording and analyzing a company’s financial data.
It is a critical process for any business, regardless of size or mode of operation.
If you are not taking your company’s accounting system as a priority because you think you don’t have to bother about it, you have to change that.
Also, if your company has gotten to the stage where you can no longer handle its accounting needs by yourself, it will be better to hire an accountant.
