What is accounting?
Accounting is the recording, classifying, summarizing and interpreting of financial events and transactions to provide management and other interested parties the information they need to make better decisions.
Transactions include buying and selling of goods and services, acquiring insurance, using supplies. Transactions may be recorded by hand or they may be recorded in a computer system. Of course, the trend today is to use computers since the process is often repetitive and complex, and computers greatly simplify the task.
After the transactions have been recorded, they are usually classified into groups that have common characteristics. For example, all purchases are grouped together, as are sales transactions. A businessperson is thus able to obtain needed information about purchases, sales, and other transactions that occur over a given period of time. The methods used to record and summarize accounting data into reports is called accounting system. Systems that use computers enable an organization to get financial reports daily if they so desire. One purpose of accounting is to help managers evaluate the financial condition and the operating performance of the firm so that they may make better decisions. Another is to report financial information to people outside the firm such as owners, creditors, suppliers, employees, and the government (for tax purposes).
In more basis terms, accounting is the measurement and reporting to various users (inside and outside the organization) financial information regarding the economic activities of the firm. Accounting has been called the language of business, which may make you think accounting is only for profit seeking firms. However, it is also the language used to report financial information about non-profit organizations such as churches, schools, hospitals, fraternities, and governmental units. Accounting can be divided into two major categories: managerial accounting and financial accounting. An accountant working for an organization is likely to do both.
Managerial accounting is used to provide information and analyses to managers within the organization to assist them in decision making. Managerial accounting is concerned with measuring and reporting costs of production, marketing, and other functions (cost accounting); preparing budgets (planning); checking weather or not units are staying within their budgets (controlling); and designing strategies to minimize taxes (tax accounting).
Simple analyses of corporate figures can disclose very important information. For example, a slight month-to-month increase in payroll costs may not appear significant. But multiply that increase by 12 months, and the increase in costs can be disastrous. Monitoring figures such as profit margins, unit sales, travel, expenses, cash flow, inventory turnover, and other such data is critical to the success of a firm. Top managements decision making is based on such data.