Accounting

What Is Accounting work? 1

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Accounting is one of the key functions

for almost any business. It may be
handled by a bookkeeper or an
accountant at a small firm, or by sizable
finance departments with dozens of
employees at larger companies.

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The reports generated by various streams of

accounting, such as cost accounting and
managerial accounting, are invaluable in
helping management make informed business
decisions

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What is Accounting? 1

Accounting is the process of

organizing, analyzing, and
communicating financial
information that is used for
decision-making. Financial
information is typically prepared
by accountants those trained in
the specific techniques and
practices of the profession.

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Accounting is the financial information system that provides

these insights. In short, to understand your organization, you
have to know the numbers. Accounting consists of three basic
activities it identifies, records, and communicates the
economic events of an organization to interested users.

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Three Activities 1

The purpose of accounting is to:

1. identify, record, and communicate the
economic events of an
2. organization to
3. interested users.

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Three Activities

The accounting process includes

the bookkeeping function.

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Types of Accounting 1

Accounting can be classified into two categories – financial accounting and

managerial accounting.

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1. Financial Accounting 1

Financial accounting involves the preparation of accurate financial statements.

The focus of financial accounting is to measure the performance of a business as

accurately as possible.

While financial statements are for external use, they may also be for internal
management use to help make decisions.

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2. Managerial Accounting 1

Managerial accounting analyzes the information gathered from financial accounting.

It refers to the process of preparing reports about business operations.

The reports serve to assist the management team in making strategic and tactical
business decisions.

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Managerial accounting is a process that allows an enterprise to achieve maximum

efficiency by reviewing accounting information, deciding on the best next steps to
follow, and then communicating these next steps to internal business managers.

An example of managerial accounting is cost accounting. Cost accounting focuses on

a detailed break-up of costs for effective cost control. Managerial accounting is
very important in the decision-making process.

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Accounting Activities 1

What is an Accounting
Activity?
Definition: You might think that
the word “activity” is not really
an accounting term, but it is. An
activity is a cost accounting
term that usually refers to a
type of work that was done.

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An activity and job are often used

interchangeably, but that isn’t always
correct. An activity is usually only one
part of a job. Most jobs include several
activities. Managerial accountants track
total job costs, or how much money it
takes to complete a job, by activities
that were performed. An activity is
actually a very important part in
activity-based costing.

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Example
i. A managerial accountant will look at each activity in the production process. Take a
guitar manufacturer for example. The job of building a guitar can be broken down
into many different activities.
ii. First the guitar body and neck need to be cut, machined, and glued.
iii. Second, the guitar must be sanded and fitted together.
iv. Third, guitar is finished and the hardware is installed.
v. A managerial or cost accountant would look at each one of these activities and
analyze their costs. They might even break down the activities into sub-activities to
separate the cost structure even further. After all the production activities are
analyzed, a total production cost can be calculated.

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What is business accounting? 1

Business accounting (definition)

Business accounting is the
systematic recording, analyzing,
interpreting and presenting of
financial information. Accounting
may be done by one person in a
small business, or by different
teams in large organizations.

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Accounting is the way a business keeps track of its operations. Accountants

analyze the business finances so the owner can make better decisions. This
information is organized into reports that show the financial health of a
business.

Accounting helps business owners meet their compliance obligations. It also helps
them make smart decisions with their money.

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What are economic Events? 1

An economic event is an event that is

consequential to a business entity,
resultantly comprising transactions that are
measurable in terms of monetary units.
For example, sale of goods, purchase of
materials, acquisition of plant and
machinery. All these transactions can be
measured in monetary units and, are,
therefore, recorded in the books of
accounts.

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Each of these events could have a

significant impact on the financial
resources of a particular company.
Anyone interested in the company's
financial status (shareholders,
investors, creditors, managers,
auditors, and other interested
parties) wants to be able to assess
the financial impact of all such
events.

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Bookkeeping Vs Accounting 1

Bookkeeping vs accounting (comparison)

Bookkeeping and accounting are both important parts of
managing your finances. At first glance, the two can
seem quite similar, but there are a few main differences.

Bookkeeping focuses on recording and

organizing financial data. Accounting is the
interpretation and presentation of that data
to business owners and investors.

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Bookkeeping typically consists of: 1

Payroll

Invoicing

Receipts

Recording business transactions

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Accounting typically consists of: 1

financial statements and reports

budgets
tax returns
analyzing business performance

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The tasks that bookkeepers and accountants do vary between businesses. Bookkeepers
working for smaller businesses might do some basic accounting duties. There’s
often overlap, and the duties may change a lot from one business to another.

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Cash base vs Accrual base accounting 1

Accrual Accounting

Under this method, revenue is accounted for when it is earned. Unlike the cash
method, the accrual method records revenue when a product or service is delivered
to a customer with the expectation that money will be paid in the future.

In other words, money is accounted for before it's received. Likewise, expenses
for goods and services are recorded before any cash is paid out for them.

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Cash Basis Accounting

Under this method, revenue is reported on the income statement only when cash is
received.

Expenses are recorded only when cash is paid out. The cash method is typically
used by small businesses and for personal finances.

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Key Differences 1
Accrual Method

The accrual method records accounts receivables and payables and, as a result, can provide
a more accurate picture of the profitability of a company, particularly in the long term.

For example, a company might have sales in the current quarter that wouldn't be recorded
under the cash method. The related revenue is expected in the following quarter. An
investor might think the company is unprofitable when, in reality, the company is doing
well.

The accrual method doesn't track cash flow. A company might look profitable in the long
term but actually have a challenging, major cash shortage in the short term.

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Cash Basis Method 1
The key advantage of the cash method is its simplicity—it only accounts for cash paid or
received. Tracking the cash flow of a company is also easier.

It's beneficial to sole proprietorships and small businesses because, most likely, it won't
require added staff (and the related expenses) to use.

However, the cash basis method might overstate the health of a company that is cash-rich.
That's because it doesn't record accounts payables that might exceed the cash on the books and
the company's current revenue stream.

As a result, an investor might conclude the company is making a profit when, in reality, the
company might be facing financial difficulties.

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