Accounting: Defined for Businesses
Accounting is the process of measuring and reporting financial information about businesses, organizations, and individuals. In simple terms, accounting records what happens to money over time. For example, the accounting process keeps track of how much money you earn, spend, save, borrow, invest, and give away. It also measures how well you do at work, school, home, and social events.
"Accounting" comes from the Latin word accountare, meaning "to reckon." This term refers to the basic principle behind accounting: we must record every transaction to know where our money goes.
Once completed, we can see whether we spent too much or saved enough. We can compare one month's expenses against another month's income. And we can use this information to make decisions about future spending and saving.
Why is accounting important for your business?
Business accounting is essential because it helps you evaluate your business's success. If you run a business, it's vital to know the type of assets, inventory, and liability your company owns. You can use financial statements to determine how profitable your business is and whether it can expand.
Accounting data helps you determine whether or not you'll be able to pay off your debts and whether you've got enough money to cover expenses. Accounting also helps you evaluate your business performance.
Types of Accounting
Accounting has several subfields or subjects that are related to it. These include financial accounting, management accounting, auditing, taxation, and accounting information systems.
- Financial Accounting: Financial accounting is concerned with recording transactions to measure a company's performance. The most common financial accounting types are cash-basis (also known as accrual) and asset-based accounting. Cash-basis accounting requires companies to report their earnings on an accrual basis. That means they must recognize revenue when customers pay for goods, services, and expenses.
- Management Accounting: Management accounting is the study of how managers allocate resources within an organization. Managers must understand managing costs, revenues, assets, liabilities, and equity. They also need to be able to forecast sales and profits.
- Cost Accounting: Businesses use cost accounting to determine how much it takes to produce goods and services. Cost accounting looks at the total expenses of making something — everything from raw materials to labor. Costs include salaries, utilities, equipment, transportation, office supplies, insurance, etc.
Once you know how much it costs to make one unit of a product, you can calculate how much it costs to mass produce the same item. You can even compare different types of things to see which ones are cheaper to make.
- Auditing: Auditing is the practice of verifying the accuracy of financial statements. An auditor examines the books and records of a business to ensure that they accurately reflect all its financial transactions. An audit can be conducted internally or by an external CPA firm.
- Tax Accounting: Taxation is the act of collecting taxes from citizens and businesses. Taxes may be collected through direct payment, withholding, or other methods. Some countries also impose value-added tax (VAT). VAT is a type of indirect tax charged at each production stage. It is usually applied to retail purchases but can also apply to wholesale purchases.
- Accounting Information Systems: An accounting information system is a computerized database businesses use to store and analyze data. Companies often use these databases to keep track of inventory, payroll, accounts receivable, accounts payable, customer orders, and more.
- Project Accounting: Project accounting is a process for tracking all income and expenses related to a particular project. This includes costs such as salaries, materials, equipment, etc. The goal of project accounting is to ensure that each expense is tracked accurately and accounted for properly.
The Accounting Cycle & the Importance of Using Generally Accepted Accounting Practices (GAAP)
GAAP (or generally accepted accounting principles) comprises a set of rules and guidelines established by the Financial Accounting Standards Advisory Board (FASAB) and the Governmental Accounting Standards Board (GASB). The accounting cycle is one component of GAAP, which every professional accountant follows to ensure the accuracy and integrity of their organization's financial records and financial statements.
Bookkeepers use the accounting cycle to help ensure that every dollar a business spends goes toward achieving its goals. The accounting cycle includes ensuring that expenses are correctly recorded and that revenues are accurately tracked.
The accounting cycle consists of six key steps:
- Analyze and record transactions: Collect invoices, pay stubs, bank or credit statements, and receipts from business transactions, such as purchases and sales.
- Prepare accounts receivable: Compile information about customers who owe you money.
- Prepare accounts payable: List vendors who owe you money.
- Post journal entries: Enter adjustments to the books.
- Close the books: Finalize financial reporting.
- File tax returns.
Differences between GAAS vs GAAP
GAAP can sometimes be confused with GAAS (Generally Accepted Auditing Standards) and it is important to understand the difference between the two.
The primary purpose of GAAP is to assist firms in preparing their financial statements. Companies also use GAAP to record day-to-day transactions and create accounting policies.
On the other hand, GAAS is the framework that guides auditors to ensure they audit companies properly. The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) created GAAS. GAAS ensures auditing activities' consistent and reliable performance by providing that auditing staff members perform their duties consistently and accurately. Using GAAS also means that audits are of the highest possible standards and that reports from different audit firms are comparable.
Similarities between GAAS vs GAAP
- Both ensure that a company's financial statements are complete, accurate, and consistent. However, how they are used varies significantly from profession to profession.
- They both consist of 10 core principles. However, the guidelines for each profession differ.
- GAAP and GAAS are designed to instill trust and credibility in a company's financial statements. They ensure that managers and shareholders have well-documented financial statements for publicly traded companies.
Differences between GAAS vs GAAP
- They are both accounting standards, but they're not always the same. GAAP is for financial reporting purposes, whereas GAAS is for internal control.
- They serve different purposes. The primary purpose of GAAP is to help companies prepare their financial statements. GAAS helps auditing firms properly audit companies.
What is Accounting Software? Business Accounting System
Accounting software is an enterprise resource planning (ERP) application that helps you record and report a business's financial transactions, such as sales, purchases, inventory, and employee paychecks. Accounts payable and receivable are the most critical accounting software modules because they help you keep track of payments owed to vendors and customers.
Billing is another key module of accounting software because it allows you to collect money due from clients. Bookkeeping is one of the essential functions of accounting software because it helps you manage finances, including tracking cash flow and reconciling bank statements.
You can use accounting software online and offline; however, the best accounting software for small businesses is cloud-based. This software lets you access your data from anywhere via the internet, making it easier to work remotely.
Benefits of accounting software
Businesses grow increasingly complex as they evolve, while the manual entry of business information remains tedious and prone to errors. Managing all your transactions and calculating how much you owe also prove challenging to businesses.
Accounting software solutions make the process easier by keeping all the financial information you need in one place. Additionally, it automatically prepares reports so that you can file returns directly from your accounting system without relying on a third-party app.
To improve the efficiency of the bookkeeping cycle, companies use software to automate processes, increase productivity, and prepare for the future. Accounting software is critical in helping organizations manage day-to-day business processes and keep their finger on the pulse of their company's financial health.
- General ledger (GL) and sub-ledger systems are types of accounting software that allow users to create different accounts within a single system. They also provide detailed reports that show how much each account has earned or lost during a specific period.
- Payroll management and payroll software automates calculating wages, taxes, benefits, and other deductions. It also provides employees with timely payment reminders.
- Accounts payable (AP) and accounts receivable (AR) or an integrated business management system (BMS) do more than basic bookkeeping. It reduces redundancies, delivers better budgeting and forecasting capabilities, and enables thorough and properly categorized expense management. Furthermore, it offers seamless integration into banking systems and allows for more accurate audits. Finally, it maintains detailed tracking records of all financial transactions.
- Cash management solutions, a subset of accounting software platforms, provide accurate financial reports by automatically reconciling transactions to bank statements. It also enables companies to manage their finances efficiently by making timely investments, loans, and other financial activities using automated forecasts.
- Asset management allows you to track every aspect of an asset from its inception to its eventual disposal. It provides you with full transparency into the value of each purchase so that you can accurately report its worth, appreciation, and depreciation at any given time.
- Risk management and compliance solutions are the best way to prevent fraud and unauthorized use by employees through robust internal control systems and separation of duty (SoD). These internal control systems and SoDs help keep your business compliant with Sarbanes-Oxley (SOX) requirements and provide a single source of truth for your financial data.
- Collections management software helps businesses collect debts owed to them. It tracks customer payments and generates invoices based on those payments. This management ensures that debtors pay what they owe.
- Revenue management software helps companies maximize revenue while minimizing costs. It analyzes sales trends and recommends which products should be promoted and when.
- Reporting and analytics software helps companies analyze data and make informed decisions. It provides easy access to information and lets users view and manipulate data in various ways.
- Business intelligence (BI) software collects, stores, and analyses data from multiple sources. It then presents the financial data in meaningful formats that give managers insight into their organization's performance. The analytics dashboards provide real-time analysis of critical metrics such as inventory levels, production cycles, debt-to-equity ratio, and employee productivity.
Best Accounting Software for Small Businesses
The best accounting software for small businesses (SMB) includes many features that will allow businesses to run smoothly. It's not meant to replace your accountant but to complement your existing workflow. However, not all software is created equal.
The best small businesses accounting software will offer mobile apps, cloud storage, and online reporting. Mobile apps allow employees to work from anywhere. Cloud storage gives you secure access to your files from any device. Online reporting tools let you create custom reports and dashboards that show key financial metrics.
Accounting software plays a crucial role in small businesses. Whether you are just starting or are already running a successful operation, accounting tools help keep track of finances, manage payroll, and automate processes. To run a successful business, find the right software and cloud service to manage your finances, keep track of your business operations, and grow with your company.
Industry Accounting Systems
There are two types of accounting software: industry accounting software and general-purpose accounting software. Industry accounting software is designed specifically for a particular industry, whereas general purpose accounting software is more generalized for many different deployments.
Industry accounting software is developed by industry-focused vendors, like Deltek, with years of experience in the field. These companies know how to cater to the needs of specific industries and therefore develop specialized accounting systems. For example, Deltek Construction Accounting with ComputerEase, is an industry accounting system that caters to the needs of small and medium-sized construction businesses.
General purpose accounting software is typically developed by smaller companies who want to enter a new market. These companies may specialize in one product or service, so they need a single solution that works well for all their customers. For example, Sage 50 Accounts is a general-purpose accounting system that allows you to manage accounts payable, accounts receivable, sales, purchases, payroll, and other aspects of your business.
General Purpose Accounting Software vs. Industry Accounting Software
When choosing between industry and general-purpose accounting software, it’s important to consider what kind of business you’re operating. A general-purpose accounting package might be enough if you're looking for a simple way to manage your books. But if you're planning to expand your business, you should look at industry-specific software. This investment will ensure you get the most out of your financial data.