Accounting is the practice of measuring a business’ financial transactions. This includes the gathering and analyzing of raw financial data to be used for taxes, projections and essentially every financial decision a company makes. Needless to say, it is a critical aspect of any business, big or small.
In this article, we’ll provide a general overview of accounting in business – the different types and how it’s used.
The Difference Between Accounting And Bookkeeping
Bookkeeping pertains to the daily recording of a company’s financial transactions (purchases, payments, sales, receipts, etc.). Accounting pertains to the process of analyzing these records to provide company leaders with financial insights gleaned from them. A bookkeeper’s role is more administrative whereas an accountant’s role demands a higher level of expertise.
Types of Accounting
Companies generate financial statements each year that individuals outside your company can use to know more about the financial health of your business. When you prepare the annual financial statement of your company, this process is referred to as financial accounting.
Managerial accounting produces financial statements for internal use only and these statements are generated more frequently.
This is a method of managerial accounting that aims to demonstrate a company’s production costs – both fixed and variable. It is used to analyze a company’s production-related operations to see what changes may be made to increase margins and reduce unnecessary costs.
Tax accounting, as the name implies, is the sector of accounting that focuses solely on preparations of tax returns and payments. This type of accounting should be regulated by the Internal Revenue Service (IRS) and should be compliant with the Internal Revenue Code (IRC).
Credit accounting analyzes a company’s liabilities and unpaid bills. Its purpose is to provide company leaders with an honest look at their spending habits to see what adjustments, if any, need to be made, i.e. borrowing less.
How Accounting Is Used In Business
1. Keeps you up to date with your taxes
Clearly, accounting plays a large role in paying your taxes. As we touched on above, there is an entire subsector of accounting that is dedicated just to taxes. Failure to pay taxes correctly and on time could lead to some serious legal repercussions, so it’s imperative that you are able to accurately predict your income to ensure that you are estimating tax payments correctly. Accountants are professionals trained to handle such payments and are also able to help you get as many reductions as possible within the confines of the law.
2. Saves you from fines
As you grow your business, keeping track of your tax obligations can be difficult. If there are errors on your financial reports, there is a chance you’ll misrepresent your business’ income. If this happens, the IRS could hold you liable for breaking tax laws. With solid accounting, not only will you have accurate financial records, but you will also reduce the risk of violating laws and paying steep fines.
3. Helps you to secure a loan
In the event that you need to take out a business loan, you will need to prove your creditworthiness to lenders. This will require you to show a variety of financial statements including a balance sheet, profit and loss statement, and cash flow projection. These are all records that are kept and managed via accounting.
4. Planning for growth
Accounting can also be used for projection. If you are planning for growth, accounting will serve as your roadmap. Growing your business involves setting goals, and your financial statements will help you assess whether or not your business is achieving said goals. If you do not have accurate financial statements, it will be harder to predict how your business will develop in the future.
5. Tracks your accounts receivable
The bigger you get, the harder it may become for you to track your accounts receivable. This is where balance sheets come in handy, a summary generated and managed through accounting. Luckily, there are now many ways to automate these types of accounting tasks with accounting software like Wave. Is wave accounting safe? When it comes to storing sensitive financial data, you can rely on Wave. It can provide you with a detailed report so you know which clients you need to follow up with for payment.
The Six Major Steps Of Accounting Cycle
- Evaluate and keep track of transactions, making sure bank statements and invoices are collected.
- Input transactions to the ledger based on the rules of double-entry accounting.
- Provide an unadjusted trial balance, which shows the listing of accounts and their balances.
- Adjusting entries at the end of each period.
- Adjust trial balance.
- Provide detailed financial statements.
The Bottom Line
Making a major financial decision can be difficult for you if you do not have any background in your financial state. Accounting provides you information so you will know if your business is ready to grow. You are in control of the future of your business if you have an accountant to keep track of your finances.