Accounting is a term that describes the process of consolidating financial information to make it clear and understandable to all stakeholders. The main objective of accounting is to record and report the financial transactions, financial performance, and cash flows of the company.
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What is Accounting?
Accounting is the process of recording, classifying and summarizing the financial transactions of a business. It involves a number of processes, such as summarizing, analyzing, and reporting the results to supervisory agencies, regulators, and tax-collecting entities.
The results of this financial report can provide an overview of how the company’s financial condition and performance, which can be used as a catalyst in managing resources and formulating further strategies.
Purpose and Benefits of Accounting in Business
More than just recording every transaction, here are some of the benefits and purposes of accounting for business.
1. Documenting Business Transaction Records
At a basic level, accounting aims to keep records of a company’s financial information. It allows companies to keep track of income, expenses, assets, liabilities, and shareholders’ equity, as well as manage cash flow.
In addition, these financial records can be used to assess a company’s financial performance by comparing current information with historical data that has been collected over a period of time.
2. Facilitate Decision Making for Management
Accounting has a crucial role for the internal users of the company-including the people who plan, manage, and run the organization.
The reason is, this data is definitely needed when they want to make important decisions. For example, to expand geographically or improve operational efficiency.
3. Communicating Financial Results and Performance
Accounting helps communicate and provide transparency of financial performance results to all stakeholders. Both internal and external parties, such as investors and creditors.
Investors and lenders will use these reports to analyze risks and make investment/loan decisions. Therefore, it is very important to provide relevant and reliable accounting information.
4. Meet Legal Requirements
Companies are required to accurately report financial assets and liabilities to local tax authorities. In this case, accounting aims to assist companies in taxation and compliance matters. Especially for companies that have gone public.
Complete and accurate records can reduce the risk of tax law violations and possible audits.
5. Provides an Overview for Investors and Creditors
One of the best ways to reassure investors and creditors is to provide complete, accurate, reliable financial information that has been examined by a Certified Public Accountant.
Types of Accounting
Accounting can be divided into several categories, where each category relates to a specific set of information or documents a specific transaction. Here are the types.
1. Financial Accounting
Financial accounting focuses on recording and reporting financial transactions and cash flows. The results of the report are used to report the performance and financial health of a company to internal and external parties.
2. Management Accounting
Management accounting focuses on the use and interpretation of financial information to make informed business decisions. It is similar to financial accounting, but its purpose is only for internal users to evaluate and analyze financial performance.
3. Cost Accounting
Cost accounting is used to track, analyze, and understand the costs involved in a particular business activity. It covers all expenses related to day-to-day business operations.
4. Tax Accounting
Tax accounting focuses on tracking and reporting a company’s tax-related income and expenses. The goal is to prevent the company from overpaying income tax from what is required by the Internal Revenue Service (IRS).
5. Project Accounting
Project accounting is used to integrate financial performance based on the project and report it to management for review of progress and success. In this case, the report will be used to assess whether management needs to make adjustments to the project budget and work breakdown structure.
6. Credit Accounting
Credit accounting involves all the company’s unpaid bills and liabilities to ensure that the company has enough cash to pay them.
7. Forensic Accounting
Forensic accounting involves auditing and investigating financial transactions when fraud, such as fraud or embezzlement , is suspected. That’s why this process usually involves law enforcement agencies and insurance companies to analyze financial records and accounts.
8. Fiduciary Accounting
Fiduciary accounting is a type of accounting that deals with estates or trusts. The fiduciary accountant represents the beneficiaries and provides information on the expenses, income, assets, and liabilities of the estate or trust.
9. International Accounting
International accounting helps businesses that operate multinationally or businesses that want to expand to other countries. Where the report format must follow the International Financial Reporting Standards (IFRS).
10. Fund Accounting
Fund accounting aims to track how businesses or non-profit organizations allocate and spend funds across their operations. This is done to assess whether they are using funds effectively to benefit the organization.
That’s the information about accounting objectives, benefits, and understanding. After seeing the big role of accounting in business, as an MSME entrepreneur you must realize how important it is to have records that document every transaction of your business.
It’s easy, you can take advantage of the best features available at Labamu by downloading the app via Google Play or App Store. From now on, all transaction records and business administration are safely under control.
