Accounting is the process of recording, compiling, examining and reporting all financial transactions of an organization.
Accounting helps organizations and businesses keep track of their performance and make informed financial projections. It is a very important part of ensuring business success.
In this blog, we cover all aspects of accounting such as what it is, its types & its importance for businesses.
Table of Contents
What is Accounting?
Accounting helps keep track of money and provides a clear picture of how well an organization is doing financially. The process of accounting has multiple steps:
- Recording financial transactions
- Compiling the records into various books of accounts
- Analyse the financial information
- Derive interpretations and find patterns
- Communicate the information to various stakeholders
Accounting is an indispensable part of any organization. Let’s understand why accounting is so important.
Importance of Accounting
Accounting is important because it helps stakeholders understand an organization’s financial performance and whether it is making the most efficient use of its money.
It helps stakeholders know if the organization is making the most efficient use of money, whether the business is making profits or if it is running on losses.
Accounting also helps with compliance, since most businesses are legally required to disclose their statements of accounts to a regulatory body like SEBI or the SEC.
Types of Accounting
Depending on the kind of transaction, objective and need of the hour, there are different kinds of techniques that accountants use.
- Financial Accounting
- Managerial Accounting
- Tax Accounting
- Cost Accounting
- Social Accounting
Let’s understand the different types in more detail:
Financial accounting focuses on preparing financial reports for external shareholders of the business, like investors, creditors, regulators and the general public.
Its objective is to prepare the three main financial statements: the Income Statement, Balance Sheet and Cash Flow Statement.
Managerial accounting focuses on communicating financial information to managers and executives, so they have access to relevant, timely financial information and can make well-informed decisions.
Managerial Accountants work closely with other teams like marketing, operations, and finance, to ensure that financial information is shared and used effectively throughout the company.
Tax accounting deals with the preparation and filing of tax returns and compliance with tax laws and regulations.
Its primary objective is to minimize an organization’s tax liability by taking advantage of tax deductions, credits, and other incentives tax authorities offer. It also focuses on ensuring that businesses pay the correct amount of taxes to avoid penalties.
Cost accounting helps businesses analyse spending and make the most efficient use of money. There are various cost accounting that provides insight into the cost of production or service. Managers and executives use cost accounting to make informed decisions about pricing, product mix, and production processes.
Social accounting is the process of measuring and reporting an organization’s social and environmental performance and impacts. It goes beyond just financial numbers and takes into account the broader effects of the organization’s actions on society, the environment, and stakeholders. The goal of social accounting is to encourage organizations to consider not only their economic success but also their contributions to social well-being and environmental stewardship.
How Does Accounting Work?
Every single financial transaction by the company is recorded in the books of accounts. At the end of the accounting period, the accountant prepares reports that summarize the company’s financial performance during that period. These statements are then used to make decisions to improve or maintain the financial performance of the company.
There are two ways of recording the movement of money. The generally accepted and widely used method is the double-entry system. There are many advantages of this method over the single-entry system.
In India, Accounting is regulated by the ASB and the Institute of Chartered Accountants of India (ICAI). The ASB determines a standard format for accounting to be followed in India. The ICAI ensures that this format is followed properly.
Businesses in India and most of the world follow a standard flow of accounts through various “books”.
Cash vs Accrual Method
There are two ways of recording financial transactions as used by accountants: the cash method and the accrual method of accounting. Let’s understand both.
|Cash Method||Accrual Method|
|Meaning||In the cash method, a transaction is only recorded when cash is exchanged – credit or non-cash transactions like depreciation are not recorded||The accrual method records any transaction that adds or deducts value from the business|
|Advantage||Cash method is simple enough to be used by the founder themselves & therefore helpful for founders just starting out||Accrual method is mathematically accurate and more robust|
|Disadvantage||The cash method is highly simplified and most of the time inaccurate.||The accrual method is more complex and thus requires the services of a professional accountant|
Accounting for Small Businesses
While larger businesses and MNCs have sophisticated accounting tools and finance teams to handle their financial reporting requirements, smaller, newer businesses may find it difficult.
Luckily, there is plenty of accounting software to help businesses with their accounting requirements. Zoho, Tally and Quickbooks automatically generate accounting statements from the financial information provided.
With accounting software, however, the initial entry of financial transactions is manual – this becomes an issue since growing businesses make thousands of transactions every day. In such cases, the automation has to begin right from the moment the transaction is made.
Current Accounts like the ones powered by RazorpayX offer direct integrations with accounting software so that every single transaction made by the business is automatically entered into the software of choice.
What is accounting?
Accounting is the process of recording, compiling, analysing and communicating a business’s financial transactions.
Why is it important to maintain books of accounts?
Recording financial transactions in books of accounts helps the founder track growth, pinpoint problem areas and make well-informed decisions. It also helps build trust and credibility among stakeholders.
What is the process of accounting?
The process of accounting is recording, summarizing, and interpreting financial information for a business or organization.
Why do founders need to understand accounting?
The best way to make insightful decisions is to first understand the movement of money. Founders who understand accounting are more likely to take better decisions related to allocation of resources, for example.