Business Financial Accounting

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Business Accounting

Accounting is a process of identifying the events of financial nature, recording them in Journal, classifying in their respective ledgers, summarising them in Profit and Loss Account and Balance Sheet and communicating the results to the users of such information.

Accounting is all about the process that helps to record, summarize, analyze, and report data that concerns financial transactions. Let’s understand the components a little better to understand the true meaning of accounting.

Accounting is a specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet.

Accounting Definition

According to the Committee of Terminology of American Institute of Certified Public Account:” Accounting is the art of recording, classifying summarising in a significant manner and in terms of money, transaction, and events which are, in part at least of a financial character and interpreting the results thereof.”

According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”

How Accounting Works

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. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions.

Functions of Business Accounting

Record Keeping: Accounting is to maintain systematic and chronological record of financial transactions and to post them subsequently to the various Ledger Accounts and finally to prepare the Final Accounts to find out the profit or loss of the business at the end of the Accounting Period.

Protecting of Properties: Accounting is to calculate the correct amount of Depreciation on Assets by choosing the appropriate Method applicable to any particular assets. any unauthorized dissipation of any asset will bring the business to the threshold of insolvency.

Communication of Results: Accounting is always to communicate the results of the recorded and transactions to the different parties who are interested in the particular business, i.e., properties, investors, creditors, employees, Govt.official and researchers etc.

Meeting Legal Requirements: Accounting is to devise and develop such a system of keeping record and reporting the results as will always meet and legal requirements to enable the proprietor or the authority to file various statements like Income-Tax Returns, Sales-Tax Returns etc.

Objectives of Business Accounting

Objectives of accounting are the following:

Maintain Systematic Records: Accounting keeps the systematic records of all the financial transactions of a company or any financial institution. Proper decision making and analysis of profits are impossible if records are not maintained systematically in a company. Even tracking previous transactions or remembering the minute detail of a transaction would be impossible without maintaining these records.

Estimating Profit and Loss: It is impossible to estimate the profit and loss of a company and even a household if proper accountancy records are not made. Moreover without the proper estimation of profit and loss it is impossible to make any further financial decisions for a company.

Balance Sheet: It is easy to understand the financial position of a company when a proper balance sheet is maintained by the accountant or any other individual of a company. It is difficult to set future targets without the estimation of the financial position of a company.

Decision Making: As a result of accounting in any particular company, it is easy for a company to make rational decisions in matters relating to the investment of capital, raising the salaries and providing incentives to the working staff.

Striking a Balance: In order to maintain the balance between the input and output of the cash flow accounting is extremely essential to maintain the financial accounts of a company.

Financial Statement: In order to gain a proper understanding of the financial status and position of a company auditing is essential. As a result, the company can understand whether or not it is headed to the right direction.

Audit: is conducted by means of accounting as a result of which proper estimation is made benefiting the company to a large extent.

Management, Tax and Social Audit: Apart from cost and property audit, management tax and social auditing is also conducted by the means of accounting

Detection of Fraud: As a result of maintenance of proper accounts, it is impossible for any member of the company to conduct any financial activity that will fill his own pocket and empty the company. As a result of proper maintenance of accounts, the fraud ratio of a company drops down to zero.

Detection of Errors: When systematic financial accounts are maintained, a proper trial and error is conducted as a result of which no errors are committed and even the future errors are corrected.