Accounting shows the monetary position of a business at any point in time to any individual. Further, accounting helps in translating the workings of a firm into reports for analyzing it.
Accounting is the process of recording, classifying, summarizing, reporting and analyzing the data related to the monetary transactions. To understand the accounting true meaning let us look at the components of it.
Through accounting, an entity can easily record the different transactions. Bookkeeping can also be referred in place of recording as it helps in perceiving the transactions and setting them up as records.
Bookkeeping is only related to the recording segment and that's it. Whereas accounting helps to maintain books of accounts for various purpose such as decision making, financial position, etc. The method of recording flows in a systematic manner.
The three diverse ways of recording are:
Though the recording is the most important part of the accounting, it cannot be used to analyze data related to a particular account. For such purpose, it is important to classify such data into different accounts. This is why classifying financial data plays a significant role in accounting.
By recording transactions the accountants get the raw information. And the accountants bifurcates such information into different categories. Further, such bifurcation helps the business to get a summarized form of all the records.
The company affairs are the responsibility of the administration. And at the time of using the cash, they must have a fair idea about the various operations occurring inside the business. Accordingly, to deal with this, owners get reports. They get these reports quarterly and toward the end that shows the statistical data of performances.
At last, there is an analysis of the considerable number of results so far. In the wake of recording and summary, it is essential to make conclusions. To look for negatives and positives in the report is the management’s responsibility.
Accounting is mainly dependent upon three basic concepts and they are:
Assets = Liabilities + Owner’s Equity
So let us see the meaning of each basic concept:
Assets: Assets are the resources in the control of an organization and also have future economic value.
Liabilities: Liabilities obligations that will result in an outflow of cash.
Owner’s Equity: Owner’s equity is the amount invested by the owner or shareholder of an organization.
As it is impossible for the human brain to record thousands of transactional data. So, here accounting plays a very important role to maintain records of all transactions.
Every business thrives for-profit and here is the place where the profit and loss statement plays a vital role. As such statements help the business owner to determine whether it is profitable or not.
Resources are limited and hence is very crucial. And for the smooth running of business one should properly utilize the available resources. Here accounting report helps the business to know details about each activity before utilizing any resource.
A business owner/shareholder to make further investment needs to have a fair idea about the financial position of the business. So through balance sheet which is a part of accounting serves this purpose.
As every record are maintained under accounting, it is easy for the owner to make decisions. Further, accounting eventually ensures that the company is carrying out its day to day activities smoothly.