Accounting is the process of recording, classifying, measuring, summarizing, and reporting all the activities of a business with specific regard for financial transactions.
Bookkeeping, which can be seen as a preparation stage for accounting, is the detailed work of recording each transaction that occurs within a business. Often thought of as the ledger work of a business, it is the means of finding out what the business spent money on, and where the business received revenue.
Accounting uses the information gathered by bookkeeping practices and develops a system of financial reporting that includes not only the information used by bookkeepers, but can project and analyze the data as well.
There are several subcategories of accounting with a particular tasks:
- Financial Accounting: The task of financial accountant is to prepare and to report about what the company has done in the past to external parties, who need this information (e.g. regulators, investors). Financial accounting provided in form of an standardized under generally accepted principles financial statements should give an in-depth look at the health and stability of a company.
- Management Accounting: The well informed management accountant can be relied on making educated projections about what the company will do in the future, e.g. to give insight into the benefits (or drawbacks) of expansion, help establish pricing structures and handle the reconciliation of corporate bank accounts.
- Tax accounting: The task of tax accountant is to ensure that the company abides by current tax laws and is maximizing potential deductions while minimizing liabilities. Filing of tax returns, corporate documents as well as personal tax filings can be handled by the accountant – lessening the chance of missing out on tax breaks and benefits.
- Audit: The audit function is typicaly separated between internal and external audit. The common task for both is to verify the accuracy of the financial statements.
For preparation of financial statements careful analysis of financial information is required, as well as knowledge of current laws and regulations regarding tax and financial legalities. For example, if a company is public, its accounting is required to follow standard rules, which can be divided into two categories:
- International: IFRS (International Financial Reporting Standards)
- National GAAP (Generaly Accepted Accounting Principles): e.g. US GAAP, UK GAAP, German GAAP, PCG (Plan Comptable Général, French GAAP)
No longer performed with a pencil and ledger sheets, today’s accounting departments are equipped with the latest in financial software and tools (e.g. Sage One, SAP), shifting the work of an accountant from detailing what has already happened, to making valuable assertions and recommendations about what can happen.
By utilizing an accountant for every area of the business’ financial health, the company can stay on top of business trends and prospects. While some companies may feel that accounting is something that can be handled in-house, companies who want to have a greater chance at success understand the value of a professional finance advisor. Utilizing an accountant will save the company time and money in the long run, and ensures that the company stays on solid financial ground.
Please read for more details: Basic accounting principles.