What Is Accounting?
Accounting is the process of tracking, recording, and organizing financial information for the purpose of analyzing your organization’s financial health. Put another way, accounting is what allows you to compile your raw financial data and create a report that tells a story of your business’s well-being.
What Is the Purpose of Accounting?
Accounting aims to ensure an organization has the financial resources necessary to remain profitable. By monitoring details such as cash flow and total expenditures, accounting can help identify ways to ensure that your organization remains economically viable for the foreseeable future.
Accounting may also help protect your organization from fraud. By frequently checking the financials of each of your departments, you may discover theft or embezzlement attempts. You may also find honest errors in financial reports, which can turn into bigger problems if otherwise left alone.
What’s the Difference Between Accounting and Bookkeeping?
Bookkeeping is the process of gathering and documenting an organization’s daily financial information, working closely with the minute details of your organization’s transactions. While accounting is also concerned with this information, it’s more concerned with the bigger picture—what does this information communicate about the organization’s overall financial well-being?
As such, bookkeeping and accounting work closely together and often have overlapping responsibilities, but they are two parts of a larger financial puzzle.
What Does the Accounting Process Look Like?
To understand what accounting is, consider the following eight-step process that most accounting professionals follow during a reporting period:
- Gather financial information: Collect invoices, bank statements, receipts, and any other document that communicates money flowing in or out of your organization.
- Record financial information: Record when the transaction occurred, which parties were involved, what it was for, and how much it cost.
- Post the financial information: Account information should be posted on a general ledger. Thanks to today’s technology, many transactions post automatically to a digital ledger.
- Record unadjusted trial balances: Trial balances ensure that your total credit and debit balances are equal.
- Create worksheets: Worksheets reaffirm the totals of your credit and debit balances created in the previous step. This ensures you aren’t working from miscalculated information moving forward.
- Adjust journal entries: Once again, accounting professionals make necessary adjustments to your organization’s journal entries. This may include adding previously unrecorded transactions.
- Create financial statements: Documents such as income statements, cash flow statements, and balance sheets are created to communicate your organization’s financials.
- Close the books: Closing the books refers to transferring all the data you worked with during that period into a permanent record. This happens at the end of every accounting period.
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