Accounting or accountancy is the basic measurement, interpretation, and reporting of financial and non-financial data about companies and other financial entities. This includes information regarding purchases, sales, cash flows, inventory, accounts payable and receivable, as well as the balance sheet. Accounting uses several tools to collect, process, record, communicate, analyze, and provide information needed by investors, management, creditors, tax authorities, and regulatory authorities to determine the health of a company’s business and the risks that it faces. Accounting methods are usually described in terms of a function, method, or account. It generally includes three major areas: financial reporting, policy, and internal control.
Financial reporting is the reports prepared by accountants that represent the transactions entered into the books of a company for financial reporting purposes. These include balance sheets, income statements, and statement of cash flow. Income statements show the income generated from various activities by the company during a specific period of time, and statement of cash flow provides information regarding the sources of funds used to operate the business. The accountant usually prepares these reports in a revenue account ledgers. ledger accounts are usually prepared on the basis of debits and credits, which are sourced from the financial statements.
Policy and managerial control refers to those responsibilities related to the achievement of financial objectives. They include the identification and selection of the assets, liabilities, funding, and performance of the company. Policy statements form the core content of the accountants’ report and are usually prepared at the direction of senior management. Management control also covers strategic decisions, investment recommendations, implementation of systems, and overall supervision of all aspects of the company’s operations. All of these areas are very closely related and may be presented in different ways. In addition, there are specific methods and systems that must be applied to each area.
An accounting period refers to the financial transactions made during a particular month. Every transaction in an accounting period is called a transaction. Trades include sales, purchases, and acceptances. All financial transactions are reported in the financial statements at the end of the reporting period. A full accounting period is when the last trades are reported in the financial statements.
All accounting systems use a manual process called manual recording of business transactions. This process involves writing down all the business transactions as they happen, with the necessary details, until such time as a computerized system can mechanically perform the same tasks. It is called a manual system because it requires the most care and attention. It involves writing down every business transaction, as it happens, from the receipt of a product to the payment of a service or the delivery of a digital product. This process of recording all business transactions, also known as accounting, is an important part of the bookkeeping process and must be done accurately and promptly in order to ensure accuracy of the financial reports prepared.
Accounting is used to guide business decisions about resource allocation, financing, risk management, investment, expansion, and many other aspects of business decision making. Proper accounting contributes to sound financial statements by removing potential errors and gaps in financial information. This helps business decisions be made in a timely fashion, thereby providing support for managers and owners to successfully make important business decisions. The main purpose of accounting is to provide decision makers with correct and reliable information that they need to make informed decisions about resource allocation, budgeting, and the allocation of resources in organizations. Accounting information is crucial to the conduct and management of businesses.