How Accounting Works in Business
Accounting is one of the key functions of 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.
The financial statements that summarize a large company’s operations, financial position, and cash flows over a particular period are concise and consolidated reports based on thousands of individual financial transactions. As a result, all accounting designations are the culmination of years of study and rigorous examinations combined with a minimum number of years of practical accounting experience.
Also, Read:- Definition of Finance in Business
System of Record Keeping
First, there must be a rational approach to record-keeping. This means setting up accounts in which financial information is stored. Accounts fall into the following classifications:
-
Assets. These are items purchased or acquired, but not immediately consumed. Examples are accounts receivable and inventory.
-
Liabilities. These are obligations of the business, to be paid at a later date. Examples are accounts payable and loans payable.
-
Equity. This is assets minus liabilities and represents the ownership interest of the owners of the business. Examples are common stock and preferred stock.
-
Revenue. This is the amount billed to customers in exchange for the delivery of goods or provision of services.
-
Expenses. This is the number of assets consumed during the measurement period. Examples are rent expense and wages expense.
Basic Accounting: Science or Art?
Expert’s opinion differs on the issue of whether accounting is a science or an art. Some considered accounting is as science and some others as art. It is not made very clear by the definition or the meaning of accounting either.
Science means a systematic body of knowledge which is based on definite rules and principles and establishes is the relationship between cause and effect. On the other hand, Art is a technique that helps in achieving the desired goals in the best possible manner.