When running a business, you’re sure to come across the term accounting more than often, but what does that term actually mean? Today, we’re here to discuss what exactly accounting is and the different types you may face.
The definition of accounting is how a business organizes, records, and understands its financial health and information. It’s easier to think of accounting as a giant machine that’s constantly getting raw financial information placed inside of it. This includes records of every business transaction, projections, taxes, etc. After the machine processes the information, it then spits it out to create a story that you can understand explaining the financial state of your business.
This story will tell you if you made a profit or if you’re losing money. It also explains your cash flow, the current value of your assets and liabilities, and what parts of the business are making money.
How does it work?
Accounting works in a cycle that begins the second you enter a business transaction or any activity that involved a business’ money. The cycle is known as the “accounting cycle.” The following steps are as follows:
- Analyze and record transactions.
- Post transactions.
- Prepare the unadjusted trial balance.
- Prepare to adjust entries toward the end of the period.
- Prepare an adjusted trial balance.
- Prepare final statements.
The Different Types of Accounting
- Financial accounting
- This involves the process of compiling, aggregation, and production of financial information in business in the form of financial statements. It is to be used by the stakeholders of the company.
- Managerial accounting
- This focuses on any information that’s used for internal operational reporting. Basically, it’s whatever happening within the business. It’s a crucial part of project management.
- Tax accounting
- Any accounting that’s related to taxes. It typically involves various tax-related statutes, and also tax planning for tax returns. A calculation of income tax and various other taxes come into play.
- Cost accounting
- This method is used to capture the various cost of production of a company. It’s done so by assessing input costs, fixed costs, etc. In this type of accounting, all the costs will be assessed, and then, it will be compared with the actual cost incurred.
- Credit accounting
- This is the analysis of a company’s unpaid liabilities and bills. Its sole responsibility is to make sure that the business’ cash isn’t tired up from always paying for them. This is also known for being one of the most difficult types of accounting.
Time to make moves!
When it comes to your company’s accounting, it’s good practice to stay on top of it. Whatever the size of your business, proper accounting will help you in the long run. Still not convinced? Be sure to ask Hayhursts Accountants for advice on what you can do for your business. The last thing you want is your business to go under because of your negligence.