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Accounting - Definition & Advantages of Accounting | What is Accounting?

Accounting is the process of documenting businesses' and corporations' financial activities. The accounting process includes summarising, analysing, and reporting these transactions to oversight organisations, regulatory authorities, and organisations in charge of tax collection. A company's operations, financial status, and cash flows are summarised in the financial statements used in accounting, which provide a summary of economic events over an accounting period.

What is accounting?

One of the essential practical aspects of any business is accounting. For example, a bookkeeper or accountant may manage small businesses, whilst larger organisations may have expansive finance departments with numerous employees. The information generated by various accounting streams, including managerial and cost accounting, helps management make informed business decisions.

Accounting is crucial for decision-making, budgeting, and measuring economic success in any business and corporation. A bookkeeper can handle basic accounting requirements, but more extensive or complex accounting responsibilities should be left to a Certified Public Accountant (CPA). 

Cost accounting and managerial accounting are two crucial categories of accounting for firms. Cost accounting assists business owners in determining how much a product should cost, whereas managerial accounting assists management teams in making business decisions. Qualified accountants adhere to Generally Accepted Accounting Principles (GAAP) guidelines when creating financial statements.

Strategic planning, external compliance, fundraising, and operations management rely heavily on accounting. Accounting is essential for managing a firm because it makes it easier to keep track of revenue and expenses, ensures legal compliance, and provides access to quantitative financial data that can be used by investors, management, and the government to make decisions.

The benefits of accounting

  1. Financial management: Corporate accounting provides corporations with a comprehensive view of their financial position, which helps management make informed decisions about resource allocation, investment, and risk management.

  2. Compliance: Corporate accounting helps corporations comply with legal and regulatory requirements, such as tax laws and financial reporting standards.

  3. Investor confidence: Accurate and transparent financial reporting through corporate accounting can help build investor confidence and attract investment.

  4. Cost control: Corporate accounting helps corporations identify areas of inefficiency and control costs, which can increase profitability and competitiveness.

  5. Performance evaluation: Corporate accounting provides a basis for evaluating the performance of a corporation and its various business segments, which can help management make decisions about resource allocation and strategy.

  6. Improved decision-making: Corporate accounting provides timely and relevant financial information to management, facilitating better decision-making.

Drawbacks of accounting

  1. Limited transparency: Corporate accounting may not provide complete transparency about a corporation's financial position, making it difficult for stakeholders to understand the company's financial health fully.

  2. Lack of accuracy: If the accounting records are not adequately maintained, there can be inaccuracies in the financial statements, leading to incorrect decisions being made by management or investors.

  3. Complexity: Corporate accounting can be very complex, especially for large corporations with multiple subsidiaries or business segments, making it difficult to record and report financial information accurately.

  4. Cost: Maintaining accurate accounting records can be costly, especially for smaller corporations that may not have the resources to hire dedicated accounting staff or invest in sophisticated accounting systems.

  5. Regulations: Many regulations govern corporate accounting, and failure to comply with these regulations can result in legal penalties and reputational damage.

The different types of accounting

  1. Financial Accounting

  2. Managerial Accounting

  3. Tax Accounting

  4. Cost Accounting

  5. Credit Accounting

  6. Forensic Accounting

  7. Public Accounting

  8. Governmental Accounting

Objectives of accounting 

Accounting makes it easier to maintain transaction records and other financial data systematically.

It provides a general notion of the likelihood of success, failure, or loss.

By guiding management in making optimal choices, the process benefits them. Accounting also determines an organisation's financial standing.

Additionally, it assists in disseminating and presenting accounting information to the user and evaluating employee productivity.

Accounting makes the most significant contribution to any firm by preventing profit hazards and fraud.

The owner may track and record multiple financial transactions relating to payments due to the company and receipts earned by the company to ensure it receives the revenue and remains profitable.