What is Accounting?
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ACCOUNTING comes from the word ACCOUNT, whose origin means counting.
There are many definitions but the one that pertains most closely is:
1. a record or statement of income and spending for a particular time period
In essence, that’s what accounting is, recording money spent and received and reporting it.
Accounting has been around for a long time, some say as far back as 7,000 years ago, using rocks or pieces of clay to represent the quantity of sheep, goats, or cows on hand.
Accounting is numbers.
It mainly applies to finance, meaning money, to see how much was taken in, how much is in the bank, and how much was spent.
Accounting’s purpose is to record the past, and use that information in the present to help make informed financial decisions for the future.
If done right, good accounting can be the savior of a person, company or government, by making sure more money is taken in than spent, ensuring solvency.
What is SOLVENCY?
Having more money in-hand than is owed or needing to be spent.
So proper accounting is a very important subject, and the livelihood of all people and organizations depend on it.
There are generally four types of accounting.
The first would be BOOKKEEPING, which is the gathering and recording of information.
Bookkeeping is a trust – if the information being gathered is not correct or not recorded properly, bad decisions are made.
The next type of accounting is FINANCIAL ACCOUNTING, more often thought of as financial reporting.
Financial accounting is reporting to people outside the organization.
These reports are usually in summary form so decisions can be made quickly.
They include information such as how much money was made last year, how much was spent, and how much was lost.
You might be providing this information to a banking institution that is considering a loan to you or your company.
The third type of accounting is MANAGERIAL ACCOUNTING.
Managerial accounting is information that is used inside organizations and not shared with others.
It’s detailed and private information used to make decisions such as:
· How much it costs to produce and deliver a product or service and how much profit is made on it,
· How much financial investment should be made for bringing new products to market that return that investment,
· and whether or not to open a new factory in another state.
That’s managerial accounting.
The fourth type of accounting deals with INCOME TAX, which makes sure you are in compliance with the laws of the land.
That would include paying the proper income tax to the state and federal government based on earnings.
The four types of accounting are bookkeeping, financial accounting, managerial accounting, and income tax accounting.
These all fall under the heading of accounting, and other than creating, selling and delivering products or services, accounting is one of the most important aspects to know and understand when it comes to the operation of any business.