Accounting is the language of business. It is a system of recording and communicating financial transactions to internal and external users. Accounting is present in all businesses and necessary for continued growth. Accountants follow a set of principles known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements for reporting.
Types of Accounting
Financial accounting is the process of tracking a company’s financial transactions using standardized guidelines by the GAAP. The transactions are recorded, summarized, and presented in a financial statement such as an income statement or balance sheet. Financial statements are generally done once an accounting period is over for legal purposes if the company is public or for looking at reports internally for performance.
Managerial accounting or management accounting is the process of analyzing, measuring, and interpreting accounting information for managers to make decisions about the company’s operations. Managerial accounting focuses on the analysis of financial statements from the financial accounting department or external CPA and translates this information into actionable decision-making. Activities in managerial accounting include: budgeting, forecasting, and financial analysis tools.
Cost accounting deals with company-wide decisions related to costs associated with producing a product or service. This type of accounting entails determining fixed and variable costs for a product or service and finding a sale price to keep a company operating at a net positive level.
Accounting in Business
In order to operate a business, accounting is one of the essential business activities necessary to operate legally and strategically. Financial accounting is necessary to report taxes and earnings to the IRS and SEC. Managerial accounting is used internally when management needs to analyze the company’s performance and make changes to operations to perform more efficiently. Cost accounting is necessary to determine the costs associated with producing a product or service along with determining a sale price suitable for the public.