September 21, 2023

Accounting: Definition and its Types

A simple definition of “accounting”

Accounting is keeping a track of your business and understanding its financial information.

You can think of accounting as a big machine in which the input is raw financial information, it records all your business transactions, taxes, projections, etc.and then the output is an easily understandable story about the financial state of your business.

Accounting lets you know if you are making a profit or not, what the current value of your company’s assets and liabilities is, what your cash flow is, and which parts of your business are actually generating money.

Accounting vs bookkeeping

Accounting and bookkeeping are similar in many ways. People say bookkeeping is a part of accounting. But if you want to analyze them separately, we can say that bookkeeping is how you record and categorize your financial transactions, whereas accounting is understanding that financial data through analysis, strategy, and tax planning.

The different types of accounting

Financial accounting

Your company will generate financial statements every year that people outside of your company like investors, government agencies, lenders, potential buyers, auditors, etc.—can use to understand more about your company’s financial health and thus preparing the company’s yearly financial statements this way is known as financial accounting.

Managerial accounting

Managerial accounting is quite similar to financial accounting, but with two important exceptions:

The statements generated by managerial accounting are for internal use only.

They’re prepared much more frequently, sometimes even on a quarterly or monthly basis.

If you ever hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to generate produce reports that give regular updates on the company’s financial health and help you analyze those reports.

Keep a track of your Finances
With LegalSalah

Tax accounting

Tax accounting is when your accountant gives you recommendations on how to get the most out of your tax return. Tax accounting is managed by the Internal Revenue Service (IRS), and the IRS needs that your tax accounting legally sticks to the Internal Revenue Code (IRC). Tax accounting ensures that you don’t pay more tax than you are legally needed to by the IRS.

Cost accounting

Cost accounting is done whenever you’re trying to figure out how to expand your margin or deciding whether raising prices is a good idea or not.

Cost accounting involves analyzing all the costs related to generating an output (whether it be a physical product or service) to make better decisions regarding pricing, spending, and inventory.

Cost accounting is a part of managerial accounting, because managers use cost accounting statements to make better business decisions, and it is also related to financial accounting because costing data is often needed when compiling a balance sheet.

Credit accounting

Credit accounting consists of analyzing a company’s unpaid bills and liabilities and ensuring that a company’s cash isn’t constantly used in paying them.

Credit accounting can be one of the most difficult kinds of accounting to do well because it usually includes telling someone something that they don’t want to hear. Most times it’s your accountant telling you that you should be borrowing less.


One Ping

  1. Pingback: Bookkeeping checklist for startups - legalsalah

Leave a Reply

Your email address will not be published. Required fields are marked *