Finance Accountancy – Accounting is the process of recording financial transactions related to business. The accounting process includes summarizing, analyzing, and reporting these transactions to regulatory, regulatory, and tax authorities. Financial statements used in accounting are summaries of financial transactions during the accounting period, summarizing the company’s operations, financial position, and cash flows.
Accounting is one of the most important functions of almost every business. It may be managed by a bookkeeper or accountant in a small company, or by a large finance department with dozens of employees in a large company. Reports generated by flow accounting, such as cost accounting and managerial accounting, are very valuable in helping managers make business decisions.
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A financial report that summarizes a large company’s operations, financial position, and cash flow for a specific period of time is a condensed and consolidated report based on thousands of individual financial transactions. Therefore, all professional accounting designations are the culmination of years of rigorous study and testing combined with a minimum number of years of accounting experience.
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The history of the account has been around almost as money itself. The history of accounting comes from ancient civilizations in Mesopotamia, Egypt, and Babylon. For example, during the Roman Empire, the government kept detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century.
Luca Pacioli is considered the “father of accounting and bookkeeping” due to his contribution to the development of accounting as a profession. An Italian mathematician and friend of Leonardo da Vinci, Pacioli published a book on the double-entry bookkeeping system in 1494.
In 1880, the modern accounting profession was fully established and recognized by the Institute of Chartered Accountants in England and Wales. This institution created many of the systems that accountants practice today. The establishment of the institution happened in large part due to the industrial revolution. Sellers not only need to keep track of their records but try to avoid bankruptcy as well.
The Alliance for Responsible Professional Licensing (ARPL) was formed in August 2019 in response to a series of state regulatory proposals that loosened the requirements to become a CPA. ARPL is an alliance of advanced professional groups including engineers, accountants, and architects.
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Accountants may be assigned to record specific transactions or work with specific data sets. For this reason, there are many broad groups that most accountants can be grouped into.
Financial accounting refers to the process used to create interim and annual financial statements. The results of all financial transactions that occur during an accounting period are summarized in the balance sheet, income statement, and cash flow statement. Most companies’ financial statements are audited annually by an outside CPA firm.
For some, such as publicly traded companies, auditing is a legal requirement. However, in general, lenders still require the results of an annual external audit as part of their debt covenant. Therefore, most companies will have an annual audit for one reason or another.
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Managerial accounting uses much of the same information as financial accounting, but it organizes and uses the information in a different way. That is, in managerial accounting, accountants create monthly or quarterly reports that the management team of the business can use to make decisions about how to operate the business. Management accounting also covers many aspects of accounting, including budgeting, forecasting Ne, and various financial analysis tools. Basically, any information that might be useful to management falls under this umbrella.
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Just as managerial accounting helps businesses make management decisions, cost accounting helps businesses make cost decisions. Basically, cost accounting considers all the costs associated with the production of a product. Analysts, managers, business owners, and accountants use this information to determine how much their products should cost. In cost accounting, money is cast as an economic factor in production, while in financial accounting, money is considered as a measure of the company’s economic performance.
While financial accountants often use one rule to report a company’s financial position, tax accountants often use a different rule. These regulations are set at the federal, state, or local level based on what is returned. Tax accountants balance compliance with reporting rules while also trying to minimize a company’s tax liability through thoughtful strategic decisions. Tax accountants usually oversee the entire tax process of the company: the creation of the strategy of the organizational chart, operations, compliance, reporting, and remittance of tax payments.
While basic accounting functions can be handled by bookkeepers, advanced accounting is handled by qualified accountants with designations such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA) in the United States.
In Canada, the three legacy designations – Chartered Accountant (CA), Certified General Accountant (CGA), and Certified Management Accountant (CMA) – have been combined under the Chartered Professional Accountant (CPA) designation.
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An important element of the accounting profession is the “big four”. These four largest accounting firms conduct auditing, consulting, tax consulting, and other services. These companies, along with many other small companies, include areas of public accounting that advise financial and tax accounting in general.
In most cases, accountants use generally accepted accounting principles (GAAP) when preparing financial statements in the U.S. GAAP is a set of standards and principles designed to improve the comparability and consistency of financial reporting across industries. Its standard is based on double-entry accounting, a method in which all accounting transactions are entered as both debits and credits in two separate general ledger accounts that roll into the balance sheet and income statement.
In most other countries, a set of standards controlled by the International Accounting Standards Board called International Financial Reporting Standards (IFRS) is used.
Tax accountants who oversee returns in the United States rely on instructions from the Internal Revenue Service. Federal tax returns must follow the tax guidelines set forth by the Internal Revenue Code (IRC). Tax accounts may be based on state or county taxes as determined by the jurisdiction in which the business does business. Foreign companies must follow the tax guidelines of the country where the return is to be filed.
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Accountants often use software to help with their work. Some accounting software is considered better for small businesses such as QuickBooks, Quicken, FreshBooks, Xero, SlickPie, or Sage 50. Large companies often have more complex solutions to integrate with their specific reporting needs. This includes add-on modules or in-house software solutions. Large accounting solutions include Oracle, NetSuite, or Sage products.
Financial accountants usually operate in a cyclical environment where the same steps occur sequentially and repeat every reporting period. These steps are often called the accounting cycle, the process of raw transaction data, entering the accounting system, and conducting relevant and accurate financial reporting. The stages of the accounting cycle are:
Financial accountants have two different sets of rules that they can choose to follow. The first method, the accrual basis accounting method, was discussed above. These rules are specified by GAAP and IFRS, are required by public companies, and are mainly used by large companies.
The second set of rules follows the cash basis method of accounting. Instead of recording transactions when they occur, the cash method determines that transactions should be recorded only when cash is exchanged. Because of the simple accounting method, the cash method is often used by small businesses or entities that do not need to use the accrual method of accounting.
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Imagine that a company purchases $1,000 of inventory on credit. Payment is due for inventory in 30 days.
The difference between these two accounting methods is the cumulative treatment. Naturally, under the accrual method of accounting, the balance is required. Under the cash method, accruals are unnecessary and are not recorded.
Accounting is a back office function where employees may not be in direct contact with customers, product developers, or production. However, accounting plays an important role in strategic planning, growth, and company compliance requirements.
To illustrate double-entry accounting, imagine a business sending invoices to its customers. An accountant using the double-entry method would record a debit to the accounts receivable account, which flows through to the balance sheet, and a credit to sales revenue, which flows through to the income statement.
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When the customer pays the invoice, the accountant gives the accounts receivable and debits the cash. Accounting is also called balancing books, because all the ledgers are balanced. If the entries don’t balance, the accountant knows there must be an error somewhere in the general ledger.
Accountants help businesses keep their financial records accurate and timely. Accountants are responsible for keeping records of the company’s daily transactions and compiling those transactions into financial statements such as balance sheets, income statements, and cash flow statements. Accountants also provide other services, such as periodic audits or the preparation of specific management reports.
Accountants come from many backgrounds. In general, however, attention to detail is an important component in accounting, because accountants must be able to diagnose and correct minor errors or discrepancies in the company’s accounts. Ability
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