1. Business Ideas
  2. Business Plans
  3. Startup Basics
  4. Startup Funding
  5. Franchising
  6. Success Stories
  7. Entrepreneurs
  1. Sales & Marketing
  2. Finances
  3. Your Team
  4. Technology
  5. Social Media
  6. Security
  1. Get the Job
  2. Get Ahead
  3. Office Life
  4. Work-Life Balance
  5. Home Office
  1. Leadership
  2. Women in Business
  3. Managing
  4. Strategy
  5. Personal Growth
  1. HR Solutions
  2. Financial Solutions
  3. Marketing Solutions
  4. Security Solutions
  5. Retail Solutions
  6. SMB Solutions
Grow Your Business Finances

What Is Accounting?

What Is Accounting?
Credit: RawPixel/Shutterstock

Accounting is vital to a strong company, keeping track of the business's finances and its continued profitability. Without accounting, a business owner would not know what money was coming in or going out, or how to plan for the future. The actions taken by accounting professionals — from bookkeepers to certified public accountants (CPAs) — make it possible to monitor the company's financial status and provide reports and projections that affect the organization's decisions.

The American Accounting Association defines accounting as "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information." This is often done by logging a business's accounts payable, accounts receivable and other financial transactions, typically using accounting software.

While bookkeepers tend to focus on the details, recording transactions in an efficient and organized manner, they may or may not see the overall picture like accountants do, said CPA Stan Snyder. [Accountant vs. Bookkeeper: What Do They Do for a Business?]

"Accountants use the work done by bookkeepers to produce and analyze financial reports," Snyder said. "Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business — managerial, financial reporting, projection, analysis and tax reporting."

One part of accounting focuses on presenting the company's financial information in the required ways to those outside of the company. In order to present this information in a format everyone can understand, accountants follow a set of guidelines. In the United States, most accountants abide by the Generally Accepted Accounting Principles. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.

CPA Harold Averkamp said accounts also provide a company's internal management team with the information it needs to keep the business financially healthy. Some of the information will originate from the recorded transactions, while some will consist of estimates and projections based on various assumptions, he said.

To come up with a company's status and projections, accountants rely on various formulas. Accounting ratios help uncover conditions and trends that are difficult to find by inspecting individual components that make up the ratio. Accounting ratios are divided into five main categories:

  • Liquidity ratios measure the liquid assets of the company versus its liabilities.
  • Profitability ratios measure the organization's ability to turn a profit after paying expenses.
  • Leverage ratios measure total debt versus total assets, and gauge equity.
  • Turnover ratios measure efficiency by comparing the cost of goods sold over a period of time against the amount of inventory that was on hand during that same time.
  • Market-value ratios measure the company's economic status compared with others in the industry.

Many accountants within the industry choose to become CPAs, a title they achieve by passing an exam and getting work experience. According to the Pennsylvania Institute of Certified Public Accountants, CPAs audit financial statements of public and private companies; serve as consultants in many areas, including tax, accounting and financial planning; and are well-respected strategic business advisors and decision-makers. Their roles range from accountants to controllers and from chief financial officers of Fortune 500 companies to advisors for small neighborhood businesses.  

According to the University of North Carolina at Wilmington's Career Center, there are countless other jobs that require accounting proficiency, including auditor, financial investment analyst, claims adjustor, loan administrator, tax lawyer, underwriter and stockbroker.

More information on accounting careers can be found on The Accounting Path.

This story was originally published in 2012 and updated Oct. 8, 2015. Additional reporting by Business News Daily senior writer Chad Brooks.