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How to Define Accounting for Business

Updated Oct 23, 2023

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Launching a business is a significant financial decision. To prepare for owning and running your company, you must understand crucial expenses, like startup costs, payroll costs, taxes and inventory expenses. 

You don’t have to be a financial expert to run a successful business. However, you must understand accounting and how to monitor and sustain your business’s cash flow. Here are some accounting basics to get you started. 

What is accounting?

Accounting is how individuals and organizations, including small businesses, track finances. 

Many individuals use accountants for tax purposes only. They may hire a certified public accountant (CPA) to calculate and submit their personal taxes. CPAs must pass an exam to prove their accounting mastery.

However, accounting is often more comprehensive for businesses. Business accounting is the process of collecting and analyzing a company’s financial information. Business owners may assemble an in-house accounting team, hire an accountant or handle accounting on their own. Proper business accounting helps you understand your company’s activities, glean financial insights and create accurate financial reports

Editor’s note: Looking for accounting software? For help finding the right solution for your business, fill out the below questionnaire to have our vendor partners contact you with free information.

Business accounting is crucial because tax collectors, regulators and other oversight agencies want to see thorough and accurate accounting records. If your business seeks investors or other shareholders, they will review your accounting paperwork. For example, when you see a deal made on a TV show like The Profit or Shark Tank that later falls apart, it’s almost always because of accounting problems.

FYIDid you know

Accurate accounting reports are crucial for conducting a small business valuation and qualifying for a small business loan.

Why is accounting important for your business?

Business accounting is crucial for several reasons. As a business owner, you must understand your organization’s assets, inventory and liabilities. This knowledge will help you grow your business and secure investors. 

Here are some of the most significant benefits of small business accounting:

  • Business accounting helps you evaluate your business’s performance. Financial statements help you understand how your business is doing. They can help you identify the areas where your business is performing well and the areas that need help. This information is crucial if you hope to bring on investors.
  • Business accounting helps you create financial projections. Understanding your business’s financial data helps you make financial projections and smarter money decisions.
  • Business accounting helps you file annual tax returns. Staying on top of your business accounting will help with business tax preparation. You’ll understand how much you owe on quarterly and annual tax statements. 

What do accountants do?

Accountants log a business’s accounts payable, accounts receivable and other financial transactions, typically using accounting software. 

“Accountants use the work done by bookkeepers to produce and analyze financial reports,” said CPA Stan Snyder. “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.”

In the United States, most accountants abide by the generally accepted accounting principles (GAAP) to present a company’s financial information in a format everyone can understand. Different accounting standards exist for companies that operate overseas and for local and state government entities.

Harold Averkamp, a CPA and owner of AccountingCoach, said accountants give a company’s internal management team the information they need to keep the business financially healthy. Some information originates from recorded transactions, while some includes estimates and projections based on various assumptions.

What are the different types of accounting?

Types of accountants include tax accountants, financial accountants, public accountants, government accountants and more. Regulators and law enforcement employ forensic accountants to help track illegal activity, and crypto accountants deal with cryptocurrency assets.

An accountant usually works for a person, a business or the government. However, major accounting firms such as Deloitte, Ernst & Young, KPMG and PwC are renowned for tracking and managing public and private financial data.

Here’s a breakdown of the primary types of accounting:

  • Financial accounting: Financial accounting considers investors. It assesses a business’s financial health and helps management get an accurate idea of its finances. Financial accounting ensures companies are transparent about their financial health.
  • Managerial accounting: Managerial accounting generates company financial statements, including product costs, cash flow reports, profit and loss statements, and business acquisition reports. Managerial accounting is essential for business leaders because it provides accurate financial data and can help companies make decisions about their money.
  • Tax accounting: Tax accounting focuses on how your business works with the IRS. Accountants can help you understand your financial picture when filing yearly or quarterly taxes. This is an essential service all small businesses should utilize.
  • Forensic accounting: Forensic accounting involves auditing and accounting practices. Banks, attorneys and businesses use forensic accounting to examine financial transactions. Forensic accountants are often used when fraud or embezzlement is suspected.
  • Cost accounting: Cost accounting examines the actual cost of doing business. This type of accounting is usually used for manufacturing and service-based businesses; it looks at the fixed and variable costs a business incurs.
Did You Know?Did you know

Cash accounting and accrual accounting are two financial reporting methods. Most businesses use accrual accounting, which recognizes income when goods and services are delivered and records expenses when they’re incurred.

What are accounting ratios?

Accounting ratios help uncover difficult-to-find conditions and trends by inspecting the ratio’s components. They help accountants determine a company’s status and projections. 

Accounting ratios are divided into five main categories:

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

What are CPAs?

Many accountants choose to become CPAs. This designation requires individuals to pass an exam and attain work experience. CPAs are well-respected strategic business advisors and decision-makers. Positions CPAs hold include accountant, controller, chief financial officer and financial advisor.

CPAs conduct the following functions: 

  • Audit financial statements of public and private companies
  • Serve as consultants in many areas, including tax, accounting and financial planning

How does accounting differ from bookkeeping?

While bookkeeping and accounting may seem similar, they’re very different functions. 

  • Bookkeeping: Bookkeeping is a record-based practice. It focuses on logging information, tracking important numbers and quantifying your business’s crucial monetary aspects. 
  • Accounting: Accounting comes into play when bookkeeping numbers and reports are interpreted and extrapolated to help guide business decisions.

While accurate bookkeeping is crucial, accounting helps you make informed decisions about your business’s future. After all, what good is data without proper interpretation? 

TipTip

Many accountants manage or oversee bookkeeping within an operation to ensure accuracy. Bookkeeping audits help ensure that all books are balanced and that your bookkeeper follows proper protocol.

What are basic accounting tasks?

An accountant’s checklist includes the following duties (note that some bookkeeping and accounting functions overlap):

  • Record transactions: Depending on transaction volume, an accountant may record transactions daily or weekly (e.g., bill customers, receive cash from customers, pay vendors).
  • Document and file receipts: Accountants may document and file all invoices; cash, check and credit card deposits; and cash, check and credit card statements. They may also start an easy-to-understand filing system.
  • Pay vendors and sign checks: Accountants may track accounts payable and schedule funds to pay suppliers on time and avoid late fees.
  • Balance business checkbooks: Accountants may balance checking accounts monthly to ensure that cash transaction entries are accurate and that the business works from the correct cash position.
  • Process or review payroll and approve tax payments: Businesses must meet payroll tax requirements based on federal, state and local laws at various times. Accountants ensure that you withhold, report and deposit the applicable income, Social Security, Medicare and disability taxes to the appropriate agencies by the required dates.

What is an accounting cycle?

An accounting cycle is your company’s process for recording and analyzing its various accounting-related events. It’s important to establish effective bookkeeping and accounting practices to manage your company’s financial health.

There are eight primary steps in an effective accounting cycle:

  1. Identify transactions. Identifying transactions means establishing accurate and correct recordkeeping practices. Accounting software and the best POS systems can help.
  2. Record transactions. Cloud-based software can help to record transactions accurately.
  3. Post transactions. When a transaction is recorded, it should be posted to a general ledger containing all of the business’s transactions.
  4. List unadjusted trial balances. This is the review of your company’s finances at the end of the accounting period, which could be quarterly, monthly or on another predetermined basis. Trial balances are established for each account within your business at the end of each period.
  5. Create worksheets. These sheets identify where adjustments must be made to each balance.
  6. Adjust journal entries. Any necessary adjustments may be recorded as their own journal entries.
  7. Generate financial statements. Most businesses need an income statement, balance sheet and cash flow statement.
  8. Close the books. The accountant wraps up the cycle with a closing entry, which resets the temporary account balances on the general ledger and serves as an overview of the given period for future analysis.
TipTip

Use receipt-tracking software to organize transactions and expenses for more accurate recordkeeping.

What is the best accounting software?

If accounting isn’t your strength but you must manage this aspect of your business, choosing the right accounting software can make your life much easier. Accounting software helps you send invoices, reconcile bank transactions, and pay vendors and employees. Your business, industry, budget and preferences will drive your accounting software choice. 

To help you get started, here are some of the best accounting software solutions to consider:

Intuit QuickBooks

Intuit QuickBooks is excellent accounting software for small businesses. It provides various accounting features, as well as live bookkeepers and professional advisors. Intuit QuickBooks is affordable and functional. Read our in-depth QuickBooks Online review to learn more.

Xero

Xero offers excellent payment systems for bookkeeping and accounting services and has countless app integrations, support services and live chat options. You can also schedule payments and automate various processes to ensure you’re on top of your expenses. Learn more about the features of this software by reading our complete Xero review

Oracle NetSuite

Oracle NetSuite is a great choice for midsize and larger businesses with extensive accounting needs. The software boasts various advanced features, enterprise resource planning tools, and automation for easy invoicing. Our Oracle NetSuite review goes into more detail about this robust financial management solution. 

Zoho Books

Zoho Books will likely appeal to smaller businesses and freelancers. It’s an affordable yet feature-rich platform that helps with manual invoicing and provides a client portal for easy collaboration. It also offers many integrations to help streamline your financial processes. Check out our Zoho Books review for more information. 

Sammi Caramela contributed to this article. Source interviews were conducted for a previous version of this article.

Matt D'Angelo
Contributing Writer at businessnewsdaily.com
Matt has worked for newspapers, magazines and various online platforms as both a writer and copy editor. He covers various small business topics, including technology, financing and marketing on business.com and Business News Daily.
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