Accounting is the process of recording financial transactions pertaining to a
business. The accounting process includes summarizing, analyzing and
reporting these transactions to oversight agencies, regulators and tax
collection entities. The financial statements used in accounting are a concise
summary of financial transactions over an accounting period, summarizing a
company's operations, financial position and cash flows.
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Accounting
How Accounting Works
Accounting is one of the key functions for almost any business. It may be
handled by a bookkeeper or an accountant at a small firm, or by sizable
finance departments with dozens of employees at larger companies. The
reports generated by various streams of accounting, such as cost accounting
and managerial accounting, are invaluable in helping management make
informed business decisions.
KEY TAKEAWAYS
Regardless of the size of a business, accounting is a necessary function
for decision making, cost planning, and measurement of economic
performance measurement.
A bookkeeper can handle basic accounting needs, but a Certified Public
Accountant (CPA) should be utilized for larger or more advanced
accounting tasks.
Two important types of accounting for businesses are managerial
accounting and cost accounting. Managerial accounting helps
management teams make business decisions, while cost accounting
helps business owners decide how much a product should cost.
Professional accountants follow a set of standards known as the
Generally Accepted Accounting Principles (GAAP) when preparing
financial statements.
The financial statements that summarize a large company's operations,
financial position and cash flows over a particular period are concise and
consolidated reports based on thousands of individual financial transactions.
As a result, all accounting designations are the culmination of years of study
and rigorous examinations combined with a minimum number of years of
practical accounting experience.1
While basic accounting functions can be handled by a bookkeeper, advanced
accounting is typically handled by qualified accountants who possess
designations such as Certified Public Accountant (CPA) or Certified
Management Accountant (CMA) in the United States.2 3 In Canada, the three
legacy designations—the Chartered Accountant (CA), Certified General
Accountant (CGA), and Certified Management Accountant (CMA)—have been
unified under the Chartered Professional Accountant (CPA) designation.4
The Alliance for Responsible Professional Licensing (ARPL) was formed
during August 2019 in response to a series of state deregulatory proposals
making the requirements to become a CPA more lenient. The ARPL is a
coalition of various advanced professional groups including engineers,
accountants and architects.5
Types of Accounting
Financial Accounting
Financial accounting refers to the processes used to generate interim and
annual financial statements. The results of all financial transactions that occur
during an accounting period are summarized into the balance sheet, income
statement and cash flow statement. The financial statements of most
companies are audited annually by an external CPA firm. For some, such as
publicly traded companies, audits are a legal requirement.6 However, lenders
also typically require the results of an external audit annually as part of their
debt covenants. Therefore, most companies will have annual audits for one
reason or another.
