What is Accounting: Types, Benefits and Best Practices

| Created on March 15, 2021
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Accounting is a critical business process for companies operating in different industries. Different businesses are involved in various types of accounting based on their revenue stream. Let’s learn about the accounting basics in detail.

What is Accounting?

Accounting is the process of recording and analysing the financial data of an organisation. All financial transactions are organised to better understand of the company’s financial health over a given accounting period.

Types of Accounting

Here are the different types of accounting to help you with simplified accounts management:

  • Financial Accounting

    Financial accounting helps generate financial statements for tracking, recording, and reporting all financial transactions. Examples of financial accounting are the statement of cash flows, balance sheets, and income statements.

  • Management Accounting

    Management accounting is done to assess the financial performance of a business in a specific period. Popular methodologies for management accounting are constraint analysis, AR (accounts receivable) management, financial leverage metrics, and cash flow analysis.

  • Tax Accounting

    The tax accounting procedure aims at creating accurate tax liabilities for individual taxpayers, businesses, and nonprofit organizations. The process is also critical for filing tax forms, calculating due taxes, and completing tax returns.

  • Auditing

    Internal Auditing ensures that a business is properly recording its transactions and carrying them out as per established rules. Different types of audits are performed by organisations like investigative, compliance, financial, and tax audits.

  • Cost Accounting

    Manufacturers and service providers depend on cost accounting for assessing the actual cost of doing a business. The method looks at variable and fixed costs for evaluating different kinds of expenditures incurred like production, material, labour, overhead, and maintenance.

  • Forensic Accounting

    Banks deploy forensic accounting, investigative agencies, police to investigate individuals and organisations’ financial activities. This type of accounting is used in embezzlement and fraud cases.

  • Internal Auditing

    Internal Auditing is done to assess and rectify financial irregularities within a company. Internal auditing forms an integral part of companies’ risk management procedures and policies.

Accounting is the process of recording and analysing the financial data of an organisation.

how to do accounting

How to do Accounting?

To perform accounting functions, you need to maintain records of all expenses and income. It is a critical process to manage finances efficiently and assess your business performance with ease. Here are some other parameters that you need to follow while performing accounting functions:

  • Analyse all financial transactions by first preparing source documents and then using them for recording all transactions.
  • Make journal entries for recording transactions like sales, cash receipts, purchases and more.
  • Create a general ledger for displaying changes made so far in an account after every transaction.
  • Prepare financial statements that include details about cash flows, balance sheets and equities.
  • Make a trial balance to ensure that total credits are equal to the total debits made.
  • Update the account using adjusting entries.
  • Prepare adjusted trial balances to avoid mismatch between credit and debit amounts.
  • Create trial balance post-closing for cross checking both debit and credit amounts.

What Is Accounting Software?

Accounting software is application software used to manage and record accounting operations and compute a business’s financial data. Accounting solutions help in keeping track of all financial transactions of a company and generating reports.

Accounting software provides necessary data for external and internal audits, periodic reports, and financial analyses for internal and legal purposes.

Apart from this, the software also provides insights on various quantifiable parameters such as inventory management, payroll, sales, purchases, credits, and debits, to name a few.

Accounting software is application used to record and report business’s accounting operations and financial data.

Accounting Software Benefits

Accounting software helps simplify complicated and time taking accounting processes. Its key benefits are:

  • Simplified tax compliances

    Accounting software helps with simplifying tax compliances by updating financial statements and maintaining an accurate record of accounts. The software’s built-in tax rules also let you perform tax calculations based on invoices.

  • Quick invoices

    Popular accounting software solutions offer prebuilt templates for creating invoices and customising them too. You can also send payment reminders for pending invoices.

  • Financial data security

    Accounting management software ensures that all your financial statements, records, and invoices are neatly stored in their respective folders. All financial data can be secured with the software’s end to end encryption and user access rights.

  • Saving time & money

    Accounting software helps companies save resources. Manual tasks like maintaining records, preparing financial reports, etc. can be automated. You don’t just save time but also prevent the possibility of manual errors.

  • Real-time reporting

    Online accounting software can be integrated into bank accounts for tracking inventory, sales and expenses in real-time. Bank reconciliation can be performed too.

  • Accurate bookkeeping

    Cloud accounting software is best for balancing journal entries to get accurate financial reports for audit and taxation. All accounting records are maintained systematically, minimising the chance of manual errors.

  • Easy collaboration

    Accounting software lets you set user and permission access. Also, you can collaborate in real-time with multiple users and share documents.

Wrapping Up

Accounting is an indispensable part of any business to record, organise and analyse financial transactions. It is best to keep your financial data organised to have better control over your finances.

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