Term: Accounting

ELI5

Accounting is the management of a company’s finances. Everything that a company buys, sells or invests in should be recorded.

Key Takeaways

  • Accounting is the process of recording all transactions of a company that involves money or assets.
  • Transactions are agreements between a buyer and seller for a product or service in exchange for money.
  • Professional accountants follow the GAAP standard.[1]https://corporatefinanceinstitute.com/resources/knowledge/accounting/gaap/
  • Accountants should also be familiar with the tax filing process.

What is accounting?

Accounting is the process of recording financial transactions of a company. Accounting includes all activities from adding transaction descriptions and amounts to categorising them to generating financial statements.

Accounting is usually taken care of by an accountant or bookkeeper. Both manage a company’s finances but there are some differences between accountants and bookkeepers.

Professional accountants follow the Generally Accepted Accounting Principles (GAAP) accounting standards. Accountants are familiar with terms such as “Chart Of Accounts”, “Income”, “Revenue”, “Income Statement”, “Balance Sheet” and “Cashflow Statement”.

Most accountants are familiar with the tax filing process of their jurisdiction and the requirements of annual reports and tax filings that must be submitted to the government. For example, Singaporean accountants should be familiar with how accounting statements must be prepared, as outlined by ACRA. [2]https://www.acra.gov.sg/xbrl-filing-and-resources/who-needs-to-file-financial-statements

A general step by step overview of accounting

  1. An accountant selects an accounting software (e.g. Adolet) and sets up an account for a company.
  2. The accountant creates accounts in the chart of accounts (e.g. “Common Stock”, “Bank Checking Account”).
  3. The accountant integrates the accounting software with all the company’s bank accounts.
  4. All transactions get automatically added to the accounting software. (Note that dates are recorded using accrual accounting.)
  5. The accountant reviews all transactions and categorises them.
  6. The accountant may have to fix errors or alter transactions by using journal entries or setting an exchange rate if he’s dealing with foreign currencies.
  7. The accountant generates the financial statements – income statement, balance sheet and cashflow statement – when they’re needed.

References

References
1 https://corporatefinanceinstitute.com/resources/knowledge/accounting/gaap/
2 https://www.acra.gov.sg/xbrl-filing-and-resources/who-needs-to-file-financial-statements

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