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A business's financial health can have a major impact on the overall success of the company. Accounting helps to track income and expenses so businesses can manage cash flow and stay on top of tax deadlines using skills such as auditing, securing investments and buying assets. Learning why accounting is important can help businesses determine whether they need more accounting resources to create a better management system for their financial information.
Accounting allows businesses to keep track of all income sources, deductions and expenses so that they can accurately report their earnings to the IRS. An accounting team can help a business determine how much tax it owes, how to pay any owed taxes and how to prevent negative actions on behalf of the IRS, like audits or penalties for improper taxation or filings. Accountants also keep proper tax records in case of an audit.
The core purpose of accounting is to help a business track and manage all of its transactions, including expenses and incomes. Accountants also track items like outstanding invoices or payments and owed debts, so business executives can better understand the company's overall financial position and make better decisions about resource allocation. Typically, the accounting team uses software that might integrate with other company programs to record daily transactions and expenses for more accurate data. Modern accounting software records transactions as they occur, reducing errors due to lag times between the transaction and its recording.
Financial accounting is a general accounting practice that focuses on tracking financial data to generate reports, like a balance sheet, income statement or statement of cash flow for a business. The accounting principles for this type of accounting follow the GAAP, or Generally Accepted Accounting Principles. These principles, set by the Financial Accounting Standards Board, provide standards for general accounting practices to ensure honesty, integrity and accuracy. Financial accounting is the most common accounting method among businesses of all sizes and also applies to individuals or non-profit organizations.
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Understand the difference between bookkeeping and accounting. Bookkeeping and accounting are terms often used interchangeably. However, the skills and responsibilities required of each are somewhat different. Bookkeepers generally keep records of sales and record them in the books directly. They do the day-to-day work of making sure every dollar the business makes and spends gets recorded. An accountant, on the other hand, creates and analyzes financial statements, and can also audit the business's books to ensure accuracy and proper reporting.
Become familiar with creating spreadsheets. Microsoft Excel or other spreadsheet software are invaluable to accountants, as they help you track numbers in a graph or conduct calculations to create a finance spreadsheet. Even if you know the basics, you can always brush up and learn intermediate or advanced skills for creating spreadsheets, charts, and graphs.
Understand dual-entry bookkeeping. Accountants make two or more entries for each transaction recorded by the business. These can be thought of as an increase in one or more accounts and an identical decrease in one or more other accounts. For example, a payment made for a sale previously made on credit would result in an increase in the cash account and a decrease in Accounts Receivable (money owed to the business by customers who have purchased items on credit but not yet paid). These entries would be made for the same amount (the amount of the sale)
Practice recording debits and credits. When dual-entry records are made, they are done in the form of debits and credits. These represent whether or not certain accounts are increased or decreased by a transaction. Using them is relatively if you remember two things:
Set up and maintain a general ledger. The general ledger is where the dual-entry transaction are recorded. Each individual record (the various debits and credits in the transaction) is made in the relevant account within the ledger. So, for a cash bill payment, an entry would be made in the cash account and another, separate entry made in the accrued expenses account. This process is greatly simplified when you use accounting software, but can also be done by hand relatively simply
Distinguish between cash and accruals. A cash transaction is the type of trade that occurs when a customer buys a pack of gum from the store and you receive the payment on the spot, and then give them the gum in exchange. Accruals, on the other hand, take into account things like credit, invoices, and billing, rather than direct payment at the time of business, as well intangible assets like goodwill.
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