Understanding Accounting – Accounting is widely known as the “language of business”. There are many quotes about the power and importance of accounting in everyday life, such as “The pen is mightier than the sword, but not the bookkeeper” by Jonathan Grancy.
This article will explain in detail what accounting is, its function in a company, the types of cycles and their principles. This is very important if we are going to be an entrepreneur.
Some people think accounting is something that is related to the counting system, but the fact is that accounting is a work process that is not simple. This science has quite a lot of use in daily applications, especially related to business activities.
With this knowledge, business owners can control whether their business is running well. Your accountant will tell you if you’re making a profit, what your cash flow is, what your business’s current assets and liabilities are, and which parts of your business you control.
Understanding Accounting According to Experts
Of the many definitions and understanding of accounting represent different things. These differences occur because the experts, explore different fields of science.
Here are some definitions of accounting according to some experts:
1. According to Weygandt, Kieso, and Kimmel
For them, accounting is a part of an information system that identifies a record and communicates economic incidents in an organization to interested users.
2. Sunyanto (1999)
For him, accounting is a stage of the process of collecting, identifying, recording, classifying, summarizing and presenting or reporting many financial transactions and interpreting the results for decision making.
3. Warren et al (2005:10)
In general, accounting is an information system that produces reports to parties who have an economic activity and company condition.
4. Suparwoto L (1990: 2)
For him, accounting is a technique for measuring and managing financial transactions and providing management results in the form of information to internal and external parties of the company. External parties are meant to consist of investors, government creditors, labor unions and others.
5. Soemarsono SR (2004)
The definition of accounting or accounting according to him is a process of identifying, measuring and also reporting economic information to enable clear and firm judgments and decisions for those who use the information.
6. S. Munawir (2005)
For him, accounting is an art rather than recording, classifying and summarizing an event which is at least partly financial in nature in a expeditious and direct manner or expressed in money, as well as the interpretation arising from it.
7. Paul Grady
Accounting is part of the body of science and organizational functions in a systematic, authentic & original way in recording, classifying, processing, writing summaries, analyzing, and also interpreting all transactions and financial events and characteristics that occur in the operations of accounting entities with the aim of providing meaningful information. management is needed as a report and accountability for the trust it receives.
8. Winarno (2006)
Accounting is a process of recording financial transactions and processing transaction data and presenting information to entitled and interested parties.
9. Bastian and Suharjono (2006)
In their book, Committee on Terminology of The American Institute of Certified Public Accountants Bastian and Suharjono (2006), the notion of accounting is the art of recording, classifying, and summarizing transactions and events of a financial nature in a meaningful way also in units of money and investing the results.
Basically, the purpose of accounting is to record, collect and report information related to finances, financial position, and cash flows in a business.
When described more fully, there are several objectives of accounting in business systems:
1. General accounting objectives
- Provide financial information, especially the company’s assets and liabilities.
- Prepare a collection of information about changes in the various sources of the company’s (net) economy.
- Provides information about changes in the company’s economic resources, assets, debt, and capital.
- Presents some other information related to financial statements to help users of these reports.
- Explaining the company’s financial information, is expected to help in making the company’s profit potential.
2. Specific accounting objectives
In particular, the purpose of accounting is to provide information in the form of reports containing financial position, results of operations, and other changes in financial position in accordance with Generally Accepted Accounting Principles (GAAP).
3. Qualitative accounting objectives
- Provide relevant information.
- The information submitted is in accordance with Generally Accepted Accounting Principles (GAAP) and can be compared. Submitting information that has been tested for truth and validity.
- Presenting the information submitted can be understood by interested parties.
- Provide financial reports for the benefit of parties related to company activities.
- Presenting transaction information in real time and as quickly as possible.
Process in Accounting
As explained above that in an accounting is a process related to finance whatever happens in a business or organization.
Accounting has a process, which consists of recording, summarizing, analyzing, and reporting data. The following is an explanation of the process:
1. Take notes
The most important process in the accounting process is the recording of transactions that occur in the business. This process, commonly known as bookkeeping, involves recording and entering transactions on the books.
In an accounting process, accounting is usually done for detailed accounting purposes and is a report to present data in the form of final financial statements.
In general, raw data is the result of recording transactions and is considered not very important. This raw data has little effect on the decision-making process.
However, the important role of an accountant is to use raw data, group it into several categories, and translate it. So, the usual process is to record transactions, then summarize them.
All activities carried out within the company are the responsibility of management. Every entrepreneur needs to know the various activities the company does and how the company spends its money.
In this case, the entrepreneur usually receives the company’s financial statements which are sent every month. At the same time, there is also an annual report that summarizes all the activities of the company.
Finally, analyzing is an important final process in accounting. After recording and summarizing, of course we need to draw conclusions. This is where the important role of a management to check the points between positive and negative.
In analyzing all of this, accounting introduces a concept of comparison. Where we can compare sales, profit and loss, and others to determine and also analyze work and make decisions.
Of the many meanings of accounting, all of them almost have the same goal, namely each goal of providing accurate reports is of course related to the company’s financial problems.
The definition of accounting will be very helpful in presenting detailed reports on the company’s expenses and income so that it can find out the profits and losses. In addition, the application of accounting knowledge will also help companies to identify employees who commit fraud.
Accounting Functions in a Business
There are several functions of Accounting itself in a business, namely:
1. Accounting helps you plan for growth
When you want to plan the growth of your company, it is very important to set goals. Like how should profits be made one year from now? How about in five years?
Financial reports help you in assessing exactly how fast a business is growing. Without an accurate financial report, it may be tempting to use easy metrics like “sales growth”, which don’t give you a complete financial picture.
Has the cost of goods sold increased? Is the profit margin less? Are the growth goals appropriate? Without a financial report, you will not have an objective answer.
2. Accounting is important to secure loans
A recent financial report shows the position of your company. They are essential if you want to fund your small business with a loan.
For example, you want to apply for a loan through one of the major banks. You will need to provide, on average, three years of financial statements, plus one year’s cash flow projections. It’s almost impossible to send everything if you don’t have an accounting system.
3. You need accounting to get investors or sell your business
It’s possible that you don’t plan on prosecuting investors or selling your business right now. But it’s a good idea to leave your options open. The best way to do this is to implement a proper accounting system.
Potential investors or buyers will expect an accounting record that proves the development of your business is profitable.
4. Accounting will help when getting paid
When a customer owes you money, it will appear as Accounts Receivable on your balance sheet. it is prepared by your accountant.
The balance sheet tells you how much accounts receivable you have pocketed during the month, and how much is still owed.
By focusing on the balance sheet, you can track how effectively you collect payments. Then you can implement processes with more difficult payment deadlines, or better follow-up with clients to ensure you get the money you get when you need it.
After we can know about the function of accounting, we also need to know what are the benefits of accounting in everyday life
Some of the benefits of accounting are as follows:
1. As Financial Information to Those in Need
The financial information that we have compiled must be very easy for us. If you have various financial transactions and do not record. It could be that you will forget where your money traffic goes.
2. As Material for Financial Evaluation
By taking notes, we can know what we should do in the future. For example with accounting, when you realize that your finances are “dying” because they are often used to buy an internet quota.
3. As Accountable Financial Evidence
There must be times when we have problems with other people regarding finances. Like unpaid debts, or others. With accounting and financial records, you will be able to account for the finances.
4. Helping Family Economic Record
When you are an adult and married, financial problems are a problem that is quite calculated in the household. Thus, accounting will be very necessary and useful.
Because after building a household, there are many needs that need to be taken into account. These expenses, of course, need to be taken into account with our and our spouse’s income.
Types of Accounting
1. Auditing Accounting
The next type of accounting is audit accounting. The field relates to audits that are independently carried out in reports that have been produced by financial accounting.
Although the main objective of the audit is to make the accounting information presented reliable, there are other objectives such as compliance with policies, procedures and assessing the efficiency and effectiveness of an activity.
In this concept, the basis for an auditing is the objectivity and independence of an examiner as well as confidentiality and the collection of evidence that is quite significant.
2. Cost Accounting (Cost Accounting)
Cost accounting is a field of accounting that records, calculates and analyzes cost data in an industrial company.
With the cost accounting, a price report is obtained to prepare financial statements. This field focuses on setting and a control over costs. Cost accounting will refer to activity-based costing. Its basic function is to collect and analyze cost data, costs that have occurred or will occur.
3. Financial Accounting
This field is certainly related to the accounting of an economic unit as a whole. Financial accounting refers to financial reporting for parties outside the company. A successful report will be general purpose.
Its activities consist of recording financial activities, aiming to be able to present financial reports. Includes balance sheets, income statements and reports of changes in capital or statements of retained earnings for a certain period of time.
4. Management Accounting
Management accounting is a field of accounting that aims to provide information to management in carrying out their business.
There are many things in cost accounting whose data are used by management accounting. When these two fields of accounting have different goals, in an implementation they can still be carried out simultaneously.
The use of management accounting is to regulate company activities, control cash flow and assess alternatives in making a decision. Company control through activities carried out (activity based management), is a new habit in management accounting.
5. Tax Accounting
Next is tax accounting, which is accounting whose activities are related to the direction of determining tax objects that are the burden of the company and the calculation refers to the interests of preparing tax reports.
In tax accounting activities, it functions to assist management in determining transaction options that will occur, related to tax considerations. Therefore, accountants who work in this field must be clear about the applicable tax laws.
The next type of accounting is the accounting field that prepares the budget for both income and costs. The budget is a full guideline for companies, individuals and governments in carrying out their financial activities in the future.
This field will be related to the preparation of a financial plan related to the company’s activities for a certain period of time in the future as well as its analysis and monitoring.
The budget can also be intended as a suggestion to explain the company’s goals, the budget contains a plan of activities to be carried out and the value of money in the future.
7. Accounting System
The next type of accounting is the accounting system. The accounting system itself is an accounting field that carries out activities by regulating the way accounting records are effective and efficient. Starting from organizing documents to compiling recording procedures.
8. Budget Accounting (Budgetary Accounting)
Budget accounting is accounting that has activities related to the collection and processing of data on financial operations that have occurred, as well as estimates of the possibilities that will occur, of course, for the purpose of determining the company’s financial operating plan (budget) within a certain period.
9. Government Accounting (Governmental Accounting)
The next type of accounting is government accounting. Government accounting is also considered as a field of financial accounting that is applied in government institutions. Government accounting has the aim of presenting a financial report, regulating and supervising state finances.
Accounting in government is expected to properly regulate financial administration in the country. In this field, it is devoted to recording and reporting the number of transactions in government agencies.
10. Banking Accounting
The last type of accounting is banking accounting. Refers to the notion of accounting for the process of recording, analyzing, classifying and also interpreting financial data.
In general we can know that banking accounting is a bank accounting method which includes a systematic recording, analysis, classification, interpretation of data in bank finance, to meet the needs of parties who have internal and external interests.