Accounting is the process of recording financial transactions involving a business. The accounting process includes the summary, analysis, and reporting of these transactions to supervisors, regulators, and collectors. Accounting can be defined as identifying, measuring, recording, and communicating financial information.
Accounting is a system for recording and synthesizing business and financial transactions and for analyzing, verifying, and reporting results. Accounting is an important function of strategic planning, external compliance, funding, and operational management.
Accounting is a key function in almost every company. It can be managed by an account of a small enterprise, or by large financial departments with dozens of employees in large enterprises. Reports produced through a variety of accounting flows, such as cost accounting and management accounting, are invaluable to helping management make informed business decisions.
The history of accounting has been around almost as long as money itself and accounting history dates back to ancient civilizations in Mesopotamia, Babylon, etc. However, modern accounting as a profession has only been around since the early nineteenth century. Luca Pacioli is considered "the father of accounting and bookkeeping" because of his contributions to the evolution of accountancy as a profession. An Italian mathematician and friend of Leonardo da Vinci, Pacioli published a book on the double-entry system of bookkeeping in the year 1494.
By the 1880s the modern profession of accounting was completely formed and recognized by the Institute of Chartered Accountants in England and Wales. This institute created lots of the systems by which accountants practice today. The formation of the institute occurred in big part due to the Industrial Revolution. Merchants not only needed to track their records but sought to avoid bankruptcy as well.
Why Accounting Is Important
Accounting is a back-office function where employees may not directly interface with customers and product developers or manufacturing. However, accounting plays a key role in a business's strategic planning, growth, and compliance requirements.
Without insight into how a company is performing, it is impossible for a business to make smart financial decisions through forecasting. Without accounting, a business wouldn't be able to tell which products are its bestsellers, how much profit is made in each department, and what overhead costs are holding back profits.
External investors are looking for assurance that they know what they are investing in. Before private financing, investors were usually required to produce financial statements to assess an enterprise's overall health (the same rules apply to debt financing). Banks and other credit institutions will often require accounting-compliant financial statements as part of the underwriting and examination process for lending.
A small business that may be looking to be acquired often needs to present financial statements as part of an acquisition or large efforts. Instead of simply closing a company, a company owner may attempt to cash out of their position and receive compensation for building a business. The basis for valuing a business is to use its accounting records.
A business naturally incurs debt, and part of the responsibility of managing that debt is to make payments on time to the appropriate parties. Without positively fostering these company relationships, a business may find itself with a key supplier or vendor. Through accounting, a business can always know who it has debts to and when those debts are coming due.
A business may agree to extend credit to its customers. Instead of collecting money at the time of an agreement, it may give a customer commercial credit conditions as net 30..Without accounting, a business may have a hard time keeping track of who owes it cash and when that cash is to be received.
Public companies are required to issue periodic financial statements in compliance with IFRS. Without these financial statements, a business may be de-listed from an exchange. Without proper tax accounting compliance, a business may receive fines or penalties.