Accounting is the process in which an individual (an accountant) systematically tracks an individual’s or company’s financial information. The information is measured, evaluated and communicated in the form of financial reports. Those reports are used by individuals to aid in making strategic economic decisions for themselves or their business.
While simple to define, accounting can be a complicated process and should be taken seriously. Proper production and analyzation of financial reporting is an integral component to a profitable business.
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Accounting vs bookkeeping: What’s the difference?
Although related, the terms bookkeeping and accounting aren’t completely interchangeable.
Bookkeeping refers mainly to the record keeping aspects of accounting. it is essentially the process of recording all the detailed information regarding the transactions of a business. Bookkeepers spend most of their time making the record keeping process run smoothly according to a system established by the business and they also spend a fair amount of time dealing with the problems that inevitably arise from recording so much information.
Most small businesses start with no employees other than the owner. So accounting software, which handles most of the tasks involved in bookkeeping, can be invaluable to the owner who doubles as the bookkeeper.
The term accounting is much broader than bookkeeping and covers the realm of designing the bookkeeping system, establishing controls to make sure that the system is working well, and analyzing and verifying the recorded information. You can think of accounting as what goes on before and after bookkeeping. Accountants prepare reports using the information accumulated by the bookkeeping process: financial statements, tax returns, and various confidential reports to managers.
Measuring profit performance is another critical task for accountants – a task that depends on the accuracy and completeness of the information recorded by the bookkeeper. The accountant decides how to measure sales revenue and expenses to determine the profit or loss for the period. The tough questions about profit – how to measure it in our complex and advanced economic environment, and what profit consists of – can’t be answered through bookkeeping alone.