Accounting is the process of recording and summarizing business transactions, both internal to a company, and external transactions with customers and suppliers, and also to create any reports required by management, creditors, shareholders and government agencies, such as the IRS or SEC.
Generally accounting can be split into two major categories - Management and Financial, although different terms are used for both. As the name implies, Management accounting is used by the management of an organization. It includes everything from highly summarized reports, to detailed cost analyses. Financial Accounting usually refers to external reporting process, which is primarily for the benefit of the shareholders, although creditors, and sometimes customers, require financial reports.
People who perform this task are called accountants. This term is very broad in that it will include a part time bookkeeping clerk or the Chief Financial Officer of a large public company. Accountants may obtain a professional designation, Certified Public Accountant, or CPA, which confers certain rights and obligations.
Accounting employs what is called "double entry bookkeeping", in which every transaction is entered as both a debit and credit. Double entry bookkeeping accurately accounts for the relationship expressed in the basic accounting equation; Assets = Liabilities + Equity. This basic equation describes the "balance" between debits (assets) and credits (liabilities and equity). The fundamental financial report is a "balance sheet". The word debit means "left" and the word credit means "right". In general Assets (what you possess) have a debit balance and are listed on the left side of a balance sheet. Liabilities (what you owe) and equity (what you own free of debt) have a credit balance and are listed on the right side of a balance sheet. The first known description if this system was published in 1494 by a Franciscan monk named Luca Pacioli.
While accounting used to be done by hand, on paper, it is much more frequently done using computer programs today.
- ↑ Accounting Principles, 16th Edition, Phillip Fess, PhD, CPA & Carl S. Warren, PhD, CPA