Definition Of Accountancy: What is Accountancy?

Definition Of Accountancy: What is Accountancy?

"What is accountancy?" This is one of the first question asked by new accounting students or people from fields not related to accounting.

Sometimes, during job interview, recruiters ask this question to candidates who applied for various accountancy roles. This article answers the question "what is accountancy?".

Definition Of Accountancy

Briefly, accountancy is the process of managing  all incomes and expenses of an entity. This definition can be broken down as the systematic process of measuring, summarising and communicating the financial information produced by bookkeeping to classify and explain account information to relevant parties such as shareholders and managers to make good financial decision.

Bookkeeping is the process of recording and summarising daily financial transactions. The main difference between bookkeeping and accounting is that accounting information helps to make decision while bookkeeping don't.

The use of financial information makes it possible to forecast future financial developments, analyse different areas of the business and check business potential.

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Who Is An Accountant?

An accountant is a professional who generally performs tasks on accounting, such as auditing, taxation etc. They might also do bookkeeping, or prepare annual reports and financial statements for businesses. A company can hire an accountant to work as a full-time staff or they can outsource accounting functions to an accounting firm.

Components of Basic Accounting

The following are the components of basic accounting;

1. Recording

The basic purpose of accounting is to record all financial transactions done by the firm. The accountant keeps a set of books for recording purposes. For trading companies, they keep cash book, income statement to ascertain their profit.

For manufacturing firms, they keep manufacturing accounts. The rules for keeping records are very systematic. Nowadays, the computer helps to automatically record transactions as they occur. This is possible through the use of software.

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2. Summarising

Recording financial transactions produces raw data. Multiple pages of raw data are of little importance to an organization during making decision. As a result of this, the accountant classifies data into different categories.

3. Reporting

Management is accountable to the investors or shareholders about the company’s state of affairs. The company's owners finance the company with their funds, so they need to periodically updated the shareholders about the activities. For this reason, management prepares periodic reports annually, breaking down performance of all four quarters in a year, which they send to them.

Reports in accounting

There are three reports which are typically generated in financial accounting and they cover a specific, accounting period. They are:

1. Balance sheet:

The balance sheet summarises the company’s assets and liabilities at a given period - commonly at the end of an accounting period. Assets are what the company own while liabilities are what the company owe. This report gives a comprehensive view of the company’s financial strength.

2. Income statement:

The income reports the company’s expenses, and profit or loss. This report addresses the income and expenditures made by both operating activities, or by ‘non-operating’ activities - income or expenditures that are not made by the business directly.

Income statement is arguably the most important of the three types of accounting reports, as it is commonly used by management to help determine financial strength of the company and making decision.

3. Statement of cash flows:

This statement analyses the flow of cash in and out of the company through various business activities. This also includes all profit and loss from any investments made in the company's name.

Managers creates these reports monthly and use them for internal planning and decision-making. This is known as 'management accounting'.

The purpose is to give managers reliable information on the costs of operations and on standards to compare costs to help with budgeting.
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