What is business accounting?

Financial data forms the basis of every sound business decision, and you can't expect a business to succeed if you don't have your finger on its financial pulse. That's where business accounting comes into the picture. Business accounting is the recording of financial transactions, as well as the analysis and interpretation of that data. The purpose is to provide stakeholders with up-to-date financial information to ensure they are equipped with the tools to make solid business decisions. 

The Purpose of Business Accounting

Business accounting ensures that key financial information is passed to the relevant parties from department heads and upper management to investors, creditors, and other relevant stakeholders. 

It isn't just a view of income; it details outgoings and overheads and provides a clear outlook on the business's performance, which ensures the relevant parties can make informed decisions about business dealings. With a clear view of how much money is spent on labour and where, how profits are distributed, and what is being spent on equipment or stationery, businesses have a complete accounting of where the money is coming from and where it's going. 

Business accounting also ensures accountability; it's impossible to hide when everything is recorded, which also ensures businesses comply with the relevant regulations. The more detailed the accounts, the simpler the tax and audit processes. 

Generally Accepted Accounting Principles (GAAP): Key Accounting Principles

Accrual accounting vs cash accounting

In accrual accounting, every expense and revenue is immediately recorded, whether the payment is complete or not. In cash accounting, the expense or revenue is only recorded once cash changes hands. 

The going concern principle

This accounting term is used for a business that is expected to meet the relevant financial obligations when they are due and can defer some expenses because of this assumption. 

The matching principle

You can't increase your profits by recording gains and costs at different times to your benefit. Rather, you must record your expenses when the revenue is recognised. 

The Cost Principle

Whether you're recording the purchase cost of an equity investment, liability, or asset, you must record it at its original cost of purchase.

The Concept of Materiality 

Materiality is any significant piece of financial information. When is a piece of financial information considered material? The omission of the information could influence the people reliant on those financial statements to make decisions. Business accounting information must be accurate and up-to-date to ensure the relevant people are informed. 

Basic Accounting Terms

Assets 

An asset is any item of value or resource that the business has control over or owns. They come in various types and classes. 

Liabilities 

A liability is a debt, whether it's a credit card or a bank loan. It's any money owed by the business, and accountants distinguish between long-term liabilities (a due date exceeding a year) and current liabilities. 

Equity

If the business sold its assets and paid its debts, the equity is essentially what's left. It ultimately describes the collective stake in the company. 

Revenue

Revenue is income, whether you earn money by selling services or products. 

Expenses

An expense is the cost incurred by a business while earning revenue, and expenses include utilities, rent, wages, and marketing. 

Profit/Loss

A P&L statement details all the costs, revenues, and expenses for a set period. It's a snapshot of a business's financial health. 

Core Financial Statements

Balance Sheet

A balance sheet provides a snapshot of the financial standing and shows the company's assets, liabilities, and equity. A balance sheet is organised into columns with assets listed on the left and liabilities and equity on the right. 

Income Statement

An income statement demonstrates how profitable a company has been, highlighting net income, revenues, and expenses. The revenues are always listed first on an income statement, and then expenses are listed by type. The difference between the two is net income or net loss. Occasionally, one-off events such as ATO debt forgiveness can affect reported income and should be properly accounted for to present an accurate financial picture.

Cash Flow Statement

The statement of cash flow highlights cash movement in and out of a business to highlight how it's generated and how it's used, whether it's investing, operating, or other activities. A cash flow statement is broken down into three sections. 

• Operating activities – the cash that the core business operation generates

• Financing Activities – the cash paid to or raised from creditors and investors

• Investing Activities – the cash used to buy or sell an asset, whether it's equipment or property

Types of Accounting

Financial Accounting

Financial accounting revolves around external reporting to provide a standardised overview of a business's financial performance. It uses GAAP standards to compile historical data and is made for regulators, investors, creditors, and the public. 

Management Accounting

Management accounting revolves around the internal decision-making process to ensure operational efficiency. It includes detailed forecasting and cost analysis, predicting future performance while detailing current performance, and is used by employees and management. 

The Accounting Process

There are a series of steps in the accounting process, from identifying and recording transactions in a journal that is then listed in a ledger where all accountings are kept. Before financial statements and closing the books, there are adjustments to ensure everything is accounted for. 

There's so much more to know about the accounting process, and the best way to do so is with an accounting and bookkeeping course.

Final Thoughts 

You can't ensure financial management without having a clear accounting cycle, accounting standards, and financial reporting, and those are made possible by business accounting. Sound business accounting serves as the foundation for your business, whether you're selling a product or a service. Accounting is the record of everything you do in a business, and it's key to making sound decisions to build a successful business.