Accounting is the language of business. It is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.1
The small business accounting function is important since it allows the business owner or the accountant to analyze both historical and current financial data in a manner that helps the different stakeholders. In larger small businesses, there is typically a financial manager who is the recipient of the accounting information and performs different types of financial analyses.
There are three types of small business accounting necessary to provide financial information to a number of different stakeholders. Financial accounting is the process of recording the financial transactions for the company and developing reports using the information for the owner, accountant, or financial manager. Those statements and reports are used to perform financial analysis. Managerial accounting is the generation of financial information for use internally by the business firm. Cost accounting is the process of analyzing the costs of production of the company’s products or services.
What Is Financial Accounting?
The purpose of financial accounting is to record, organize, report, and analyze the financial data generated by the company’s daily financial transactions. The financial transactions made by the firm during an accounting period are used to develop the firm’s financial statements. From the financial statements, the owner, manager, accountant, or financial manager can perform various forms of financial analysis, get the most professional assitance from accounting services miami.
The results of the financial analysis are then reported to the firm’s stakeholders. The Stakeholders include parties with a vested interest in the performance of the company. The firm’s stakeholders include the business owner, the Board of Directors, the stockholders and creditors of the firm, prospective investors, and the Securities and Exchange Commission (SEC) if the firm is publicly traded.
Publicly traded companies are required to follow the Generally Accepted Accounting Principles (GAAP) when preparing their financial reports for reporting or for investors.
GAAP is established by the Financial Accounting Standards Board (FASB).2 Their goal is to guide businesses through accounting procedures and practices by using these standardized principles.
The Accounting Cycle
Financial accounting for a business is based on the accounting cycle.3 Here are the steps:
- Record financial transactions: All daily financial transactions are recorded in chronological order in the accounting journal.
- Transfer financial transactions: The journal entries are transferred to the firm’s general ledger at the end of the accounting cycle.
- Classify financial transactions: At the end of the accounting period, the journal entries are classified by account, according to the firm’s Chart of Accounts. The major classifications on the Chart of Accounts are Revenue, Expenses, Assets, Liabilities, and Shareholder’s Equity.
- Trial balance and adjusting entries: The trial balance for the accounting cycle is the sum of the debits and credits in the general ledger. Adjusting entries are then made and the firm’s accounts balance as specified by the accounting equation.
- Preparation of financial statements: Using the financial information from the general ledger, the income statement, balance sheet, and statement of cash flows can now be prepared. These are the primary financial statements generated by the accounting data of a business.