How to Define Accounting for Business

A strong company can attribute some of its success to its accounting. Without accounting, it would be hard to keep track of your business’s finances and profitability, and you might not know exactly how much money is coming in or going out.

Unless you are well-versed in finance yourself, your business will likely need to enlist the help of a professional accountant. Here’s a breakdown of who accountants are and what they do for your company.

The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” Logging a business’s account payable, accounts receivable and other financial transactions, typically using accounting software, is often how it’s done.

“Accountant use the work done by bookkeepers to produce and analyze financial reports,” said Stan Snyder, CPA. “Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business – managerial, financial reporting, projection, analysis and tax reporting.”

In the United States, most accountants abide by the Generally Accepted Accounting Principles to present a company’s financial information to those outside of the company in a format that everyone can understand. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.

Harold Averkamp, CPA and owner of Accounting Coach, said accountants also provide a company’s internal management team with the information it needs to keep the business financially healthy. Some of the information will originate from the recorded transactions, while some will consist of estimates and projections based on various assumptions, he said.

Accounting ratios help uncover conditions and trends that are difficult to find by inspecting individual components that make up the ratio, and formulas like this help accountants to come up with a company’s status and projections. Accounting ratios are divided into five main categories:

  • Liquidity ratios: measure liquid assets of the company versus its liabilities
  • Profitability ratios: measure organization’s ability to turn a profit after paying expenses
  • Leverage ratios: measure total debt versus total assets and gauge equity
  • Turnover ratios: measure efficiency by comparing cost of goods sold over a period of time against amount of inventory that was on hand during that same time
  • Market-value ratios: measure company’s economic status compared with others in industry