What is accounting?

Definition, What is Accounting, and Accounting Equation

Accounting refers to all the work done and processes utilized to ensure that records reflect the true picture of the financial status of an entity. It involves recording transactions systematically, reporting them through appropriate channels and analyzing all related financial activities that an individual, business or company has undergone over a certain period of time. Whether accounting is performed at a personal or corporate level, the outcome allows for an in-depth understanding of overall financial performance.

By accounting for all the money and assets gained and disposed, it is possible for a business to examine losses, profits, sales trends, productivity and costs. Through installation of proper accounting structures, information can be gathered, classified, and manipulated to reveal systemic issues that affect financial prosperity. Even though the need for accounting is necessary across different setups, many people lack the right skillset for comprehensive analysis. This is why most students seek online tutors to help with accounting homework help to serve the growing demand for accounting services.


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Before any accounting process can be initiated, it is important to establish a system through which financial data will flow. A basis requirement in any accounting process is the acquisition of a journal – a ledger where all related financial transactions will be documented. The accuracy with which this data is captured will determine the effectiveness of any decision that stems out of analyzing that data.

The History of Accounting

The Association of Chartered Certified Accountants reports that accounting can be traced back to the beginning of time. Apart from being among the oldest professions in the world, people have a deep seated respect for what it can achieve. As an important component of any business or industry, the role of accounting cannot be ignored. No wonder some people refer to accounting as ‘the language of business.’ 

Types of Accounting

Types of accounting

Understanding how the various processes involved in accounting such as investing, saving and budgeting impact finances is the key to understanding accounting principles. The truth is that personal expenses management is just a branch of the broad accounting subject. Accounting applies to different disciplines and fields although the principles may cut across several aspects of everyday living. The different types of accountings are as follows;

Financial Accounting

The focus of Financial Accounting is to maintain records that will ultimately be used to analyze the kind of transactions that a business makes over a certain period of time. Financial accounting experts are skilled in offering detailed analysis of all transactions the involve use or acquisition of funds. By weighing the role that each of these transactions makes to influence the financial position of a business, it becomes easier to make wise money decisions in future. As far as personal level accounting is concerned, Financial Accounting is applied in simplified versions.

Managerial Accounting

Managerial Accounting is also known as Management Accounting and focuses on compiling financial data for the purpose of influencing management decisions. Typically, the management accounting process begins with a set of objectives for which the accountant seeks answers from the available data. This type of accounting is common at the household level; a certain objective like homeownership, adoption, or retirement is declared and the family head strategizes on ways of raising the necessary financial resources required to meet that goal.

Cost Accounting

Cost Accounting is a section of Managerial Accounting but with a bias towards running a business. Managers use this approach to calculate the total cost required to run production in a company setting then peg this as their running cost. The main objective of Cost Accounting is to create an expenses benchmark that will be used when planning for all other expenses and income streams for a business. Running a profitable business of any size is practically impossible if Cost Accounting will not be utilized.

Tax Accounting

Tax Accounting is a function of tax experts (individuals that are familiar with taxation laws and can offer advice on the same, accounting tutors who have tax accounting specialty to handle tax computations, and CPA professionals who are government certified to practice accounts). Every individual or agency that makes an income or trades in whatever capacity is required by law to pay tax. There are various categories of taxes and a Tax Accounting expert knows where and how each is calculated.

Forensic Accounting

In Forensic Accounting, an audit of the financial history of an individual or organization is conducted to ascertain compliance or none thereof. Professionals in this field of accounting are often highly skilled, with most of them possessing post graduate accounting qualifications. This level of accounting professional is in high demand in governments and large organizations. Forensic Accounting for households is rather uncommon.

Auditing Accounting

An audit of accounts is the process of running a detailed analysis and review of all financial transactions pertaining to an institution. There are several reasons for which an audit might be commissioned but mainly it is to ascertain whether expenses match the value gained. If an organization is suspected of engaging in fraudulent activities, an accounts audit is the only way to establish the claims. Auditing Accounting can be internal as well as external. Internal is where tracking of expenses is done to uncover inefficiency while external is driven by the desire to uncover anomalies. It is highly unlikely that a full and comprehensive audit will be performed by an average person and that is why Auditing Accounting professionals are usually sort after.

Public Accounting

A Certified Public Accountant (CPA) is an individual or agency that offers accounting services to people and businesses at a fee. A public Accounting officer is skilled in all the processes involved in tax preparation, auditing, tax advisory and financial consultation. Some people have Public Accounting professionals on payroll throughout the year while others hire temporary workers during tax season.

Government Accounting

As the name suggests, Government Accounting if a function of state authorities on matters to do with policy implementation. The process is characterized by application of a defined set of procedures, systems and systems that facilitate the budgeting of large sums of money. Since it is a reserve of government institutions, strict adherence to social accountability is highly regarded.

Fund Accouting

Fund Accounting refers to a system of record keeping mainly used by non-governmental organizations for purposes of accountability. It used to record resources whose use has been limited by the grant authority, donor, governing agency, indivudual or organizations.

The Accounting Equation

Accounting equation

The accounting equation forms the basis of all accounting transactions and is the most essential component of the balance sheet. This is the equation:

Assets = Liabilities + Shareholder’s Equity

When filling out the accounting journal, it is important to keep in mind the fact that each transaction affects both sides of this equation to maintain a value balance; this is what double entry accounting is all about. For instance, if an asset is bought, it means that the value of the asset side will go up and this will cause a decrease in the liabilities or equity accounts. The greatest test of the accounting equation is when the journal for a certain financial period is closed. All entries if grouped under the three main clusters of the equation must equal the value obtained on the other side of the ‘equal’ sign.

The Balance Sheet

Accounting Equation comprises of three broad categories of entries that appear on the Balance Sheet. The following are some of the items that are captured under the various sections;

  • Assets: Inventory/stock, Equipment/property, Cash at hand, Sales
  • Liabilities: Short-term credit facilities, Long-term Debt/bad debt, Purchases
  • Shareholder’s Equity: Retained Earnings, Share Capital

The Accounting Equation is supposed to portray a picture of how the individual items relate to each other. Provided that the relationship between the various elements has been maintained, the equation can be tweaked around. Another presentation of the Accounting Equation is as follows;

Shareholder’s Equity = Assets – Liabilities

In this format, the equation highlights the relationship which exists between company equity and liabilities. The shareholder’s equity is what remains after the liabilities of a business have been deducted from the assets. This makes sense because when a company runs into debt, the creditors often go after the assets; use them to settle their claims then hand over what remains to the shareholders.

What Is the Expanded Accounting Equation?

In the Expanded Accounting Equation, details are provided for the various components reported in the basic accounting equation. In the case of a sole proprietorship, the expanded accounting equation would appear as follows;

Assets = Liabilities + Revenues + Owner’s Capital – Owner’s Draws – Expenses

If the expanded accounting equation is used by a corporation, additional stockholders’ equity details would be provided. The equation would thus look like this;

Assets = Liabilities + Revenues + Paid-in Capital – Expenses– Treasury Stock – Dividends.

By using the Expanded Accounting Equation, accountants and business owners are able to see,

  • How income affects equity
  • How own transactions affect equity

If the accounting equation balances all the time, it is deemed to have painted a true picture of the financial status of an organization.

Through technology, emergence of new techniques has made things much easier. The importance of ethics in accounting cannot be downplayed since a slight accounting mistake or negligence can cause a ripple effect that will echo across industries and last a long time before it is resolved. 

Accounting is an interesting subject to study as it still has benefits to our personal lives as well.

Learn More

Explore the additional relevant resources below.

  1. Prepaid Expenses Journal Entry
  2. Asset Management Ratios
  3. Conversion Cost
  4. Write Off Accounts Receivable
  5. Cannibalization Rate
  6. Net Operating Assets
  7. Substantive Audit Procedures
  8. Predetermined Overhead Rate