What is Business Accounting?
Definition of Business Accounting
Business accounting entails the recording, organizing, analyzing, interpretation, reporting and presentation of financial data. Business accounting can be performed by an individual or a larger team of financial professionals.
It is through accounting that a Business gets an overview of operations and the ability to track items. Accountants would report on this business accounting in order to assist the business owner to make business decisions that are right and also timed right.
The Business Accounting does result in the production of financial reports that are used by internal and external stakeholders.
The basics of business accounting
Business accounting is a broad term encompassing various principles and disciplines. Understanding accounting basics can help you make better business decisions and ensure compliance when filing taxes. Let’s take a look.
Assets, liabilities and equity
The three main accounting principles are assets, liabilities and equity.
Your company's finances consist of liabilities, equity, and assets. Liabilities are what you owe. Equity is what you and your shareholders own. Assets are the things that define your company.
Assets and liabilities are divided into the following subcategories:
- Current Asset: Assets that you will possess for a duration of one year or less, like cash, receivables, prepaid costs, and inventory/stock.
- Fixed Assets: These are enduring assets such as machinery, plant, or equipment that are with you for an extended period.
- Current Liabilities: Present obligations are financial responsibilities and costs that must be settled within the fiscal year, including brief period loans, payable accounts, salaries, and so on.
- Long-Term Liabilities: these will remain with the business for over a year and cannot be liquidated (turned into cash). These may include financed or leased vehicles, machinery or plant, trademarks and patents, etc.
The fundamental formula of accounting:
Assets = Liabilities + Equity
Cash vs accrual accounting
Cash and accrual are distinct accounting techniques that are suitable for various business scales and operational structures. When cash is logged as an asset, it creates a fundamental difference.
When using the cash method, you log the funds as an asset as soon as you receive them. The system calculates tax based on the resulting net earnings. This is the simplest form of accounting, used by smaller companies and microbusinesses.
When using the accrual method, the company recognizes revenue as soon as it sends an invoice. While the company does not yet have access to the invoice amount, it is still technically an asset. Expenses are recorded when they contribute to generating revenue, not when the money is spent.
Frequently asked questions
What is the meaning of business account?
A business bank account is a bank account that's used only for business transactions rather than personal finances. It can be opened in the name of the business, allowing payments to be made and received using the business's name.
What is an example of a business account?
Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.
What is the difference between financial accounting and business accounting?
Financial accounting follows financial standards like IFRS, while business accounting focuses on the internal needs of the business.
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