Accounting is essential for any business because it is the financial system used to manage, budget and forecast the financial aspects of a company. All companies should have an accounting system - usually maintained by an accounting department and headed by an accounting officer - that handles cash flow and maintains records of financial transactions in a company.
An accounting department is crucial because they keep a record of money spent and earned and calculate the profit or loss of a company. This is done by maintaining accounts using balance sheets and cash flow analysis. Employee pay, tax payments, childcare expenses, insurance premium payments, and other financial transactions are also maintained and recorded by the accounting department, and the successful running of a business depends on these day to day actions.
A company can have an accounting department in their corporate office or hire an accounting service to maintain accounts for their business. Many accounting firms offer services on a weekly, biweekly, or monthly basis.
A CPA, or Certified Public Accountant, is a person who has passed the Uniform Certified Public Account Examination and is eligible to check and maintain accounts. There are many services provided by CPAs including estate planning, financial planning, tax preparation, tax planning, performance management, venture capital, corporate governance, and forensic accounting. A CPA can also help a corporation with maintaining accounts, especially during mergers, acquisitions, debt issuing, and initial public offerings.
Balance sheets are maintained to determine the financial situation of a company at any given time. There are basically three things in a balance sheet; assets, liabilities and ownership. Assets refer to money, property, or any other financial security that can be considered a source of income to a company. Any debt or obligation that a business has is known as its liabilities. The difference between a company's assets and debts gives a picture of its economic condition. A company shows profit when the assets are more than the liabilities, and when the assets are less than the liabilities the business is said to be showing a loss.
Budgeting and Forecasting
The basis of any effective business plan is budgeting and forecasting, which is usually conducted by the accounting department of a company. In the process of budgeting, the previous year's financial performance is studied and a plan is created for the current year. Based on those findings the performance of the next year is determined, and that process is known as forecasting.
Cash Flow Analysis
The solvency of a business is measured by calculating the inflow and outflow of cash. Accounts receivable, inventory, credit items, operating activities, financial activities, investing activities, and accounts payable are calculated during cash flow analysis.
Cash flow is prepared in two ways: direct method and indirect method. The direct method of cash flow analysis only reports major classes of gross cash receipts and payments. The indirect method of cash flow analysis, which is the more used of the two, uses net-income as a starting point and makes specific adjustments from there.