Buchhaltung is the back-office function that keeps up with every incoming and outgoing financial transaction in a business. It involves meticulous record-keeping and financial transaction tracking year round and is the foundation for important business reports such as the balance sheet, cash flow statement and profit and loss report. It requires the attention of professionals who specialize in the field, such as Certified Public Accountants (CPAs) and Certified Management Accountants (CMAs). Accounting is also a term that can be used more broadly to describe the entire accounting profession, including bookkeepers, accounts payable specialists and payroll administrators.
As an essential component of a company’s business, accounting is often misunderstood. Most people think of accounting as the process of recording business transactions – how much money went out, and how much came in. However, the discipline is actually far more complex than that. Accounting is not just about capturing the transaction data, it’s also about understanding that data and presenting it in a way that provides useful information to the users of that data, whether they be the owners, government agencies, creditors, investors or others.
While many of the responsibilities of accounting are behind-the-scenes, the work is vital to all businesses. Without accurate accounting, a company would be unable to meet regulatory and investor reporting requirements, or make informed decisions about investment opportunities. Even more importantly, it would be unable to understand its own performance and identify areas where cost-cutting measures could improve profitability.
Accounting has two primary sectors: financial accounting and managerial accounting. Financial accounting involves the preparation of a company’s financial statements, such as balance sheets and income statements, for use by external stakeholders, including investors. Managerial accounting, on the other hand, uses financial data to help internal stakeholders make more informed business decisions. Examples of this include determining which products to market and how to price them.
To make sense of these varied responsibilities, it’s helpful to break down the overall accounting process into its fundamental components. The three Golden Rules of Accounting are a great place to start. These are a set of guidelines that allow accountants to record transactions in a consistent and systematic way. They are the basis for the system of double-entry bookkeeping, which means that each transaction must be recorded in both the debit and credit accounts.
As an example, when you buy a new computer for your business, it’s recorded in the general ledger as a debit entry. When you sell a computer, it’s recorded in the general ledger a credit entry. This method allows you to easily see how your business is performing at any given time. It’s why the basics of accounting are called the Golden Rules. Without them, you wouldn’t be able to pass journal entries and accurately account for your financial transactions.