Overview of Accounting: Financial vs Management

What is Accounting?

Accounting is the process of recording, summarizing, analyzing and presenting financial transactions and reporting them in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). It involves capturing financial information from sources like sales receipts, accounts payable, bank statements, etc., and organizing it into specific categories. This system ensures that businesses can monitor their performance over time by comparing actual results against budgeted amounts. At its core, accounting helps individuals and organizations manage and make decisions related to money matters effectively.

There are two main branches of accountancy: Financial Accounting and Management Accounting. While both involve compiling and interpreting data, they serve different purposes. Financial Accounting provides external users such as investors, creditors and tax authorities with insight into a company's financial position and operating results based on GAAP or IFRS requirements. On the other hand, Management Accounting focuses more internally within the business; providing managers with the necessary tools to assess performance, identify areas needing improvement, and support decision making processes.

Financial accounting aims to create reliable reports that reflect the true financial state of a firm at any given point in time, which are used primarily for external stakeholders. These records detail revenues, expenses, assets, liabilities, and equity, among others. Traditionally, these documents were prepared manually using ledger books and journals; however, modern technology has streamlined this process through software applications and electronic databases. There are several types of financial statements including balance sheets, income statements, cash flow statements, and statement of retained earnings, all of which contribute to painting a clear picture of an organization's fiscal health.

In summary, accounting serves as an important tool for managing finances efficiently and effectively. By understanding basic concepts and practices, anyone involved in running a business - whether personally or professionally - can leverage accounting techniques to achieve better control over their financial affairs.