the process of recording and analyzing the financial activity and transactions of a business.
Accounting is one of the most important functions a business undertakes. As you can see in its name, "account"ing helps hold a business "account"able for the flow of money coming in and out of its bank account. Typical accounting tasks include:
- Recording debit and credit transactions in various ledgers.
- Reporting end-of-term financial reports to tax agencies and other oversight agencies and regulators.
- Summarizing cash flows for a company.
Although accounting may seem like a large task, it can be as simple as hiring a bookkeeper to record basic daily cash flow and debt. If you need accounting services on a large-scale, e.g., if you need to manage multiple accounts, ledgers, or deal with large sums of money, you’re best off hiring a certified public accountant (CPA). A CPA goes through extensive training and certification to obtain this status and is familiar with Generally Accepted Accounting Principals (GAAP). These principals guide accountants on how to fill out financial summaries.
Real World Example of Accounting
We could look at accounting through the lens of Mel Brooks’s film “The Producers.” Leopold Blume, the shy and nervous accountant, works the books with some creative accounting to scam his and his partner’s Broadway investors. But let’s leave fiction to the movies and look at an example of some real accounting. It’s the case of Al Capone and Frank Wilson.
The Capone/Wilson case deals with one of the most famous forensic accounting stories in U.S. history. Forensic accounting rebuilds financial information when records are missing. It involves document review, witness interviews, asset training, and financial analysis. Frank Wilson was the forensic accountant who took down Capone, although Capone’s bookkeeper was really the one who got him caught.
Capone kept meticulous records of his transactions (because he was a mob boss and had to track these things), but never once did he file a tax return. Set on nailing him for tax evasion, Wilson led an investigation into Capone’s confiscated ledgers. In one of the ledgers, Capone’s bookkeeper wrote, “Frank paid $17,500 for Al.” A brief entry, but enough to record a possibly incriminating business transaction related to illegal gambling. Wilson matched this handwriting to deposit slips, got himself a testimony, and threw a mob boss in jail.
Types of Accounting
Because there are different aspects to a business’s finances, there are specialized types of accounting to meet those businesses’ needs. There is also accounting for things outside of internal business cash flow that deals with more serious problems like auditing. Here are some more of the common types of accounting you’ll encounter:
- Financial Accounting: deals with financial information and compiles reports.
- Tax Accounting: helps people prepare and file their taxes and follows federal and state tax regulations.
- Internal Auditing: a type of accounting that looks for fraud, suspicious activity, and where a company may be losing money.
- Managerial Accounting: uses a company’s financial information to generate monthly or quarterly reports. A company can take this information and make decisions accordingly.
Accounting vs. Bookkeeping
Bookkeeping is one of many tasks that accounting covers. It is also much more straightforward in its purpose: to keep track of day-to-day financial transactions. Accounting offers financial insights and solutions based on information accountants find in bookkeeping records. Practicing accounting also requires a higher degree of training, whereas any organized and reliable person can practice bookkeeping.