Accounting is the process of recording and summarizing business transactions (both transactions with customers and suppliers, and transactions internal to the company itself), and also to create any reports required by management, creditors, shareholders and government agencies, such as the IRS or SEC.
Generally accounting can be split into two major categories: Financial and Managerial (though different terms are used for both). Financial Accounting usually refers to the preparation of documents used for external reporting, such as the company's financial statements (or, for publicly-traded companies, the annual SEC Form 10-K and quarterly Form 10-Q) and tax returns to various governmental agencies. On the other hand, Managerial Accounting usually refers to the preparation of documents used for internal reporting to the company's management, such as reports showing whether a particular product sold by a company, or a store in a retail chain, is meeting management's profitability expectations.
People who perform this task are called accountants. The term is very broad, as it can include anyone from a part-time bookkeeping clerk to the Chief Financial Officer of a large corporation. Some accountants may obtain a professional certification which confers certain rights and obligations; the most well-known is the Certified Public Accountant (CPA).
Accounting employs what is called "double entry bookkeeping", in which every transaction is entered as both a debit and credit. Double entry bookkeeping accurately accounts for the relationship expressed in the basic accounting equation: Assets = Liabilities + Equity. This basic equation describes the "balance" between debits (assets) and credits (liabilities and equity). In general, Assets (what you possess) are debits, while Liabilities (what you owe) and Equity (the difference between Assets and Liabilities) are credits. The first known description if this system was published in 1494 by a Franciscan monk named Luca Pacioli.
While accounting used to be done by hand, on paper, it is much more frequently done using computer programs today. Examples of software programs include LedgerLite, QuickBooks, and for larger firms SAP and Deltek.
- The word debit means "left" and the word credit means "right"; in the days of manual entries this is how debits and credits were recorded.
- Accounting Principles, 16th Edition, Phillip Fess, PhD, CPA & Carl S. Warren, PhD, CPA