What Is Accounting? The Basics Of Accounting (2023)

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Accounting is the process of keeping track of all financial transactions within a business, such as any money coming in and money going out. It’s not only important for businesses in terms of record keeping and general business management, but also for legal reasons and tax purposes. Though many businesses leave their accounting to the pros, it’s wise to understand the basics of accounting if you’re running a business. To help, we’ll detail everything you need to know about the basics of accounting.

What Is Accounting?

Accounting is the process of recording, classifying and summarizing financial transactions. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.

Accounting is like a powerful machine where you input raw data (figures) and get processed information (financial statements). The whole point is to give you an idea of what’s working and what’s not working so that you can fix it.

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Why Accounting Is Important

Accounting information exposes your company’s financial performance; it tells whether you’re making a profit or just running into losses at the end of the day.

This information is not just available to you, but also to external users such as investors, stakeholders and creditors who would want to be enlightened about your business, to figure out whether it’ll be a good choice to invest in and what they can expect in returns.

Besides playing a key role in providing transparency for stakeholders, accounting also ensures you make informed decisions backed by data.

Accountant vs. CPA vs. Tax Pro

In accounting, you’ll come across certain titles which appear to bear similar duties but actually have unique job descriptions. In this section, we’ll briefly review the roles of accountants vs. CPAs and tax professionals.

An accountant is a professional with a bachelor’s degree who provides financial advice, tax planning and bookkeeping services. They perform various business functions such as the preparation of financial reports, payroll and cash management.

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A certified public accountant (CPA) is a type of professional accountant with more training and experience than a typical accountant. Aspiring CPAs are expected to have a bachelor’s degree, more than two years of public accounting work experience, pass all four parts of the CPA exam and meet additional state-specific qualifications if required. In the U.S., licensed CPAs must have earned their designation from the American Institute of Certified Public Accountants (AICPA).

Tax professionals include CPAs, attorneys, accountants, brokers, financial planners and more. Their primary job is to help clients with their taxes so they can avoid paying too much or too little in federal income or state income taxes.

As a general note, CPAs are considered to be more qualified than tax professionals when it comes to preparing taxes on an individual basis as they are trained to analyze business and personal finances to maximize savings and minimize taxes. It’s also worth noting that while all CPAs are accountants, not all accountants are CPAs.

Types of Accounting

Accounting can be broken down into several categories; each category deals with a specific set of information, or documents particular transactions. In this section, we discuss four of the most common branches of accounting:

Financial Accounting

This is the practice of recording and reporting financial transactions and cash flows. This type of accounting is particularly needed to generate financial reports for the sake of external individuals and government agencies. These financial statements report the performance and financial health of a business. For example, the balance sheet reports assets and liabilities while the income statement reports revenues and expenses. Financial accounting is governed by accounting rules and regulations such as U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).

Managerial Accounting

This focuses on the use and interpretation of financial information to make sound business decisions. It’s similar to financial accounting, but this time, it’s reserved for internal use, and financial statements are made more frequently to evaluate and interpret financial performance.

Cost Accounting

This is the process of tracking, analyzing and understanding the costs involved in a specific business activity. This includes all direct and indirect expenses associated with your business’s day-to-day operations. Cost accounting is particularly important because it helps you ensure that you are spending money on things that benefit your business’s bottom line.

Tax Accounting

This is the act of tracking and reporting income and expenses related to your company’s taxes. You don’t want to be in a situation where you have to pay more income tax than is normally required by the Internal Revenue Service (IRS).

Ways To Manage Your Business Accounting

So far, we’ve seen the types and benefits of accounting. This leads us to the next question of knowing how to carry out accounting efficiently. There are many ways to manage your business accounting. They include:

Outsource to Professionals

You can outsource your accounting work to outside professionals who specialize in bookkeeping and tax preparation. Outsourcing can offer many advantages because it allows you to take advantage of specialized skill sets that may not be available when hiring someone in-house. It’s also flexible and generally costs less.

Using Accounting Software

Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or bookkeeper. Besides, this frees up time so you can focus on running your business smoothly. Check out our recent piece on the best accounting software for small businesses.

Hiring an In-House Accountant

You can choose to manage your business accounting by hiring an in-house accountant or CPA. This can be a great option if you want to ensure your books are in order, and that your company’s financial information is accurate, but it does come with some drawbacks. For one thing, the cost of hiring someone like this can be a substantial burden on your business’s finances.

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Effective Accounting Practices To Adopt Immediately

There are many ways to do accounting, but there are also certain practices that make it easier to keep track of your finances. Some best practices include:

  • Keep your personal finances separate from that of your business to get an accurate view of your company’s financial health. This applies a lot to small businesses just getting started with accounting.
  • Pay attention to details. Make sure that all transactions are accounted for and properly totaled to facilitate accurate reporting at year-end.
  • Hire an accounting professional if you don’t have the time to learn accounting software. This will save you stress and give you the needed time to focus on other important parts of your business.
  • Keep adequate records of all assets, liabilities and cash flows for tax purposes. Pay attention to tax laws and regulations. Stay up to date on current news so you can know what’s happening in the financial world.

Bottom Line

Accounting is popularly regarded as “the language of business” because it doesn’t just help you keep track of your money, but also helps you make informed decisions about your business. To speed up action, you may hire accounting professionals or purchase accounting software to ensure accurate financial audits and reporting.

Frequently Asked Questions (FAQs)

What is accounting in simple terms?

Accounting is the process of keeping track of your business’s financial transactions. It helps you to understand how money comes in and how it goes out.

Why is accounting important?

Accounting helps a business understand its financial position to be able to make informed decisions and manage risks.

What is the simplest accounting software?

Freshbook is one of the easiest accounting software systems to use. Its interface is very intuitive, making it very easy to learn. Another easy to use option that’s perfect for self-employed entrepreneurs who need an affordable accounting solution is Neat. Learn more about the best accounting software.


What is accounting and basics of accounting? ›

Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance. Accounting also serves as a useful way for people and companies to honor their tax obligations.

What is accounting in short answer? ›

Accounting, which is often just called "accounting," is the process of measuring, processing, and sharing financial and other information about businesses and corporations. What is accounting? Accounting is the processor keeping the accounting books of the financial transactions of the company.

What is accounting one line answer? ›

What Is Accounting? Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.

What is accounting in your own words? ›

Accounting is how your business records, organizes, and understands its financial information. You can think of accounting as a big machine that you put raw financial information into—records of all your business transactions, taxes, projections, etc.

What is basic accounting example? ›

Examples of Accounting Transactions

Receive cash in payment of an invoice owed by a customer. Purchase fixed assets from a supplier. Record the depreciation of a fixed asset over time. Purchase consumable supplies from a supplier.

What are the 3 basics of accounting? ›

Golden Rules of Accounting
  • 1) Rule One. "Debit what comes in - credit what goes out." This legislation applies to existing accounts. ...
  • 2) Rule Two. "Credit the giver and Debit the Receiver." It is a rule for personal accounts. ...
  • 3) Rule Three. "Credit all income and debit all expenses."

Why is accounting important simple definition? ›

Why Is Accounting Important? Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

What is the basic purpose of accounting *? ›

What is the Purpose of Accounting? The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.

What is the basic accounting process? ›

The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.

What are 5 basic accounting skills? ›

Top Skills of an Accountant
  • Knowledge of Accounting Practices. ...
  • Proficiency in Accounting Software. ...
  • Ability to Prepare Financial Statements. ...
  • Knowledge of General Business Practices. ...
  • Ability to Analyze Data. ...
  • Critical Thinking Skills.
Jul 13, 2021

What is the most important accounting? ›

The most important accounting report for your business is its income statement, also called the profit and loss statement or P&L. This report tells you how much money you're making as well as some other vital data.

What are the 2 most important accounting principles? ›

Some of the most fundamental accounting principles include the following: Accrual principle. Conservatism principle.

What are the 5 basic accounting? ›

Although the guidelines for accountants are extensive, there are five main principles that underpin accounting practices and the preparation of financial statements. These are the accrual principle, the matching principle, the historic cost principle, the conservatism principle and the principle of substance over form.

What are the 4 types of accounting? ›

What are the 4 types of accounting?
  • Corporate accounting.
  • Forensic accounting.
  • Public accounting.
  • Government accounting.

Why is accounting important? ›

Accounting is important as it keeps a systematic record of the organization's financial information. Up-to-date records help users compare current financial information to historical data. With full, consistent, and accurate records, it enables users to assess the performance of a company over a period of time.

What are the 3 most important skills every accountant should have? ›

Accountants have to be accurate, numbers-minded and analytical. Analytical skills remain one of the most important skills for accounting professionals, especially for those in disciplines such as forensic accounting.

What is the most important skills in accounting? ›

Accountants should possess the following:
  1. Business Knowledge. In general, accountants coordinate and collaborate with professionals across departments within a business. ...
  2. Technology Expertise. ...
  3. Communication Skills. ...
  4. Flexibility & Adaptability. ...
  5. Creativity & Problem Solving. ...
  6. Customer Service. ...
  7. Experience. ...
  8. Analytical.
Jan 27, 2022

What is the basic formula of accounting? ›

What is the Basic Accounting Equation? The basic accounting equation is Assets = Equity + Liability. It is also known as the balance sheet equation. The double-entry bookkeeping system is founded on this very equation, as it represents that the total credit balance equates to a total debt balance.

What is the most important branch of accounting? ›

Tax accounting is important because tax laws are complex and often change. The main purpose of tax accounting is to determine a company's tax liability and to report that to the federal and state government using the correct tax forms.

What are the two main types of accountants? ›

Corporate accountants work for businesses, filing and managing a company's financial data for tax compliance and external reporting purposes. Public accountants work with external clients — individuals, businesses, nonprofits or government bodies.

What are 7 process of accounting? ›

The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.


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