DEFINITION OF 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. The resulting information—in the form of the balance sheet, income
and cash flow statement, forecasts and other reports—is used to inform business leaders as they:

 Evaluate staffing and payroll

 Balance or assess inventory levels
 Investigate new business opportunities
 Maximize profitability
 Manage cash flow
 Analyze the financial health of the business

The reports and other information that accountants produce are also used outside of the company, by
lenders, investors, auditors and, in the case of public companies, investors.

TYPES 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 or government-owned-and-controlled corporations. For example, the balance sheet reports
assets and liabilities while the income statement reports revenues and expenses. Financial accounting
is governed by accounting agencies by the government of the Philippines such as DOF (Department of
Finance), Department of Budget and Management, COA (Commission on audit), and BIR (Bureau of
Internal Revenue).

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

Tax accounting, which is governed by the BIR (Bureau of Internal Revenue), deals with preparing tax
returns and making tax payments. This is the act of tracking and reporting income and expenses related
to a company’s taxes. Accountants ensure that companies comply with complex and changing laws.

Project accounting

Professionals such as project managers and accountants use project accounting to integrate key
financial tasks on a project-by-project basis and report their progress and success to management.
Project managers rely on project accounting to inform them of the status of direct costs, overhead
costs and any revenues in a specific project. Project accountants generate these figures in financial
reports. A project manager uses these reports to determine if they need to adjust the project’s budget
and work breakdown structure (WBS).

A work breakdown structure (WBS) is a visual, hierarchical and deliverable-oriented deconstruction of a

project. It is a helpful diagram for project managers because it allows them to break down their project
scope and visualize all the tasks required to complete their projects.

Why Is Accounting Important:

Importance of Accounting

1. Keeps a record of business transactions

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.

2. Facilitates decision-making for management

Accounting is especially important for internal users of the organization. Internal users may include the
people that plan, organize, and run the organization. The management team needs accounting in
making important decisions. Business decisions may range from deciding to pursue geographical
expansion to improving operational efficiency.

3. Communicates results

Accounting helps to communicate company results to various users. Investors, lenders, and other
creditors are the primary external users of accounting information. Investors may be deciding to buy
shares in the company, while lenders need to analyze their risk in deciding to lend. It is important for
companies to establish credibility with these external users through relevant and reliable accounting
information.

4. Meets legal requirements

Proper accounting helps organizations ensure accurate reporting of financial assets and liabilities. Tax
authorities, such as the U.S. Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), use
standardized accounting financial statements to assess a company’s declared gross revenue and net
income. The system of accounting helps to ensure that a company’s financial statements are legally and
accurately reported.