A simple definition of “accounting”

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.—that then spits out an easy to understand story about the financial state of your business.

Accounting tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Accounting vs bookkeeping

Accounting and bookkeeping overlap in many ways. Some say bookkeeping is one aspect of accounting. But if you want to break them apart, you could say that bookkeeping is how you record and categorize your financial transactions, whereas accounting is putting that financial data to good use through analysis, strategy, and tax planning; If you are starting a small business make sure to get professional assistance and guidance from a small business accounting miami firm.

The accounting cycle

Accounting begins the moment you enter a business transaction—any activity or event that involves your business’s money—into your company’s ledger.

Recording business transactions this way is part of bookkeeping. And bookkeeping is the first step of what accountants call the “accounting cycle”: a process designed to take in raw financial information and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

1. Analyze and record transactions (looking over invoices, bank statements, etc.)
2. Post transactions to the ledger (according to the rules of double-entry accounting)
3. Prepare an unadjusted trial balance (this involves listing all of your business’s accounts and figuring out their balances)
4. Prepare adjusting entries at the end of the period
5. Prepare an adjusted trial balance
6. Prepare financial statements

Most of these rules and processes are automated by accounting software, so we’re going to skip over the gritty details of the accounting cycle and talk about the end product: financial statements.