Ever wondered what goes on behind the scenes of big company financials? All those numbers, charts, and accounting terms can confuse the average person. Here comes a corporate accountant to aid businesses in getting meaningful insights from these numbers and charts. But corporate accounting doesn’t have to be so mysterious.
Corporate accounting refers to companies’ processes and principles to record, analyze, summarize, and report on their financial performance and status. Without good corporate accounting practices, companies would be flying blind!
So, what is corporate accounting exactly?
Continue reading this post to find out, as this blog will decode the core concepts of corporate accounting in simple terms. The post will explain the process and benefits of corporate accounting and how a corporate accountant helps businesses.
Read on to get an inside look at the important world of corporate accounting.
Table of Contents
What is Corporate Accounting: Meaning and Process
Corporate accounting is the standardized system companies use to track revenues, expenses, assets, liabilities, equity, cash inflows/outflows, and other financial transactions over a set time. A corporate accountant generates important financial statements that provide insights into the company’s profits, losses, financial position, and cash flows.
The process of corporate accounting involves several key steps to record, analyze, summarize, and report financial transactions.
These steps include:
- Recording Transactions: Corporate accountants record all financial transactions, including sales, purchases, payroll, taxes, etc., in journal entries. This could be done manually or using accounting software. The entries capture important information like the accounts affected, date, amount, and a short description.
- Posting to General Ledger: The journal entries are posted to general ledger accounts like cash, accounts receivable, inventory, salaries payable, etc. The general ledger provides a complete record of all accounts and is used to prepare financial statements.
- Trial Balance: A trial balance is created to ensure debits equal credits in the ledger. If not, errors are traced and rectified.
- Adjusting Entries: Adjusting journal entries to match revenues and expenses to the current period, such as accrued expenses, deferred revenue, depreciation, etc. This follows the matching principle.
- Closing Entries: Temporary accounts like revenues, expenses, and dividends are closed at the end of the period. Balances are transferred to permanent accounts like retained earnings.
- Financial Statements: The general ledger accounts are used to prepare the major financial statements like income statements, cash flow statements, and balance sheets. These reveal the company’s financial position.
- Closing Process: Books are closed for the period. Data is reviewed for anomalies before books are closed.
Proper documentation for all accounting entries and review processes is critical for effective corporate accounting.
Key Components of Corporate Accounting
Corporate accounting relies on key components that are the foundation of recording and reporting financial transactions.
Assets: They are resources owned by the company that hold future economic value. They are recorded at historical cost and depreciated over time. Examples are cash, accounts receivable, inventory, and fixed assets like property and equipment.
Liabilities: These are obligations of the company payable in the future. Examples include accounts payable, wages payable, bank loans, and bonds payable. Liabilities involve the future outflow of company resources.
Equity: It represents the residual claim on assets after settling liabilities. It is the investment shareholders have made in the corporation. Common examples are retained earnings, preferred, and common stock.
Revenue: It is the income earned from the company’s operations and activities. It increases equity. Examples are revenue from the sale of goods or services.
Expenses: These are costs incurred by the company to generate revenues. It decreases equity. They are recorded when incurred, not when cash is paid. Examples include rent, utilities, and wages.
Recognition Principles: The revenue recognition principle says to record revenue when earned, not when cash is received. The matching principle matches expenses to the associated revenue in the same period.
Inventory Valuation: Inventory is valued at a lower cost or net realizable value. Popular valuation methods are FIFO, LIFO, and weighted average cost.
Depreciation & Amortization: It systematically allocates asset cost over its useful life. Depreciation is for tangible assets; amortization is for intangible assets.
Understanding these accounting elements allows companies to correctly analyze, summarize, and disclose financial transactions. It is key for assessing profitability, financial position, and cash flows.
Benefits of Corporate Accounting
Implementing robust corporate accounting practices has significant benefits for businesses:
Better Financial Visibility: Detailed records of financial transactions allow managers to track revenue and spending accurately. This provides critical insights into the company’s profitability, loss trends, working capital needs, etc.
Informed Decision Making: The financial data and reports generated through corporate accounting form the basis for data-driven business decisions on expanding operations, new investments, pricing strategies, budgeting, etc.
Access to Capital: Accurate financial statements can instill confidence in investors, banks, and other lenders to invest in or extend credit to the company. This provides easier access to growth capital.
Regulatory Compliance: Following GAAP standards and having audited financial statements are mandatory for meeting compliance with accounting regulations and standards. This also builds trust.
Reduced Fraud: Established processes like trial balances, reconciliations, and audits help detect discrepancies and errors early. This acts as a deterrent to intentional misstatements and fraud.
Benchmarking: Standardized reporting allows comparing competitors and industry benchmarks to assess operational performance. Companies can then work towards bridging competitive gaps.
Stakeholder Confidence: Investors, lenders, vendors, and other stakeholders rely on a company’s financial statements to assess financial health and viability before committing resources. This builds long-term relationships.
Embracing corporate accounting best practices leads to transparency, operational control, stakeholder confidence, regulatory adherence, and overall support of business goals. It is a critical business investment.
Conclusion
Corporate accounting refers to companies’ standardized processes and principles to record, analyze, summarize, and report on financial performance and status. It is the system companies rely on to track revenues, expenses, assets, liabilities, equity, cash flows, and other financial data over set periods.
Some key components of corporate accounting include recording transactions via journal entries, maintaining general ledgers, preparing adjusting entries, and issuing financial statements. Corporate accounting relies on assets, liabilities, equity, revenues, expenses, and recognition principles to accurately capture business transactions.
Embracing best practices for corporate accounting provides many benefits for companies, such as better financial visibility, informed decision-making, easier access to capital, fraud prevention, benchmarking capability, and stakeholder confidence.
Corporate accounting may seem complex at first glance, but it is simply a standardized means for companies to have clear financial insights and operating control. The processes and principles of corporate accounting create an essential foundation for business success. If you are looking for the best finance or accounting resources, Account Staff can help. Our recruiting experts are here for you to source qualified candidates tailored to your business needs. Get in touch to learn how we can assist you in building your finance and accounting team.