The Importance of Accounting in Our Daily Life

When you hear the term “accounting,” you may think of offices full of certified public accountants (CPAs) preparing and filing tax returns. That’s understandable, but it’s actually a very general term that describes many different aspects of how we budget, spend, save and invest money.

Accounting plays an important role in your life, and, whether you’ve realized it or not, you’re most likely already applying accounting principles in several ways. For example, many of us have experienced having “too much month left at the end of the money.” If you manage a monthly household budget, you already know how to predict your income and expenses for the month, and must endeavor to budget carefully to be sure you can meet all of your financial obligations and have something to put into savings.

You also might use simple accounting procedures when working out a budget for a home improvement project, vacation or other occasional expenditure where you want to be careful not to overspend. Without basic accounting it would be almost impossible to keep track of our financial lives.

Let’s take a closer look at a few different aspects of accounting.

Setting a budget is one of the first and most important steps that any accountant does for a client or for themselves. To set a budget properly, you need to carefully analyze your income, fixed expenses and existing liquid assets. Once you've done that, you can see how those numbers line up with your financial goals. For instance, if you make $2000 a month and want to save $500 per month, you need to have less than $1500 per month in fixed expenses.

Budgeting well means balancing spending with income and making sure to leave money left over in case of an emergency or for savings should no unexpected emergencies occur.

The concept of appreciation is essential for investing money. Concepts like the time value of money (TVM), and a decent grasp of accounting principles can set you up to make wise investments for your future.

A common interaction that most people have with accounting is during tax season. If you've kept up with tracking your expenses and income throughout the year, tax season will be easier.

Saving money is essential for building a budget that enables you to hit your goals and supplement spending, saving and investing.

Understanding how to properly budget, save, invest and prepare for tax season is essential to understanding how accounting functions within our society.

Of course, managing personal expenses is not all there is to accounting. Accountants work in several different fields and disciplines, each containing principles and techniques, but you may even use some of them in your day-to-day life.

Financial accounting focuses on recording the transactions that a business makes over time. Financial accountants primarily provide analysis of transactions and help businesses to make wiser decisions with their money. In day-to-day life, you're likely to use a simplified version of this discipline.

Managerial accounting, or management accounting, involves preparing and presenting financial information to decision makers at a company. Typically, a managerial accountant is provided with a set of goals and is tasked with figuring out how those financial objectives can be reached. Households use the basic principles found in this discipline to identify how they will meet certain goals such as retirement, home ownership and starting a family.

A subset of managerial accounting, cost accounting is a practice used by managers to identify the total cost of production for a company. This particular practice is slightly less applicable for households, but it is essential for anyone who wants to run a small business.

The functions of tax accounting for private individuals and corporations differ greatly, but many of the core principles remain the same. Some tax accountants have a CPA, which is a license awarded by a state or territorial government indicating an individual has passed a test to become a qualified accounting professional.

Forensic accounting blends investigations and audits into a single practice. These professionals are often highly experienced, with most possessing a master’s degree or an MBA in accounting. The accountant is typically employed by governments or businesses. It's uncommon for households to use forensic accounting.

Auditing involves detailed tracking and analysis of an insitution's finances. An audit can be initiated for several reasons. For instance, the IRS may audit a company or individual who appears to be engaging in fraud. An internal audit may also be performed by a company in order to uncover inefficiencies. While a full and detailed audit is unlikely to be done by the average person, careful tracking and analysis of your finances can help uncover problem areas in your household's finances.

Certified public accountants (CPA) are individuals or businesses that work for clients to do a variety of accounting tasks. Public accounting involves everything from preparing taxes, audits, tax advising and consultation services. Most people will likely work with someone who provides these services during tax season.

Government accounting is the form of accounting that the average person is least likely to utilize. It involves a very particular set of practices, standards and systems that help governments meet the needs of their citizens. Because the practice is directly related to government entities, there is a high level of scrutiny associated with government accounting.