Accounting tells the story of a company in the form of numbers. It is a key tool to know what the financial situation or condition is, in a business venture. And through its documentation, enables one to generate strategies that will improve the company’s financial performance.
1) What is accounting?
Accounting is a discipline involving a set of rules or norms to be followed for the correct management of a company or organization. It reflects the economic activity, the state of the patrimony, and the financial-economic situation of the company or organization.
It is a discipline, in charge of data processing, studying, measuring, and analyzing the economic-financial situation of a business venture. It also examines the assets of the company or organization. For example, a company will have to keep a record of its purchases, sales, payments to workers, loans, debts, taxes, etc.
For this reason, accounting is a key tool since it shows a “capture” of the situation and condition in which a company is. And through its documentation, it enables one to formulate strategies to improve its economic-financial situation.
2) Purpose of accounting
There are 4 fundamental purposes of accounting, which are:
ii) Information and Declarations
The documentation is the basis of accounting. It involves data processing. And it serves to have everything perfectly organized. For example, it can enable you to know where the expenses and income of the company are coming from.
Also, it provides financial information which could be regularly reported to the tax authorities or financial institutions. For example, when applying for a business loan from a financial institution, you’ll be requested to present your company’s financial report.
Likewise, it is extremely important to have control of the cash flow entries and exits in the business venture. For example, having a record of money inflows and outflows in your business venture will enable you to manage cash flow effectively, and prepare good budgets.
Finally, accounting is used to develop and establish a plan (of course ethical and legal) for a certain field. For example, having an effective record of your company’s financial record enables you to plan effective strategies that will boost the revenue of your business venture.
Consequently, accounting attests that the data presented is truthful. Accounting is not only important for companies, it’s also important for financial entities, tax authorities, investors, suppliers, and customers.
3) Accounting objectives
The fundamental aim of accounting is to deliver precise data on the condition of the business venture in a given month and/or period.
Therefore, breaking down the main objective, here are the sole aim of accounting:
a) To register and obtain all the operations carried out in a certain period in the different accounting books.
b) To be able to provide at any time the current situation of the company in terms of liquidity, debts, equity, profit, etc.
c) To enable you to know and explain the results obtained in a certain period. And be able to compare records from one year to another. And to know if the business organization is making progress.
d) To ascertain the company’s present and historical information, assets, and debts record.
e) To determine the profits and losses associated with the business venture.
4) Types of accounting
Due to the great diversity of sectors and companies in the economic or business sector, various types of accounting that adapt to each need have been in existence. The different types of accounting are:
According to its origin
a) Public Accounting: It is the type of accounting that is responsible for recording and structuring all the information of state institutions.
b) Private Accounting: This kind of accounting is usually utilized by businesses in the private sector.
According to the activity of the company
c) Industrial accounting: This form of accounting is utilized by companies dedicated to transforming raw materials into finished products.
d) Commercial Accounting: This is adopted by organizations that act as intermediaries before a purchase-sale transaction.
e) Accounting for extractive companies: Organizations specialized in the exploitation and extraction of natural resources require this form of accounting to keep daily records.
f) Service accounting: This is very effective for companies or businesses dedicated to the service sector.
According to the type of information
g) Financial accounting: This accounting type is utilized by company partners, managers, and outsiders to obtain data on economic profitability, loans, liquidity, soundness, etc.
h) Administrative accounting: This type of accounting works as an information network. And it is required for the administrative needs of a company.
h) Tax accounting: This is used to prepare and record reports relating to tax obligations and payment of taxes.
h) Cost accounting: are utilized by businesses to prepare and analyze the acquisition cost, and other costs associated with the process of production.
i) Management accounting: It deals with the calculation of costs. It usually offers information for short periods which are used to analyze and make decisions.
As you can see, for each sector there is a type of accounting that suits its activity. Therefore, each company will require one or more forms of accounting that are according to its needs and mode of operation.
5)Terminologies associated with accounting
In accounting, there are two main crucial theories which are financial statements and assets.
Here are some of the basic terminologies used in accounting:
Assets: This refers to the total facilities, equipment, and ownership that a company possesses.
Liabilities: This includes the debts and obligations that a company owns.
Heritage: Represents the assets, rights, and obligations of the company.
Net Equity: It is the total possessions of a company when all its debts or obligations have been discounted.
Assets = Liabilities + Equity
Liabilities = Assets – Equity
Equity = Assets + Liabilities
Equity = Assets – Liabilities
On the other hand, there are the financial statements.
Financial statements are extremely important reports since they show the financial situation and economic structure of a company in any certain period.
The financial statements include:
i) Balance sheet record
ii) Income declaration (earnings and expense statements).
iii) Declaration of alterations in equity
iv) Declaration of changes in monetary status
v) Cash flow declaration
Ultimately, the financial accounting declarations are the conclusive image that must reveal the monetary condition of the business venture. They allow you to know the variation and evolution of the economic structure of a business venture during a specific period.