Accounting is a financial tool that covers a series of information about a company or person, regarding their expenses, income and investments. This information is used to obtain reliable periodic results of the financial situation, and based on it, allow shareholders or management to assess risks and make decisions to maintain good profit margins and make it more productive.
What is contability?
Accounting is a system for organizing the financial data of an entity or natural person, or in other words, a practical discipline to provide continuously and in real time, a statement of financial position.
What is financial management accounting?
General accounting is not just a reflection of past information, it is also the foundation of another discipline called “financial management accounting.” It is a technique that extends from general accounting, based on a real analytical tool for decision support, which is generally divided into three areas:
- Financial: analysis of intermediate management balances, financing tables.
- Forecast: forecast operating account, financing plan and investment plans.
- Management: cost analysis, cost accounting, dashboards.
This field of accounting measures the economic performance of income, rather than seeing it as a factor of production. It also encompasses the entire system of monitoring and control of capital as it enters and leaves an organization, represented in its assets and liabilities, income and expenses.
Financial management accounting and financial data summary are the areas in charge of financial reporting, such as:
- Balance general
- Profit and Loss Statement
- Income statement of the management organization
- Reports from investors, creditors, suppliers, tax authorities, and other interested areas.
How is accounting used?
The broad notion of accounting extends throughout an accounting cycle, from the receipt of documents or invoices, their processing and classification; to the production of the company’s financial statements. It is also the basis for all management tools, real decision support tools.
An accounting cycle is a defined period during which the company must record all accounting transactions carried out.
The first accounting period does not contemplate a minimum duration: it can be, for example, one, two or three months, etc. On the other hand, the maximum duration of an accounting cycle is set at 24 months. However, for practical reasons, this choice is generally governed by the calendar year and therefore it is very common for companies to run their fiscal year from January to December.
In the case of a public limited company, shareholders can subsequently change the duration and closing date of the accounting year, during an extraordinary general meeting.
Accounting books are named in various ways and are kept periodically. Each of these books has a specific function that provides individual results, which are finally integrated into the result of the large catalog of general accounts, to determine a result.
The daily book
In the journal the company records each day and chronologically the various financial transactions: purchase and sale, that it carries out and that its assets evolve. This accounting document must be kept by merchants who depend on the actual tax system.
For its part, the general ledger includes the various operations mentioned in the journal, but based on the general chart of accounts designed by the company. Therefore, each of the transactions recorded in the journal is recorded globally, in the corresponding accounting account.
The record should also summarize all accounts for transfer to the balance sheet and income statement. Merchants or other entities that depend on the tax system are required to maintain a large accounting ledger.
The inventory book
The inventory book must be protected by companies that depend on the tax system. This mandatory record mentions the passive and fixed assets of the balance sheet. This includes equipment, stock, but also debts and accounts receivable. Therefore, each item must be entered into the inventory book with its book value.
The main function of the general accounts and their results is to lead to the presentation of summary documents called annual accounts, which consist of a general balance sheet, an income statement and a supplement.
Without waiting for a certain period, such as the closing of the fiscal year, accounting allows the issuance of temporary account statements, generally called “intermediate accounting situations”. These reports provide the partners of the company, bankers and employees, information of great importance from which the decision-making that guides the destiny of the company is derived.
What is accounting for?
Accounting is mainly used to properly record the expenses and income of a legal or natural person.
In practice, this means that receipts and invoices must be carefully recorded in an accounting book, which is generally kept electronically, using software designed for this purpose.
What is accounting for in a company?
In a company, accounting is the essential tool that provides significant data on its accounting situation, through reports that reflect profits and losses, presented in various financial statements on a regular basis. With these reports, shareholders or managers can make the necessary decisions to maintain or increase the profits of the company.
Accounting is used to pay taxes
The accounting of a company allows to determine the base and, therefore, the amount of many taxes that the company is obliged to pay, according to the internal laws of each country, such as: Value Added Tax (VAT) , Income Tax (ISLR), Contribution on Value Added Businesses (CVAE), among others.
Accounting is used to keep regular statistics
The accounts of the entire company, reflected in an accounting financial statement, contribute to the compilation of statistics where the behavior of the company can be analyzed, in a specific period of time: monthly, quarterly, semi-annually and annually.
The accounting serves for the control of the shareholders
The shareholders of a company can have control of their business through financial statements issued monthly and annually by accounting systems. With these results, shareholders can calculate their dividends and make projections of new investments to grow the business.
What are the objectives of accounting?
Each country is governed by laws of accounting principles, which require companies to present annual financial statements that provide a true picture of the assets, financial position and results of the company.
The accounting information presented must meet many qualities to comply with current legal obligations, for example:
Comparability : accounting must allow the reader to compare financial information in time and space.
Reliability : the accounting information must be exhaustive and without errors of any kind.
Sincerity : the reality and importance of the events recorded during the accounting year must be correctly translated into the accounts.
Regularity : financial information must comply with current rules and procedures.
Clarity : the accounting information as it is produced must be understandable to its readers, it must not be addressed to specialists but to an informed public with reasonable knowledge of the business.
Cost : the cost of accounting should not exceed its value, that is, the costs generated should not be disproportionate in terms of what it contributes to its beneficiaries.
Professional accountants in each country are subject to specific rules, that is, they obey a code of ethics and are subject to professional, behavioral, labor standards, standardized missions, etc. They belong to a regulated profession placed under the authority of an order: the order of public accountants.
Why is it important to keep the accounts?
Keeping a correct accounting is essential for the proper management of a company. Not only is it legally mandatory, but it is also indispensable for the various analyzes that will help the different decisions to make the business prosper. The accounting of a company must, therefore, follow certain standards so that the financial information it produces is exploitable but also valid in the eyes of the law.
The success and growth of a business is subject to numerous aspects, however, accounting plays a determining role in these objectives, since it represents a global vision that determines the financial position on which new investment ideas can be sustained to obtain the expected results.
Dr. Samantha Robson ( CRN: 0510146-5) is a nutritionist and website content reviewer related to her area of expertise. With a postgraduate degree in Nutrition from The University of Arizona, she is a specialist in Sports Nutrition from Oxford University and is also a member of the International Society of Sports Nutrition.