Accounting is the part of finance that studies the different items that reflect the economic and financial movements of a company or entity.
It is a key tool to know in what situation and conditions a company is and, with this documentation, to be able to establish the necessary strategies in order to improve its economic performance. For example, if we buy wood to make chairs we will have to count that purchase to know how much we have, how much it has cost us, who is the seller, on what date we bought it, etc. Accounting is in charge of all that and more.
Accounting is a resource available to manage the expenses and income of a company. Any company in the development of its activity carries out purchase, sale, financing operations as a result of these activities, its assets vary and it obtains a profit or a loss.
All companies are aware that they must properly manage the accounting parameters. This concept involves both so-called small and medium-sized companies ( SMEs) and large multinationals. In the same way, it is due to both financial reasons – in terms of ensuring adequate profitability – and tax provisions, due to pressure from federal, provincial and local treasuries on each corporate formation.
Origin of accounting
Accounting has been present in the lives of men for thousands of years, it was used in a more rudimentary way in great civilizations such as Egypt or Rome, but accounting as we know it today, had its origin in the publication in Italy of the work "Summa de Arithmetica, Geometría, Proportioni e Proportionalita" ‘by Luca Pacioli, which was dedicated to describing accounting methods of Venetian merchants, commercial uses, contracts and practices of interest and exchange; This document established double entry bookkeeping, the precedent for what is now known as "must and have" in accounting jargon. But, since the old Italian republics and microstates were the great promoters of trade in previous centuries, these teachings were adapted and modified with the passing of time, without losing their original essence.
In this way, if we talk about accounting, we are referring to a science – given that it provides knowledge -, to a technique – to the extent that it works with procedures and systems -, to an information system – given that it can capture, process and offer conclusions about pieces of information – and, finally, a social technology – because it combines knowledge of science to solve specific problems of life in society.
Equity elements and financial statements
Within accounting there are both equity elements and financial statements. They are two very important concepts and on which the entire basis of it is articulated.
The assets are:
- Net worth.
On the other hand, the financial statements are:
- Balance sheet or situation.
- Income statement or profit and loss account.
- Statement of changes in equity.
- Statement of cash flows.
Types of accounting
Of course, as we have been able to verify, there are many details that must be taken into account in a registry. In the same way, there are quite a few areas of the company on which an accounting record must be made. Thus, different types of accounting have been developed. For example, public accounting is not the same as cost accounting. In this line, a financial company does not use the same accounting items as an agricultural company.
However, having said that, we could say that accounting can be divided based on three details:
- Depending on its nature: Here we talk about whether it is public or private
- By the type of economic activity: For example, there is industrial accounting, oil, commercial, etc.
- Depending on the field in which it is applied: Depending on the specialization we can differentiate between tax accounting, managerial (for executives), cost accounting or financial accounting.
To know more you can consult the following link on the types of accounting.
It should also be noted that the fundamental objectives of accounting are, on the one hand, to interpret the past to make decisions in the company and satisfy the demand for information of different interest groups (such as shareholders, lenders or public administrations) and, on the other hand , record all economic and financial operations. Moreover, if we break down these reasons, we can say that accounting is used to:
1. Analyze and report on the economic resources of a company.
2. Allow administrators to properly plan and direct business transactions.
3. Control and keep a record of the management of the administrators and the tax burdens of the company.
4. Help predict money flows.
5. Collaborate with the necessary information when compiling national statistics on economic activities.
Accounting since the end of the 20th century
Thanks to the technological advance that the world has experienced since the end of the 20th century, it is mandatory to make special mention of computing. Modern resources have overturned the conventional approach to accounting. Thus, the task of experts in this discipline has been facilitated thanks to spreadsheets and asset or stock records, with better control of entries and exits.
There are numerous accounting programs or software to assist companies in their daily accounting tasks. Programs that facilitate billing, customer management, automatically carry out balances and even control the hours of the organization’s employees.
Accounting harmonization is a process that has been carried out in recent years to make the annual accounts of companies comparable with each other. This process is key in a globalized and competitive world where companies can not only obtain financing anywhere in the world, but are comparable with each other in a simple way for those stakeholders. Either because you want to invest in it or simply because you want to work in your organization. For this, international financial reporting standards (IFRS), also known by its acronym IFRS, have been created.