What is Accounting? – The Basics of Accounting

From recording transactions to generating financial reports, accounting plays a crucial role in the long-term success of an organization. If you are not an expert on the subject, you should continue reading this article to resolve all your doubts. 

The Origin of Accounting

Financial accounting arose from the need to count people’s assets and later evolved to provide information about a business’s economic status.  The first author on this subject was the Italian Luca Pacioli, recognized as the father of accounting. He published an important work on double-entry and introduced accounting in Italy.

Over time, accounting regulations emerged to allow the public treasury to control taxes. And so the accountant or bookkeeper figure appeared in Scotland in the 19th century. They were usually lawyers who offered accounting services to their clients; however, after a few years, it became an organized profession. The Institute of Chartered Accountants in England and Wales was created in 1880.

From its beginnings to today, accounting has undergone significant evolution, with technological innovations almost always accompanying it. Technology has driven significant changes that make accounting processes more complete, reliable, and useful. 

The Definition of Accounting

Accounting is defined as the process of recording, classifying, analyzing, interpreting, and communicating a company’s financial information. Therefore, accounting consists of recording all economic transactions to determine where everything the company has comes from, where it has gone, and how much is left.

Thus, through accounting, each and every economic operation carried out by an entity is recorded to provide all this information in an orderly, grouped manner. Therefore, as the definition shows, in one way or another, all those who “handle” funds can keep their accounts: a person, a group, a community of owners, an association, etc. It is important to note that, among the types of accounting, companies are required to use double-entry accounting, also known as the double-entry system.

This is based on the fact that there is no debtor without a creditor; therefore, in each accounting entry, at least two accounting accounts are involved: one for the debit and one for the credit (profits and losses). And the sum of the items recorded on one side must match the total sum on the other.

The Importance of Accounting

As we have said, accounting involves recording all economic transactions of a company to prepare its financial statements.

We could say, then, that it pursues the following objectives:

• Provide a true picture of the state of the business to interested parties, both internal and external, such as partners, creditor banks, the treasury, investors, etc.
• Serve as a basis for calculating the corresponding taxes. In other words, anyone can claim their company is doing very well, but only the financial statements will tell whether that is true.
• Make informed decisions about investments, expansion, hiring, and other strategic areas.
• Maintain accurate accounting records and clear financial statements to comply with tax and legal obligations.
• Evaluate the company’s profitability, identify areas for improvement, and measure financial performance over time. 

Accounting information is therefore essential to the company. It allows:

• Knowing how much we have, how much we earn, how we earn it, what we spend it on, etc.
• Better manage cash, inventory, accounts, expenses, liabilities…
• Understand the company’s past and present, and foresee its future. 
• Have absolute knowledge and control over the business.
• Improve decision-making and stay one step ahead. 

All of this is in accounting. Therefore, it is the best tool for successful business management. 

Who is Required to Keep Accounting Records?

The principles of accounting establish that all companies are obliged to keep their accounts except in the following cases:

• A natural person covered by the module regime is only required to keep invoices in chronological order.
• In the case of individuals subject to the simplified direct assessment regime, instead, they must keep a sales and income record book, a purchase and expense record book, and a capital asset record book.

In other words, the following companies are required to keep accounting records:

• Legal Entities: for example, limited companies, public limited companies, cooperatives, etc.
• Natural Persons (self-employed): if they are under the normal direct estimate regime.

In practice, it happens that:

• Few individual entrepreneurs are in the normal Direct Estimation Regime, as it is mandatory only when turnover reaches certain thresholds. Most entrepreneurs choose to form a company for these amounts.
• On the other hand, many individuals carry it without being obliged to do so, simply because they want to, even though they do not have to present it at any time.

Basic Business Accounting Documents

Business accounting is based on several fundamental documents that allow a company’s financial information to be recorded, analyzed, and presented clearly and in an organized manner.

These documents are essential for proper control of financial transactions. The main documents are:

• Balance Sheet: This is one of the most important accounting documents. It shows the company’s financial position at a specific point in time, presenting its assets, liabilities, and net worth.
• Income Statement or Profit and Loss Statement: This document shows the revenue generated and expenses incurred during a specific period, usually a quarter or a year. The difference between revenue and expenses determines whether the company had a profit or a loss during that period.
• Cash Flow Statement: Provides information on cash inflows and outflows over a given period of time. It is divided into operating activities (related to the company’s main activity), investing activities (investments in long-term assets), and financing activities (obtaining or paying for financing).
• Journal: A detailed, chronological record of all the company’s financial transactions. Each transaction is recorded with its date, description, affected accounts, amount, and payment method.
• General Ledger: A record summarizing and organizing journal transactions into individual accounts. It shows the balance of each accounting account at the end of a specific period.
• Inventory: records the physical assets owned by the company, whether raw materials, work in progress or finished products, and shows their value in terms of costs.
• Invoices and Receipts: These are documents that support financial transactions, such as purchases, sales, payments, and collections. They have legal and accounting importance and must be kept as part of financial records.

What Does It Take to Manage a Company’s Accounting?

If your next question is how to keep the accounts of a company, you should know that you will need three things: 

• Accounting Software: You need software that helps you keep track of your business accounts simply and intelligently. It allows you to automate the most mechanical tasks and delve deeper into your business’s key data.
• Proof of Payment: You must keep invoices or proof of payment for four years, in case of an inspection. But you can also take a simple photo of them using Anfix and save it digitally to the cloud. And since the five tax agencies approve us, you can get rid of the paper. 
• A Professional to Manage it: Count on the help of a professional to manage your accounting and allow you to focus on the other, more important parts of your business. In addition, having their help and advice will allow you to grow your business. 

Which Professional Should Handle the Business’s Accounting?

A registered technician must carry out a construction project, and a public deed can only be drawn up by a notary, but this only applies to accounting.

In a company, anyone can do accounting: it does not matter whether they are part of it or not, nor whether they have any qualifications or studies.

This does not mean that it is not extremely convenient for the owner to be familiar with the basic concepts and essential operations of accounting.

That is to say, even if you are not dedicated to “mechanizing” data, you must have some knowledge (even if it is general), since accounting reflects the company’s economic situation, and the data it provides is essential for making appropriate decisions.

Benefits of Accounting Software

We are in the 21st century, and accounting is done using computer programs.

There are two types of accounting programs:

• The ones you install directly on your computer.
• Those who are in the cloud.

Although these are the most recent, cloud accounting programs have several advantages over the former. These two are worth highlighting:

• You only need an internet connection to work from anywhere, on any device.
• Cloud technology is much safer. There are no backup, update, or disk space problems on your computer.

Cloud-based accounting software will allow you to obtain a balance sheet on a specific date, find out what a client owes you, or see the profit from the current activity, among many other things, with just one click.

Online cloud accounting services allow you to gain efficiency in recording accounting events and preparing reports in a much simpler and faster way.

These programs can also automate various types of information, including billing, banking connections, inventory control, payroll, and assets…

Cutting-edge cloud accounting programs like Anfix have eliminated the need to manually record things like expense receipts or reconcile with your bank.

Automating your business management will substantially reduce the possibility of errors in the registration process and the need for a professional to enter information by hand.

Final Tips

• Keep accurate records: Recording every transaction accurately is essential for accurate accounting.
• Update regularly: Perform reconciliations and record updates to avoid errors.
• Consult professionals: In complex situations or for critical financial decisions, seeking advice from accountants or financial advisors is wise.

Conclusion

In summary: 

• Accounting involves recording the company’s economic transactions to prepare financial statements used for decision-making or tax settlement.
• All companies must do so, except for individuals (self-employed) covered by the Simplified Direct Estimation Regime or the Modules Regime.
• The information extracted from it is very useful, which is why many self-employed people keep it even when they are not required to.
• It is not necessary for a person with a specific qualification to be in charge of its preparation, nor for the person to be part of the company’s staff. Sufficient knowledge is enough.
• Choosing a good accounting program that fits your needs is very important.