This informal CPD article ‘An Introduction to Accounting’ was provided by London Optimum Training & Consultancy (LOTC), a UK-based training and consultancy provider committed to professional development and organisational performance.
In simple terms, bookkeeping is the ongoing recording of business transaction in its books of account (1). Accounting is the process of using the financial information recorded in those books to interpret, explain and understand the financial position and performance of the business.
What is accounting?
Accounts are a summary of a business’ financial activities for a period of time, typically 12 months. Accounts can also be referred to as financial statements. A business needs accounts to assess how it is performing. They are also needed to raise finance for the business, as bank managers will usually want to see the accounts (2). Accounts can help the owners obtain loans and mortgages, support insurance claims, and prepare tax returns. They enable partners in a partnership to determine their share of the profits and allow companies to meet their filing requirements with Companies House. Finally, when a business is being sold, potential purchasers will want to see both past and current accounts.
The accounting information you prepare will show whether the business is making a profit or a loss. It will indicate the value of the business, its cash position, and who owes money to the business. It also provides an overall picture of how the business is performing. Therefore, the main purpose of accounting is to provide clear and reliable information to those who need to make informed decisions (3).
Within the business world, accountants perform a variety of roles, each serving a different purpose. The main areas of accounting include Financial Accounting, Management Accounting, Government Accounting, Tax Accounting, Forensic Accounting, Project Accounting, and Social Accounting. Each of these areas has its own specific functions and responsibilities.
Different types of accounting
- Financial accounting, or financial reporting, is the process of producing information for external use usually in the form of financial statements. Financial Statements reflect a business’ past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles) (4).
- Management accounting produces information primarily for internal use by the company’s management (5).
- Government accounting, also known as public accounting, refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state owned and privately owned institutions.
- Tax accounting is the area of accounting that deals with tax-related matters. It involves preparing and reporting financial information in accordance with the tax laws and regulations of the relevant jurisdiction.
- Forensic accounting is the use of accounting, auditing and investigation techniques in cases of litigation or disputes. Forensic accountants act as expert witnesses in courts of law in civil and criminal disputes that require an assessment of the financial effects of a loss or the detection of a financial fraud (6).
- Project accounting refers to the use of accounting systems to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management.
- Social accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting, refers to the process of reporting implications of an organisation’s activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies.
Final thoughts
In conclusion, accounting helps businesses record and understand their financial activities, meet requirements, make informed decisions, and plan for the future. It provides essential information to support business success.
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REFERENCES
(1) Warren, C. S., Reeve, J. M., & Duchac, J. E. (2020). Financial & Managerial Accounting. Cengage Learning.
(2) Atrill, P., & McLaney, E. (2020). Accounting and Finance for Non-Specialists. Pearson.
(3) Financial Accounting Standards Board (FASB). (2010). Statement of Financial Accounting Concepts No. 8: Conceptual Framework for Financial Reporting.
(4) Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting. Wiley.
(5) Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
(6) Crumbley, D. L., Heitger, L. E., & Stevenson, T. L. (2019). Forensic Accounting and Fraud Investigation. Emerald Publishing Limited.
