Accounting – What is it, objectives, Elements, Types, and Importance?

Accounting is a branch of financial economics that systematically and structured quantitative information, expressed in monetary units, about the transactions carried out by various economic entities.

What is Accounting?

Accounting is a branch of financial economics that systematically and structured quantitative information, expressed in monetary units, about the transactions carried out by various economic entities.

According to Enrique Fowler Newton: “accounting is a technical discipline that, based on the processing of data on the composition and evolution of an entity’s assets (…), produces information for decision-making by administrators and interested third parties; and monitoring the resources and obligations of said entity.

Accounting objectives

Accounting has the following objectives and functions:

  • Record all entry and exit operations of the company.
  • Report on the financial situation of the company.
  • Facilitate decision-making at the different hierarchical levels of the organization.
  • Serve as a means of control in different functional areas of the company.
  • Allow the methodical, systemic, and comprehensive analysis of the information that the entity incurs for the normal development of its activities.
  • It constitutes a means of conservation and multiplication of capital.

Elements of accounting

Among the main elements that accounting makes use of in general are:

  • Assets: These are the assets, properties, or rights that a natural or legal person has.
  • Liabilities: obligations that a natural or legal person must fulfill in the future. Ex: debts.
  • Equity: also called capital, the difference between assets and liabilities.
  • Accounting books: files or documents in which the financial and economic information of a company is recorded.
  • Financial statements: reports and records of economic and financial activities.

Types of accounting

Accounting is a very broad science, which is why it can be classified as follows:

According to its origin

  • Public accounting: it is the branch of accounting that is responsible for the processing of patrimonial data of the Public Administration of a country at its different levels (municipal, provincial, or national).
  • Private accounting: it is one that is responsible for registering the economic-financial operations of a particular company or of natural or legal persons.

According to the activity

  • Industrial accounting: deals with the recording of transactions of a manufacturing company, focusing mainly on the valuation of inventories and the cost of finished products.
  • Commercial accounting: it is the branch of accounting that focuses on the activities of a business, keeping the record of its operations and the breakdown of taxes to pay the treasury.
  • Service accounting: it is the accounting used by companies in the service sector. It includes the accounting processing of the expenses incurred in providing a service and the income received from the provision.

According to the information

  • Financial accounting: its objective is to record all the economic and financial operations of the company as a result of its commercial transactions.
  • Administrative accounting: it is carried out only for internal use of the company, mainly to facilitate the functions of the administrative area in planning and decision-making.
  • Tax accounting: deals with the registration of information related to tax obligations. Includes filing of affidavits, annual balances, payment of taxes, etc.
  • Cost accounting: this branch of accounting disaggregates the operating costs of activity in different cost centers (purchases, production, sales, etc.) to facilitate the study of the cost structure of a company.
  • Management accounting: records financial operations to know and control costs, contributing to planning and decision-making.

Importance of accounting

Accounting is one of the most relevant elements of a company because:

  • It allows knowing the past, present, and economic-financial future of an organization.
  • It facilitates decision making through the analysis of the company’s financial situation.
  • It serves as a means of control to various sectors of the organization (sales, warehouses, production, among others).
  • It provides data that, applied to ratios and indicators that allow inferring the financial health of the company.
  • As an administrative management tool, it allows managing inventories, accounts receivable and payable, expenses and fixed costs, and so on.
  • It registers all the transactions that have to do with the main activity of the entity, facilitating the comparative analysis of accounting exercises from different years.
  • At the time of requesting external financing, it offers information to banks about the company’s equity evolution.
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Ahmed Ismail

I'm a Civil Engineer. I like reading everything related to Business so I decided to launch the "Fast Grow Company" website to help Entrepreneurs in their business journey. Keep updated and follow us.

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