What is Accounting?

Accounting is a fundamental pillar in the management of any company, regardless of its size or sector.

It provides key financial information that enables business owners to make informed strategic decisions, maintain accurate control of finances and comply with legal obligations.

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 the assets that people had and later evolved to provide information on the economic status of a business. 

The first author on this subject was the Italian Luca Pacioli, who has been 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 organised profession. The Institute of Chartered Accountants in England and Wales was created in 1880.

From its beginnings until today, accounting has undergone a significant evolution that technological innovations have almost always accompanied. Technology has motivated important changes to 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 in order to know where everything the company has has come 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, in order to obtain all this information in an orderly and grouped manner.

Therefore, as can be seen from the definition, 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, of the types of accounting that exist, companies are required to keep double-entry accounting, also known as a 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 consists of recording all the economic movements of a company in order to prepare its financial statements.

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

1. Provide a true image of the state of the business to interested parties, both internally and externally, such as partners, creditor banks, the treasury, investors, etc.
2. Serve as a basis for calculating the corresponding taxes. In other words, anyone can pretend that their company is doing very well, but only the financial statements will tell whether that is true or not.
3. Make informed decisions about investments, expansion, hiring and other strategic areas.
4. Maintain accurate accounting records and clear financial statements to comply with tax and legal obligations.
5. Evaluate the company’s profitability, identify areas for improvement and measure financial performance over time. 

Accounting information is, therefore, essential for 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 past and present and foresee the future of the company. 
• 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:

• In the case of a natural person covered by the module regime: they are 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:

1. Few individual entrepreneurs are in the normal Direct Estimation Regime because it is mandatory in cases where the turnover reaches certain amounts. What usually happens is that most entrepreneurs choose to form a company for these amounts.
2. On the other hand, there are many individuals who, without being obliged to do so, do carry it because they want to do so, 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 organized.

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 situation at a specific 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: This is a detailed and 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 the key data of your business.
• 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 through Anfix and save them digitally in 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 project for a construction project and a public deed can only be drawn up by a notary, but this only happens with accounting.

In a company, anyone can do accounting: it does not matter whether they are part of it or not, and also whether they have some kind of qualification 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 economic situation of the company and the data it offers 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 and with any device.
• Cloud technology is much safer. There are no backups, updates, or 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 different types of information: billing, connection with banks, inventory control, payrolls, 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 regular reconciliations and updates of records 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 consists of recording the economic operations of the company to obtain the financial statements that will be 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 if they are not required to do so.
• 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.