Accounting is the documentation of financial transactions that are relevant to a business. The process generally involves the collation, examination, and communication of transactions. Reports are made to regulators, tax collectors, and oversight agencies.
An important component of this process is the creation of financial statements. These statements are a concise summary of the financial transactions completed over a specific period. They also outline an entity or company’s financial health, operations, and cash flows.
What Is The Purpose Of Accounting?
The complex nature of most business operations is what makes accounting important. This is why you’ll often find companies with large-scale financial departments. Accounting has key branches such as cost accounting and managerial accounting. These branches typically need tailored reports. These reports can be very useful in making informed decisions.
Companies usually complete hundreds to thousands of individual transactions on a monthly basis. Because of this, there’s an ever-present need for the impact of those transactions to be assessed. While some opt to handle this themselves, there’s always a huge margin for error. Particularly, if one doesn’t have the necessary designations and practical experience.
Types Of Accounting
What many don’t know is that accounting is far from just looking at a balance sheet or income statement. Accountants can be assigned to document specific transactions or to analyse certain information. Accounting functions are divided into several categories. The categories help to define an accountant’s duties and reporting processes.
Financial accounting
This type of accounting involves the methods used to generate interim and yearly financial statements. The balance sheet, cash flow statement, and income statement join the outcomes of all financial transactions.
They cover transactions that have taken place over a certain accounting period. The financial statements are then audited by external accounting firms every year.
In the case of public companies, audits are required by law. But, lenders often need external audits as part of their debt agreements. As a result, many companies undergo annual audits for a variety of reasons.
Managerial accounting
With managerial accounting, accountants use most of the data that they’d use if doing financial accounting. However, they use different methods for organising and utilising information.
For example, accountants will generate financial reports on a quarterly or monthly basis. These reports are tailored for a business’s management team. The team will use the information in the financial reports to guide operational decisions. Guidance is made according to a company’s financial position.
This area encompasses aspects such as budgeting, forecasting, and various financial analysis tools. In short, any information that could be useful to management falls under this type of accounting.
Cost accounting
Much like how managerial accounting helps decision-making, cost accounting assists costing-related decision-making. This form of accounting involves all costs associated with product manufacturing. Business owners, accountants, managers, and analysts use this data to determine product pricing.
With cost accounting, money is an economic factor in production. In financial accounting, money functions as a metric for assessing economic performance.
Tax accounting
Unlike financial accountants, who often have to stick to one set of rules, tax accountants regularly use a different set of rules. Depending on the type of tax return being filed, these rules are established at either the national or local level.
The primary goal of tax accounting is to maintain compliance with reporting requirements. Additionally, these accountants will use strategic decision-making to reduce a company’s tax obligations. This involves overseeing the entire tax process. It also includes the strategic structuring of the organisation.
Other aspects of tax accounting include tax reporting and making tax payments.
Forensic accounting
Forensic accounting is a specialised field involving several functions. Forensic accountants combine accounting, legal, and investigative skills to expose financial fraud. This usually results in them having to provide evidence in legal proceedings.
They conduct extensive analyses of financial records and business transactions. They use these analyses to expose fraud and financial misconduct. This involves using investigative methods to trace assets, quantify losses, and reconstruct transactions.
A forensic accountant’s findings can aid insurance claims, litigation, and internal investigations.
Accounting Standards
Most accountants have to follow the Generally Accepted Accounting Principles (GAAP). This happens globally but some countries may have slight variations of these principles. For example, in the UK, Generally Accepted Accounting Practice forms the accounting standards. These standards are published by the UK’s Financial Reporting Council.
The idea behind these standards is to improve the comparability. They also aim to improve the consistency of financial reporting across various industries.
In other countries, the standards are controlled by the International Accounting Standards Board. This board is joined to the International Financial Reporting Standards (IFRS). Accounting can be slightly more complex in places, like the United States, where tax laws can vary between counties or states.
Lastly, it’s important to remember that foreign companies have to follow the tax regulations of the country in which it needs to file a return.
Accounting Software
Luckily for modern-day accountants, there’s lots of accounting software out there. They can use them to ease and speed up their function. The software an accountant may utilise depends on the size of a business and the type of accounting they’ll be performing.
For small businesses, accounting software such as:
- Quickbooks: £10/month (+VAT)
- Freshbooks: £12/month (+VAT)
- Sage: £12/month (+VAT)
- Zoho: £12/month (+VAT)
- Xero: £14/month (+VAT)
Are all relatively cheap and work well.
Large businesses often need accounting software to match their complex internal systems. Solutions such as Oracle and NetSuite are generally best for large companies.
Why Accounting Is Important?
Fundamentally, accounting is important for compliance and strategic planning. Here are some other areas in which accounting is necessary:
Growth
The financial statements that accountants provide give key information on the business’s financial health. Without them, it’s almost impossible for companies to perform financial planning via forecasting. Without forecasting, nurturing growth becomes incredibly difficult.
Funding
Investors usually need as much financial information as possible before investing in a company. This helps them gauge a business’s financial health and whether an investment will be worthwhile.
Owner exit
Companies in mergers and acquisitions are required to present accounting records, as part of the process. The records are the basis upon which a company is valued, thus illustrating the role accounting plays in the exit of owners.
Payment collection
Companies often enter credit agreements with their customers. Without the application of the necessary accounting methods, a company may struggle to keep track of how much money is owed to them.
FAQs
How do I know if my accountant is qualified?
In the UK there are a variety of qualifications your accountant can get and/or organisations they can join here are some of the most common:
ACA: This is the qualification from Institute of Chartered Accountants in England and Wales (ICAEW). You can find ICAEW members here.
ACCA: The Association of Chartered Certified Accountants Another popular international recognised qualification. Find ACCA accountants here.
AAT: The Association of Accounting Technicians, the world’s leading professional body for accounting technicians. Find AAT members here.
CIMA: The Association of International Certified Professional Accountants. Find members here.
Moreover, some accounting software companies such as Xero and Quickbooks offer their own members directories.
What is the British version of the Internal Revenue Service (IRS)?
What is a tax advisory service?
This is a service that involves analysing problems related to finance and tax. It also involves creating solutions and recommendations.
These solutions can then aid either individuals or businesses with taxation.
How long are UK accounting periods?
Your ‘accounting period’ for Corporation Tax is the time covered by your Company Tax Return.
It can’t be longer than 12 months and is normally the same as the financial year covered by your company or association’s annual accounts.
A UK tax year runs from 6 April to the following 5 April.
The VAT quarters depend on when your business was registered.
Where to Find The Best UK Accountants?
We’ve created guides to where you can find the best UK accountants in the 264 biggest cities and towns in the UK:
Also see: Accounting vs Bookkeeping