What is

Accounting - Explanation and definition of accounting.

What is accounting

Accounting is the science concerned to identify, record, analyze, summarize and communicate regularly economic data that occur in any organization, company or institution in order to know the economic situation as well as tool support for correct decision making that achieve and maximize the objectives.

Accounting is a science that use mathematics and statistics science in order to develop a series of techniques and methodologies that seek to understand and analyze how the organization or company behaves from an economic point of view, the analysis and understanding helps to do a correct decision making for the proper functioning of the business, as well as planning and control.

The origin of accounting dates back to the beginnings of human beings, when our ancestors were forced to keep records and controls its properties and transactions because his memory was not enough to save all information. The first accounting records preserved on clay tablets dating from the ancient Mesopotamian civilization over 6,000 years ago, moreover audits accounting records exist at the time of ancient Egypt.

It is indisputable that any home need to know the revenues and expenses incurred in order to plan future purchases or payments to cope, without this control economic resources will surely be exhausted creating problems of acquiring food, clothing or payment of the electricity bill. Also managers or directors of any company or organization requires accounting analysis to know the progress of your business and to take appropriate decision for management, on the other hand outsiders to the company as banks or shareholders need to know periodically a summary in figures of economic progress of the business.

What is the minimum price of a product and / or service?, How much money do I need to start a business?, How much money can invest this year?, what taxes I have to pay?, these and other questions are answered by accounting.

Types of Accounting - Accounting Classification

From the point of view of the flow of economic resources accounting can be classified into 2 major families:

  • External Accounting

  • Internal Accounting

External accounting study all economic transactions that occur outside of the company or organization, by external accounting we can know among others the economic situation of the company allowing to know if it can afford the payments to its suppliers and shareholders or know profitability and viability of the business among others.

Internal accounting is study all economic transactions that occur internally within the company, thanks to this discipline we can calculate manufacturing costs of a product which allows us to take the best decision on issues such as manufacturing or deletion of a product, outsourcing of certain processes, pricing...

Furthermore from the viewpoint of the end user to which the economic information is intended, accounting can be classified into:

  • Financial Accounting

  • Directive Accounting

The Financial Accounting aims to provide the necessary information to certain external agents to the organization periodically agents such as banks, shareholders, customers, suppliers, financial analysts or government itself. The techniques and methods used in Financial Accounting are regulated under mandatory rules in order to obtain economic information comparable and understandable for all users regardless of their geographical location regulations.

Income statement, balance, memory accounting or cash flow are economic reports developed by Financial Accounting.

On the other side is the directive o management accounting which aims to provide financial information to managers and executives of the organization by helping them make the right decisions. Unlike Financial, Management accounting is not regulated under any legislation being flexible in the methods and techniques used for calculation.

The techniques used to know the costs of inventories, valuation of cost centers and calculation of costs by activity or process, the generation of indicators such as profitability, productivity, cash or debt ratio are in this branch of accounting.

Accounting software

Before the computing revolution, the accounting of companies manually recorded mountains of data in accounting books stored in their closets, constantly checking the robustness of the data and calculations resulting in an extremely slow and tedious work in any miscalculation resulted the loss of hours or even days or months of intense work.

With the development of computing and information technology today we have fully automated accounting systems that collect and track financial transactions within milliseconds, this has allowed a massive reduction in time required for generating financial reports, improving efficiency and accuracy of the information generated.

These accounting systems used to manage massive amounts of financial data with little accounting team, on the other hand these systems are equipped with control algorithms that are continuously reviewing and balancing the financial statements of the company or organization.

From complex and flexible accounting modules that bind to the ERP system such as SAP to simple spreadsheets developed in Excel computing has revolutionized accounting of the company and organizations on the planet.

We can date the origin of accounting computer in 1959 when IBM company developed the first computer system of collection, storage and generation of reports oriented to business known as IBM 9pac, this software was a milestone in the history of accounting.

The development of electronic spreadsheets in late 1978 as well as advances in programming languages databases helped financial and accounting workers for the entire world to improve the calculations, analysis and checks on the accounts of the company.

Currently we have specialized software in accounting systems that automate accounting work allowing to share information with anyone who has permission through computers, tablets or smartphones, knowing at all time an updated and reliable accounting information of our company or business.

Now that you know what is accounting, did you know that in the tombs of Egyptian pharaohs found papyri which collected the cost accounting of labor and materials had been used in the constructions made during his reign? Definitely accounting for ancient Egyptian pharaohs was very important.

what is accounting