What is accounting?

Our mission at Vosel is to provide SMEs with all the tools they need to manage their business. In this guide we explain everything you need to know to get started in the world of accounting.

According to the Royal Spanish Academy, accounting is the system adopted to keep the account and reason in public and private offices.

The origin of accounting

The study of accounting on a scientific basis had its first written manifestation with the publication in Venice, Italy in 1494 of the famous work “Summa de Arithmetica, Geometria, Proportioni e Proportionalita”, written by Fra Luca Pacioli. This work introduces for the first time the concept of double entry.

However, it is considered that accounting in one form or another has existed since people started to acquire goods and to provide services to each other in exchange for a price, as they have needed to keep track of them in one way or another. In the Inca empire and in ancient Egypt and Rome we can already find some accounting records.

What is accounting and what is it for?

Accounting is the discipline that reflects the economic activity of a business. It is based on a set of standardised procedures known as Generally Accepted Accounting Principles (GAAP).

The purpose of accounting is to provide reliable information about a company’s statements obtained over a given period of time. Accounting enables business managers to make strategic decisions.

The four fundamental purposes of accounting are:

  • Documentation.
  • Disclosure and reporting.
  • Control.
  • Disposition.

Documentation serves to keep everything organised: to know where the company’s cash or capital inflows and outflows come from.

On the other hand, it is compulsory to declare and report the company’s profits and net worth to the State Tax Administration Agency (AEAT) either at the end of the quarter, at the end of the accounting cycle or whenever required.

It is essential to have control of these inputs and outputs in order to be able to make decisions and determine the company’s budgets.

Finally, accounting serves to know the disposition of the company’s assets, rights and obligations and its net worth according to their degree of liquidity and enforceability.

Therefore, accounting can be internal, so that the company itself knows what its economic situation is, or external, to provide information to those who need to have it.

The purpose of accounting

The main function of accounting is to produce and communicate appropriate economic and financial information to reduce uncertainty related to the decision-making process. Accounting has evolved and is now conceived as a science and has the following characteristics:

  • It is a scientific discipline included within the economic sciences.
  • It is related to law, mathematics, statistics and business economics, among others.
  • It has a special character because it has a theoretical-practical sense and at the same time the intervention of regulatory bodies.
  • It is subject to rules.
  • It has multiple definitions that emphasise, depending on the case, patrimonial, legal or economic aspects.

Legally compliant accounting

For an accounting entry to comply with the law, a number of characteristics must be present. Any entry or entry must be continuous, i.e. there can be no gaps between entries.

Furthermore, the accounting must be complete and must be based on the time at which the movement to be accounted for occurred. It must also be organised in a factual manner.

The accounting documentation is daily. This does not mean that it has to be done every day, but it does mean that each movement must be accounted for on a daily basis.

On the other hand, it is important to note that no movement recorded in the accounts can be deleted.

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