Accounting - what it is and how it can help improve performance in a company

Publication date: 15 May 2023

Find out in this article what accounting is, what an accountant does and what its importance is in a business.

Contents:

1. Accounting - definition, importance, history and principles

1.1. What is accounting and what does an accountant do in a company?

1.2. What are the principles of accounting?

1.3. The history of accounting and its evolution

2. The functions of accounting and its importance in a company

2.1. Accounting functions and their purpose

2.2. Who can keep a company's accounts?

2.3. The role of accounting in a company

2.4. Types of accounting

1. Accounting - definition, importance, history and principles

Regardless of the size of a business, accounting is mandatory and absolutely necessary for making decisions and measuring economic performance. The accounting department has several tasks within a company, including the task of knowing the management and assets, liabilities and equity and the results achieved. Financial data is important for good strategic planning, but also for managing transactions with investors, creditors, customers and other public institutions. To this end, more and more companies, both large and small, are turning to outsourcing accounting advice and services to implement compliance policies, manage costs and improve their performance.

1.1. What is accounting and what does an accountant do in a company

All accounting activities are regulated by Law No. 82 of 1991, as amended and supplemented over the years. It stipulates that all companies, national companies, autonomous companies or other legal persons are obliged to organise their own accounts specific to the activity they carry out.

According to the definition in the law, "accounting is a specialised activity in measuring, evaluating, knowing, managing and controlling assets, liabilities and equity, as well as the financial results obtained from the activity". Through this process of recording, classifying and summarising financial transactions, a clear picture of a firm's financial health and performance is provided. This is very important as it provides guidance for resource management and strategic growth.

The recording, processing, publication and storage of financial information shall be done in chronological and systematic order. Accounting is a key function in any business. The reports generated by financial flows are invaluable in helping management make informed business decisions, especially in this ever-changing business environment.

The accounting activity can be done through the employment of chartered accountants or through service contracts in this field, respecting the legal provisions set by the Romanian Body of Chartered Accountants and Certified Accountants. The internal team can be harmoniously complemented by external specialists in accounting and financial and tax reporting. An accountant is a licensed and accredited professional responsible for keeping and interpreting a company's documents and financial records, ensuring that the organisation manages its money efficiently. In addition to the professional work they do, accountants must continually improve their skills and keep up to date with all legal requirements in this field.

The role of the accountant in a business is very important and the day-to-day duties vary depending on the position and the organisation. Some of the most common duties and responsibilities include:

• Ensures the accuracy of financial records and their compliance with applicable laws and regulations.
• Prepares important financial reports.
• Keeps records of payments to suppliers or banks.
• Prepares tax returns and ensures timely and accurate tax payments.
• Evaluates financial operations to recommend best practices, identifies problems and develops strategies for resolution.
• Provides guidance in reducing costs, increasing revenue and maximizing profit.
• Produces trial balances, account balances and issues payment orders.
• Records payments and receipts based on supporting documentation.

So what an accountant does in a business is essential to the effective running of the organisation. In addition, they have a legal obligation to act honestly and avoid negligence in their work. Accountants are also responsible for financial records and their compliance with relevant laws and regulations.

1.2. What are the principles of accounting?

Accounting principles are the rules and theories that companies must follow when reporting financial data. Their purpose is to ensure that a company's financial statements are complete and consistent. The accounting principles are as follows:

• Going Concern Principle - means that the company continues as a going concern into the future.
• The going concern principle - means that accounting practices are consistently applied each financial year.
• Prudence principle - its application protects the company and third parties from subjective assessments.
• The principle of accrual independence - considers that each financial year is independent and shows the expenditure and income for that period only.
• Intangibility principle - this principle states that the opening balance sheet of the current financial year should coincide with the closing balance sheet of the previous one.
• No-netting principle - this requires assets and liabilities, expenses and income to be valued and recorded separately in the accounts.
• Economic over legal principle - accounting information must be reliable, consistent with economic reality, and not just taking account of its legal form.
• Materiality principle - this principle is necessary in order not to overburden financial statements with overly detailed accounting information.
• Separate valuation principle - the total value of a balance sheet item should be determined for each asset and liability.

1.3. The history of accounting and its evolution

The history of accounting dates back to the ancient civilisations of Mesopotamia, Egypt and Babylon. One example is the Roman Empire whose government kept detailed records of its finances. But modern accounting only emerged in the early 19th century. Back then, techniques used single-entry bookkeeping, but because of the complexity of capitalist enterprises, accounting practices evolved towards double-entry bookkeeping. This led to the creation of accounts for assets, using the debit account on the left and the credit account on the right.

Luca Pacioli made important contributions to the development of accounting as a profession and is considered the "Father of accounting and bookkeeping". He published a book on the double-entry accounting system in 1494. In Romania, the spread of double-entry bookkeeping took place later than in the rest of Europe because forms of capitalist economy emerged later than in Western countries. Over time, Romanian accounting progressed with the development of the economy, and the double-entry system was the product of an evolution of accounting practices.

2. The functions of accounting and its importance in a company

Accounting is a process by which financial transactions in a business, such as cash inflows and outflows, are tracked. This is important for businesses, not only for record-keeping and business management, but also for legal and tax reasons. Even if accounting-related activities are left to professionals, alongside other administrative services or those in HR and payroll, it is still advisable to understand the basics, especially when running a business. Find out what the functions of accounting are, how many types it can be and what its role is in a company.

2.1. Accounting functions and their purpose

A company's accounting has several important functions:

• Processing and recording of data - this involves recording economic processes that can be expressed in terms of value within asset units.
• Reporting - this can be internal, for the management of the unit, or external, for third parties.
• Management control - this concerns the way in which both material and monetary values are kept.
• Legal - this is very important for proving the reality of economic operations and serves as evidence in legal proceedings.
• Predictive - information for a completed financial year can be used to determine certain trends in future developments.

2.2. Who can keep a company's accounts?

In terms of who or how a company's accounts are kept, they can be organised internally or outsourced:

• Internally - it is organised in separate departments headed by a business manager, chief accountant or other authorised person. Persons appointed to management positions must have a higher degree in economics. In the event of improper application of the accounting regulations, they are liable.
• Externally - outsourcing of accounting activities can be done on the basis of service contracts concluded with authorised natural or legal persons who are members of the Romanian Body of Chartered Accountants and Certified Accountants. According to the law and the provisions of the signed contract, they are responsible for the management of the accounting.

2.3. The role of accounting in a company

Accounting plays a very important role because the information resulting from such activities presents the financial situation of a company. They show whether at the end of a day the company makes a profit or a financial loss, which is essential not only for management but also for external users such as investors, creditors or other stakeholders. In short, accounting helps a business better understand its financial position so it can make better decisions and manage risks.

Accounting deals with recording and reporting a company's financial transactions, performance and cash flows. It involves consolidating all financial information to make it clear and understandable to all stakeholders and shareholders. Accounting serves the purpose of producing transparent, reliable and accurate financial statements, so the need for it is clearly understood by everyone. Here are some facts that will give you an accurate picture of the importance of accounting:

• Keeps a systematic record of an organisation's financial information. With complete and up-to-date records, stakeholders can assess a company's performance over a period of time.
• It facilitates management decision-making, such as geographical expansion or improving operational efficiency.
• Accounting helps communicate company results to various users, such as investors or creditors. Investors may decide to buy shares in the company, and lenders consider the risks of lending.
• The accounting system helps ensure that a company's financial statements are reported legally and fairly.

2.4. Types of accounting

Accounting can be divided into several categories, each referring to a particular set of information about certain transactions. The main types of accounting are:

Financial accounting

Is the practice of recording and reporting financial transactions and cash flows. This type of accounting is mainly required to generate financial reports for government authorities or other interested parties, providing information on the performance and financial health of an enterprise through a monthly, semi-annual or annual balance sheet.

Management accounting

Focuses on the use and interpretation of financial information so that managers can make sound business decisions. It is similar to financial accounting, except that it is intended for internal use. Financial statements are prepared to assess and interpret financial performance.

Tax accounting

It is a branch of accounting that tracks taxes owed to the government, aimed at controlling and supervising a company's tax liabilities. It focuses on accounting practices related to meeting tax obligations. Depending on the specifics of each company, this type of accounting needs to be approached differently.

Legal accounting

This type of accounting also plays an important role in providing the necessary information in the event of criminal or civil litigation, financial audits or other processes related to suspected fraud.

Other branches of accounting may also include cost accounting, auditing, fiduciary, public or governmental accounting, each with its different role.

So understanding accounting and the key concepts behind it helps to better manage your business, whatever its size. Accounting practices monitor all financial activity and play an important role in maintaining order and legality in financial transactions. For the economic success of a business, the work of the accountant or finance department can be complemented by an outsourced accounting services partner to help leverage the company's strengths.

*This material has been prepared for informational purposes only and is not intended to provide tax, legal or accounting advice. We recommend that you consult with your team of tax, legal and accounting advisers before making any decisions on the topics mentioned in this article.