Defining Accounting

Accounting means more than you think. And yes, it matters.

Accounting is the process of recording, classifying, summarising and interpreting financial statements to help individuals and organisations understand their financial position and make informed decisions.

That’s quite a mouthful, and means nothing to 99% of people. So, let’s break it down.

Accounting covers everything money. If you get it, spend it, are owed it or need to pay with it, then its part of accounting. It’s the one thing every single business needs to deal with, which makes it so important to understand. It can be broken down mainly into the following five categories:

• Bookkeeping – the day-to-day work involved in keeping on top of your finances.
• Compliance – turning bookkeeping into financial statements needed to comply with the law.
• Tax – reporting to the authorities taxes that are due.
• Payroll – paying staff for a job well done.
• Audit – an independent opinion on how correct financial statements are.

The first four will be covered in the following articles. Audit is a very complex topic that only affects large companies and charities, so doesn’t really suit a “back to basics” style learning program, so here’s a basic summary.

Large companies (usually those big enough to be selling £12m+ a year) need to have an audit as part of their compliance. This involves an audit team reviewing the work done to create the financial statements and provide an opinion on how accurate they are. The idea being that the auditors are independent of those who create the statements (either because they are from a different team within the same firm or a different firm completely) so they can be free to say if they are correct. An audit is meant to make people looking to work with a business feel comfortable that the numbers are right.

For most people’s purposes, the main four categories are as much as they’d ever need to know, so we’ll focus on those.