Introduction to accounting

Introduction to accounting

Accounting is a system for organising financial information, making it possible to enter, classify and record basic numerical data. After appropriate processing, this discipline also provides a set of information that meets the needs of the various users. Accounting work is divided into several branches and departments.

  • Evaluation of financial flows

The cash flow statement is based on the annual accounts published by the company. It shows the amounts of cash received and disbursed during a financial year. This treatment of cash therefore includes the company's income and expenditure.

  • Accounting as a business management tool with a decision-making role

Calculating a company's profitability and keeping its accounts are essential for the proper management of any business. In fact, accounting is the only way of providing the indicators needed to determine whether a company's turnover or income exceeds its expenditure and costs.

In other words, accounting is a company's compass. Accounting data and the various accounting exercises carried out provide reliable figures and indicators of a company's financial situation, all of which makes decision-making much easier for managers and business leaders.

  • Accounting as a control tool

Accounting is also the primary control tool for banks, labour inspectorates and tax authorities. In fact, it is thanks to the profit and loss account that these various institutions are informed of a company's financial performance and any shortcomings.

  • Keeping the accounts

Bookkeeping involves recording all a company's accounting records in accordance with the chart of accounts. It is a rigorous process and requires the systematic recording of all supporting documents to ensure accuracy.

These documents are generally purchase or sales invoices, receipts, receipts or expense claims. Bookkeeping is carried out within the company by an accountant or a firm of chartered accountants.

The purpose of bookkeeping is twofold. It is used to justify the use of company funds and to certify a company's various accounting transactions (various purchases, payment of salaries, sale of goods or services, etc.).

Keeping accounts also enables you to meet the legal obligations of the tax authorities. These obligations include VAT, profit tax returns, income tax returns and social security returns.

  • The financial year

The financial year is the period during which an entity must record all its economic activities in order to produce the accounts for the year at the end of the period. Under the provisions of article L 123-12 of the French Commercial Code, all natural and legal persons trading as a business must record all movements relating to their company's assets and liabilities.

These movements must be recorded chronologically at least once every 12 months. The duration of an accounting period may not exceed the end of the year following that in which the company was incorporated (i.e. a maximum of 24 months).

In addition, although sole traders must close their accounts on 31 December, companies may choose another date to close a calendar quarter (31 March, 31 June, 31 September). There are two main types of accounting: financial or general accounting and cost accounting.

General accounting

General accounting is an organisational system in which flows and transactions are translated into financial terms. It is used to record a company's transactions with its various partners (suppliers, customers, capital providers, the State, employees, etc.). The aim of general accounting is to establish a company's assets and liabilities and financial position in a table known as the balance sheet.

General accounting also makes it possible to determine the result by comparing the values produced with the values consumed in the profit and loss account. It is used to inform any interested private parties (partners, shareholders, bankers).

It feeds into statistics of various kinds and forms the basis for calculating several forms of tax. Examples include income tax, the business value added contribution (CVAE) and value added tax (VAT).

Cost accounting

Cost accounting is a form of financial data processing designed to explain a company's financial results. It is used to analyse general accounting data.

Cost accounting enables cost prices to be calculated, and results to be determined by sector of activity and by product. As a result, it enables forecasts to be made and the level of execution and any resulting variances to be assessed. It is therefore a real budgeting tool for companies.

Cost accounting makes it possible to determine the costs of the various functions recorded by the company: marketing, after-sales service, production. Each company is free to decide how to organise this neutral and objective measurement system.

Cost accounting is not compulsory for companies. There is no legal requirement to do so. However, it is widely recommended, as it is a guarantee of good practice in determining the various charges. The credibility of a company is therefore at stake with cost accounting.

What's more, without cost accounting, the company uses special calculation procedures to value its inventories, even though it is impossible to capitalise certain fixed costs. These include development costs and software created by the company.

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