Introduction to accounting

Introduction to accounting

Accounting is a system for organising financial information which allows basic numerical data to be entered, classified and recorded. This discipline also makes it possible to provide, after appropriate processing, a set of information that meets the needs of the various users. The work of accounting is divided into several branches and services.

  • 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 paid out during a financial year. This treatment of cash therefore includes the company's income and expenditure.

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

Calculating the profitability of a company and keeping its accounts are necessary for the proper management of any entity. Indeed, accounting is the only way to provide the necessary indicators to know whether a company's turnover or income exceeds its expenses and costs.

In other words, accounting is a company's compass. The accounting data and the various accounting exercises carried out provide reliable figures and indicators on the financial situation of the company; all of which makes it much easier for managers and business leaders to take decisions.

  • Accounting as a control tool

Accounting is also the primary control tool for banks, the labour inspectorate and the tax authorities. Indeed, it is thanks to the profit and loss account that these various institutions are informed of the company's financial performance and its possible shortcomings.

  • Keeping the accounts

Keeping accounts or bookkeeping consists of recording all the accounting documents of a company in accordance with the standard chart of accounts. It implies rigour and requires for its accuracy the systematic recording of all supporting documents.

These documents are generally purchase or sales invoices, receipts, receipts or expense reports. Bookkeeping is carried out within the company by an accountant or an accounting firm.

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

Bookkeeping also enables the company to meet the legal obligations of the tax authorities. These obligations include VAT, profit declarations, income tax returns and social security returns.

  • The accounting period

The accounting period is a 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. According to the provisions of Article L 123-12 of the Commercial Code, any natural or legal person having the status of a business must record all movements relating to the assets of its company.

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

Furthermore, although sole proprietorships must close their accounting year on 31 December, companies may choose another date closing a calendar quarter (31 March, 31 June, 31 September). Accounting is divided into two main branches: financial or general accounting and cost accounting.

General accounting

General accounting is an organisational system in which flows and operations are translated into financial terms. It records the transactions of a company with its various partners (suppliers, customers, capital providers, the State, staff, etc.). The objective of general accounting is to establish the financial and asset situation of the company in a table called the balance sheet.

General accounting also makes it possible to determine the result by comparing the values produced with the values consumed in the income statement. It makes it possible to inform any interested private party (partners, shareholders, bankers).

It feeds into statistics of various sizes and forms the basis for the calculation of several forms of taxes and duties. 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 aimed at providing an explanation of the financial results of a company. It provides an analysis of the elements of the general accounts.

Cost accounting makes it possible to calculate cost prices and to determine results by sector of activity and by product. Consequently, it makes it possible to make forecasts and to be aware of their level of execution and the various differences that result. It is therefore a real budgetary 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 an obligation for companies. In fact, no text exists to make it a legal obligation. However, it is very widely recommended as it constitutes a guarantee of good practice in determining the various tariffs. It is therefore the credibility of a company that is involved with cost accounting.

Furthermore, without cost accounting, the company uses special calculation procedures to value its stocks, while certain capitalizable costs cannot be capitalized. These include development costs and software created by the company.