What is accounting: types, functions and importance for your business

Accounting is the backbone of business management. It enables you to record, classify and analyse all economic transactions of a business so you can make informed decisions and meet legal obligations.

Definition of accounting

Accounting is the economic discipline concerned with systematically recording, classifying and summarising all financial transactions of a company. Its purpose is to provide quantitative and qualitative information about the financial position of the business to the various stakeholders: owners, investors, public authorities, financial institutions and employees.

Through accounting, a company can understand its assets, its results and its capacity to generate wealth, all of which are essential for strategic planning and decision-making.

Main functions of accounting

Recording function

Accounting records all economic transactions carried out by the company in chronological order: purchases, sales, receipts, payments, investments, financing, and so on.

Information function

It transforms accounting data into useful information through financial statements (balance sheet, income statement, cash flow statement), which provide a clear picture of the real state of the business.

Control function

It allows you to verify that the company's resources are being used efficiently and that operations are in line with established budgets and objectives.

Legal compliance function

It ensures the company meets its legal obligations in accounting and tax matters: preparation of annual accounts, filing of taxes, submission of accounts to the Commercial Registry, and more.

Analysis and planning function

Accounting data enables you to analyse how the business is evolving, spot trends, identify problems and plan for the future based on objective information.

Types of accounting

Financial accounting

This is accounting regulated by legal standards (the General Chart of Accounts). It focuses on preparing financial statements aimed at external users: investors, banks, public authorities and other third parties.

Its main characteristics are:

• It follows mandatory accounting rules and principles.
• It produces standardised and comparable information.
• It focuses on past events (historical information).
• It generates the mandatory annual accounts.

Management or analytical accounting

Also known as cost accounting, it is for internal use and is not regulated by law. Its purpose is to provide detailed information for operational decision-making.

Among other things, it allows you to:

• Calculate the production cost of each product or service.
• Analyse profitability by business line, department or project.
• Prepare budgets and monitor variances.
• Set selling prices based on actual costs.

Tax accounting

It focuses on calculating and managing the company's tax obligations. Although it builds on financial accounting, it applies specific rules from tax legislation to determine the tax base for each tax.

The main areas it covers are:

• Corporate income tax or personal income tax settlement.
• VAT returns.
• Withholdings and payments on account.
• Adjustments between accounting profit and the tax base.

Public accounting

This is the accounting applied by public administrations and public sector bodies. It is governed by the General Public Accounting Plan and has its own particular features, such as budgetary accounting.

A brief history of accounting

Accounting has a millennia-old history:

• 3000 BC: the earliest civilisations (Mesopotamia, Egypt) already recorded commercial transactions on clay tablets.
• 15th century: Luca Pacioli, an Italian Franciscan friar, published the first systematic description of double-entry bookkeeping in 1494, which is considered the birth of modern accounting.
• 19th century: with the Industrial Revolution, accounting became professionalised to meet the needs of increasingly complex businesses.
• 20th century: national and international regulatory frameworks (IFRS, US GAAP) were developed and management accounting emerged.
• 21st century: digitalisation has transformed accounting with cloud software, automation and artificial intelligence.

The double-entry method

The universally used accounting system is based on double-entry bookkeeping, which states that every economic transaction affects at least two accounts simultaneously and by the same amount. In other words, every debit in one account has a corresponding credit in another.

This method ensures that the fundamental equation always remains in balance:

Assets = Liabilities + Equity

Who needs to keep accounts

In Spain, the obligation to keep accounts varies depending on the legal form and tax regime:

• Commercial companies (SL, SA): accounting is mandatory under the General Chart of Accounts.
• Self-employed under the normal direct estimation regime: accounting is mandatory, following the Commercial Code.
• Self-employed under the simplified direct estimation regime: record books of income, expenses and capital goods.
• Self-employed under the module system: books of sales and capital goods.

Regardless of the legal obligation, keeping orderly accounts is advisable for any business, as it provides essential information for its management.

Accounting in the digital age

Digital transformation has revolutionised how accounting is done:

• Cloud software: allows you to access your accounting from anywhere and on any device.
• Automation: journal entries are generated automatically from invoices, payments and bank transactions.
• Automatic bank reconciliation: bank transactions are intelligently matched with accounting records.
• Real-time reports: financial statements are updated instantly with every new transaction.
• Artificial intelligence: algorithms that categorise expenses, detect anomalies and forecast cash flows.

How to manage your company's accounting with Holded

Holded is a cloud accounting software designed to simplify the accounting management of businesses and self-employed professionals:

• Automates the recording of journal entries.
• Generates the balance sheet and profit and loss statement in real time.
• Facilitates bank reconciliation with a direct connection to your bank.
• Allows you to file taxes (VAT, corporate income tax, personal income tax) from the same platform.
• Integrates with invoicing, CRM, projects and inventory for unified business management.