What is contability? Definition, types, importance and example

Maintaining accurate financial records is the most important thing you can do to establish, grow, and maintain a successful business. But it's not enough to simply track your company's finances: you also need to interpret the data stored in your financial records so you can make smart, informed decisions that drive your business forward.

The process of tracking and interpreting financial data is known as accounting. Below, we explain more about what accounting is, why you should care, and how you can incorporate accounting into your daily business operations.

What is contability?

Accounting is the process of maintaining accurate and detailed financial records, and then analyzing and interpreting them to draw conclusions about your past and future financial decisions.

Accounting vs. Bookkeeping

While laypeople may use accounting and bookkeeping interchangeably, bookkeeping actually refers only to the aspect of financial record keeping. Accounting as a whole is a more comprehensive process that involves not only maintaining financial records but also interpreting them to draw dynamic conclusions that impact real-world decisions.

In other words, it is possible to do accounting without accounting, but it is impossible to do accounting without accounting. Similarly, professional accountants perform accounting and bookkeeping tasks, but professional accountants focus solely on bookkeeping.

Why is accounting important for companies?

As a business owner, your top priority is to establish a profitable business and maintain positive cash flow year after year. While accounting can show you how much money you make and lose, only accounting can help you understand where that money came from, where it's going, and what results you can anticipate in the future. Using the information you gain through accounting, you and other business stakeholders can develop strategic plans for business growth.

For example, based on the information you gain from crucial financial statements, you can zero in on unnecessary expenses and work to eliminate them completely. At the same time, you may decide to invest in certain aspects of your business that show more promise. The accounting decisions you make can help you chart a course toward positive cash flow.

SEE: The best accounting software and services (TechRepublic)

In addition to helping business owners make smarter financial decisions, accounting data helps external stakeholders (such as lenders, investors, and creditors) decide whether or not your business is a good investment. Accounting also helps companies maintain financial transparency, which can reassure stakeholders and help companies avoid legal problems.

What are the main types of accounting?

There are four key types of accounting used by businesses in all industries and all sizes.

Financial Accounting

Financial accounting refers to using your company's financial information to generate financial statements that you can share with outside entities, such as government offices, banks, lenders, shareholders, and auditors.

Typically, these financial statements include cash flow statements, income statements, and balance sheets, which are created and reviewed at least annually. All publicly traded companies in the US must make these documents publicly available and must also comply with the nationally standardized and federally regulated Generally Accepted Accounting Principles (GAAP).

Managerial (management) accounting

Management accounting (also known as managerial accounting) is more or less the same as financial accounting with one key difference: Instead of generating financial statements for external parties, management accounting creates statements used by decision makers within itself. company. Because these documents inform internal financial strategy, they are typically produced more frequently than once a year, ideally on a monthly or quarterly schedule.

If you are a sole proprietor or a very small business owner, you can use accounting software to draft these documents yourself. You could also work with an accountant, specifically a CPA (Certified Public Accountant), who will also use accounting software to generate financial statements and share them with you.

Figure A

Over time, your company could be large enough to justify an in-house accounting team, which could use robust business accounting software to track and analyze your company's finances.

cost accounting

Cost accounting specifically refers to the recording and reporting of costs related to daily business tasks and processes. For example, cost accounting lets you know how much money it takes to create a physical product or provide a service.

Based on the information you obtain, you might decide that a certain item is too expensive to produce and discontinue it. Alternatively, you could see that a particular service makes your company the most money, so you may want to allocate more resources to that department to maximize profits and minimize losses.

Tax accounting

Tax accounting refers to the recording and reporting of financial information related to business taxes. Fundamentally, tax accounting ensures that you understand your tax obligation so that you don't end up owing money to the IRS at the end of the year.

How do most companies do accounting?

Accounting program

Accounting software is one of the easiest and most cost-effective ways for solopreneurs and small business owners to get familiar with accounting. Using in-house accounting software, business owners track their finances, organize their income and expenses, and generate accounting statements that inform their business decisions.

Accounting software can cost anywhere from nothing per month to thousands of dollars per year. It's worth noting that almost no one offers accounting services without software: Whether you choose to do your accounting in-house or outsource it to a full-service accounting firm, you and your accountants will rely on desktop or online accounting software to automate, streamline and simplify financial analysis.

internal counters

While many business owners start doing their own accounting, this solution often becomes impractical as they hire more employees and their business finances become more complicated. Some business owners choose to hire in-house accountants who use accountant-friendly software to manage the company's finances.

Working with a full-time accountant can be cost-prohibitive for small business owners, which is why some of them prefer to work with accountants on a contract basis.

Outsourced accounting firms

Business owners who do not have the time or money to do in-house accounting can also outsource accounting services to outside companies. These companies also use accounting software (either popular vendor software like QuickBooks or proprietary in-house software solutions) to track and analyze their company's finances.

Best accounting software solutions

If you're new to the world of business ownership and plan to manage most of your company's finances yourself, at least initially, accounting software is a good starting point. (We also recommend meeting with an accountant in person who can help you understand basic accounting concepts related to your specific organization.) Our article on the best accounting software for small businesses can help you find popular online accounting products and take control of your business's financial health.

Below we've listed three of our top accounting software recommendations for business owners who don't know much about accounting yet but are eager to get started.

SEE: Best practices for choosing the right accounting software (TechRepublic)

QuickBooks online

Our star rating: 4.6 out of 5

Intuit QuickBooks Online is considered by many to be the gold standard of cloud-based accounting software. In fact, Intuit has spent decades creating easy-to-use financial software that is as accessible to non-accounting business owners as it is to corporate accountants. QuickBooks Online's easy setup and user-friendly control panel make it a great first software choice for new business owners.

After a 30-day free trial, QuickBooks Online starts at $30 a month.

xero

Our star rating: 4.4 out of 5

Xero may be a much newer entrant in the accounting software sphere than QuickBooks Online, but it's at least as accessible, full-featured, and easy-to-use as its main competitor. With unlimited users and useful inventory management features, Xero is a good choice for new entrepreneurs trying to get the hang of selling products and establishing a personal brand.

After a 30-day free trial, Xero starts at $15 a month.

Wave Accounting

Our star rating: 4 out of 5

Wave Accounting is completely free for life. You can set up an online account with just a few clicks (and without needing to enter a credit card) and then start exploring the software right away to learn the basics of financial management. Financial statements are easy to generate and you can link as many companies as you want to a single Wave Accounting account.

Read next: Double-entry bookkeeping: What it means and how it works (TechRepublic)