Banking Category Banking: the easy, simple banking guide

What Is the purpose of accounting?

Keeping track of transactions and recording revenue and expenses are important business processes often assigned to an accounting department or a financial manager. Accounting is a business discipline that allows companies to record, analyse and retrieve critical financial information that can be used to determine a company's financial status and provide reports and insights needed to make sound financial decisions.


The primary purpose of accounting is to identify and record all activities that impact the organisation financially. All activities, including purchases, sales, the acquisition of capital and interest earned from investments, can be classified in monetary terms and posted to a specified account as an accounting record. These transactions typically are recorded in ledgers and journals and are part of the process known as the accounting cycle.


Accountants develop systems and processes to evaluate and analyse different types of transactions. Each transaction that involves the acquisition or sale of goods and services must be reported in the general ledger and posted to relevant accounts. Bookkeeping is the function of accounting that helps maintain these types of transactions as debits and credits; this data can then be used to create accurate and timely financial reports.


The two main branches of accounting are managerial accounting and financial accounting. Managerial accounting refers to the processes and procedures implemented for internal decision-making and reporting within an organisation. Financial accounting refers to the fundamental guidelines, policies, procedures and regulations mandated by the UK's Generally Accepted Accounting Principles (GAAP), which has been established by the Financial Reporting Council (see Resources).


Accountants typically are responsible for the following types of financial activities and projects: assessing the value of different accounts using an accrual or cash method of accounting; providing financial reports and conducting a financial analysis for different members of an organisation; developing an internal controls system and reporting procedures or guidelines for the organisation; preparing financial statements, such as the balance sheet, income statement, statement of the owner's equity and statement of cash flows, at the end of the accounting period.


Companies that adapt the basic accounting principles from the FRC can create their own efficient system of internal accounting controls and practices that can be used across all departments of the organisation. Setting up a universal accounting system for the organisation can help limit errors and reduce the risk of noncompliance with tax laws. Appointing an accounting manager to oversee a team of accountants or to train company managers in reporting rules and regulations can help a company record, maintain and retrieve critical financial data during any accounting period.