Accounting

Definition of Terms

Accounting is a company’s primary tool for obtaining information about its financial situation. It is essential for corporate management and, by recording, monitoring, and analyzing all relevant data related to business operations, provides a foundation for developing business plans and product cost estimates.

The two main areas of accounting are external accounting (financial accounting) and internal accounting (management accounting).‍

External Accounting‍

The overview of individual transactions provided by accounting is relevant, among other things, for presenting a company’s financial position to external parties. Companies are required by law to report on their business operations to external stakeholders. The income statements, balance sheets, and annual financial statements prepared as part of the accounting process are essential for fulfilling these obligations. Although external accounting is intended for external stakeholders, it can also be important for internal purposes. For example, company management uses information from external accounting to inform decision-making.

The responsibilities of external accounting include commercial bookkeeping, documenting business processes, preparing annual financial statements, and processing ancillary accounts. In day-to-day operations, external accounting is often equated with bookkeeping. However, bookkeeping is only one aspect of external accounting.‍

Internal Accounting

Unlike external accounting, internal accounting is not subject to any legal requirements. Companies can decide for themselves whether and how to use this form of accounting. Another difference from external accounting is that internal accounting is not backward-looking. Instead, it primarily provides current data derived from the analysis and evaluation of business processes. This data is used by management to support decision-making and may also be relevant to other individuals within the company. It rarely provides data to external stakeholders.

Internal accounting includes financial accounting as well as cost and performance accounting. Internal accounting is also referred to as controlling.

Two other subfields of accounting are business statistics and comparative analysis, as well as planning and budgeting.

Business Statistics and Comparative Analysis

Business statistics and comparative analysis use data from financial accounting as well as cost and performance accounting to provide information that can be used to review business operations and enable a company to be compared against benchmarks. These comparisons are made either with competitors (inter-company comparison) or with previous years in the company’s history (time-series comparison).

Planning or Budgeting

Planning and budgeting use historical figures and data to support internal decision-making and strategy formulation.