What is accounting? Why do we need it? And what types of accounting are there? I'm sure you'll agree with me that these are three important questions we should ask at the beginning of the course. So, let's answer the first one. What is accounting? Accounting is an information science that is used to collect and organize financial data for organizations and individuals. Okay, perfect. Let's break down this definition. First of all, we said that accounting is an information science. It is concerned with analyzing, collecting, and organizing information. But what type of information? Accounting organizes financial information. It is about money. It is quantitative in nature and measures money. Accounting isn't an abstract science.
It is much more practical than theoretical. It's one of those things that you'll learn best by doing. The last part of the definition says that accounting serves organizations and individuals. How come? Well, as one can imagine, every firm needs to be able to organize the financial information related to its business. A firm has to know how much of a product it was able to sell, how much it cost to produce the product, and how much money it has in the bank. Similarly, an individual needs to be aware of their personal finances. If they don't pay attention to how much comes in and how much goes out, they may soon be in deep trouble. I think we've answered the second question, too. Accounting is a science that helps us organize and represent financial information.
And it helps corporations and individuals understand their finances and make decisions about the future. Accounting helps you to use the past in order to take action in the present and change the future. Pretty cool, right? However, there is one more question that we need to answer. What types of accounting are there? There are four main areas of accounting. First of all, we have bookkeeping. Without bookkeeping, we wouldn't be able to do anything, because bookkeepers are responsible for all of the information that is collected and taken into consideration. Bookkeeping is a fundamental activity, as it ensures that financial information has been gathered systematically. Then we have Financial Accounting, which focuses on the three main statements, Income Statement, Balance Sheet, and Cash Flow. It is prepared for the company's ownership, its lenders, financial analysts, and for other external stakeholders.
It is highly regulated given that the information is prepared for third-party users, and they should be able to read it without having inside information. The fact that the information is prepared according to a specific set of rules renders it comparable with the one prepared by other companies, which, in turn, facilitates investors and lenders. Financial statements are prepared according to a uniform set of rules called accounting principles. The aim of these reports is to allow externals like banks and investors to get an idea of your business. How much sales you had? Was the company profitable? How was it financed? And so on. The third type of accounting is managerial accounting. It is available only for insiders. It is not defined by accounting principles. and is in most cases more detailed than financial accounting.
It contains strategic information that shouldn't be seen by the firm's competitors. Managerial accounting looks into topics like pricing, competition, marginality, budgeting, and so on. The company does not want to reveal this information to outsiders because, well, otherwise outsiders will prepare a counter plan and gain strategic advantage. Of course, managerial and financial accounting are often interrelated, and it is a frequent practice to reconcile managerial and financial accounting figures. The fourth type of accounting that we need to mention is tax accounting. This is the accounting that will determine the amount of taxes that a company has to pay. Tax accounting is a very technical field that varies for every single legislation in the world. We won't cover it in this course. In this course, our main focus will be on bookkeeping and financial accounting, as they are the solid foundation that one needs in order to understand financial transactions.
