Purpose of Accounting and Accountability
Accounting expresses the activities of the company by collecting financial information about the company’s business activities and recording them in accordance with a specific book-keeping method. The purpose of accounting is to keep the income, expenses, assets and debts of an enterprise separated from those of the enterprise’s owner and other enterprises. Other functions of accounting include establishment of the distributable profits of the enterprise, i.e. calculation of business’s profit or loss (profit and loss or P/L statement), and establishment of the enterprise’s financial standing (balance sheet). The profit and loss of the business activities is calculated for each financial period. The financial period is normally 12 months.
Accountability applies to everyone, who carries out business or professional activities, as of incorporation of the enterprise. Companies, trusts, associations and certain funds are, however, always accountable regardless of whether business activities are carried out or not. Accountability means that the management of the corporation is under an obligation to ensure, that all written material arising out of and describing the corporation’s business activities (such as receipts and correspondence) is collected and retained, and that the corporation’s accounts are prepared based on such material within the specified time periods and in accordance with the Accounting Act and good accounting practice. The corporation’s financial statements must be prepared on the basis of the accounts within a specified time. In addition to the Accounting Act, other legal requirements depending on the form of incorporation apply to preparation of the financial statements.
The concepts of the Accounting Act, the Business Taxation Act and the Value Added Tax Act differ somewhat. As regards periodization issues, the accounting principles are based on the precautionary principle to a higher degree than the principles applicable in taxation. Therefore, the processing of financial transactions may differ between accounting and taxation. Tax legislation, accounting legislation and company legislation apply in parallel to business activities.