What is accounting?

Accounting is the systematic and comprehensive recording of financial transactions related to a business. It is the language that businesses use to communicate their financial health and performance. This article provides an in-depth analysis of the core components of accounting, from the fundamental principles to more advanced, specialized fields.

Section 1: The Conceptual Framework of Accounting

The conceptual framework for accounting is a set of principles and assumptions that form the basis for financial reporting. This framework ensures that financial statements are consistent, comparable and reliable.

1.1 The Basic Accounting Equation

At the heart of all accounting is the fundamental equation that defines a business's financial position. For a thorough understanding of bookkeeping as the foundation of all accounting, we recommend our comprehensive guide:

Assets = Debt + Equity

• Assets: Economic resources controlled by the entity that are expected to provide future economic benefits. For an in-depth explanation of assets, see our article What are assets? .
• Liabilities: Existing obligations of the entity that arise from past events, the settlement of which is expected to result in an outflow of resources.
• Equity: The residual interest in the assets of the entity after deducting all liabilities.

1.2 Accounting principles (GAAP & IFRS)

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are the two dominant standards for financial reporting. While GAAP is primarily used in the United States, IFRS is the global standard. Both aim to ensure transparency and comparability in financial reporting.

Section 2: The Accounting Cycle

The accounting cycle is a systematic, eight-step process that ensures accurate and consistent financial reporting.

1. Identify Transactions: Analyze source documents (invoices, receipts) to identify financial events. Systematic document processing ensures that all transactions are documented correctly from the start. In modern retail, this process is often automated through computerized cash registers (cash registers) , which generate electronic vouchers and integrate directly with the accounting system.
2. Journal Entry: Recording transactions in a journal using double-entry bookkeeping.
3. Posting to General Ledger: Transferring journal entries to general ledger accounts. This step is the core of bookkeeping and requires systematic recording of all transactions.
4. Prepare Trial Balance: A list of all general ledger accounts and their balances to verify that debits equal credits.
5. Record Adjustment Entries: Accruals and deferred income/expenses to adjust for transactions that are not completed.
6. Prepare Adjusted Trial Balance: A new trial balance after adjustment items.
7. Prepare Financial Statements: Preparation of income statement, closing balance sheet and cash flow statement.
8. Close Accounts: Reset temporary accounts (income, expenses, dividends) to equity.

Section 3: Double-Entry Accounting Principle

Double-entry bookkeeping is a fundamental concept in which every transaction has a double effect. For every transaction, the sum of the debit entries must equal the sum of the credit entries. For a comprehensive explanation of the principles, history, and practical application of this system, see our detailed guide to double-entry bookkeeping .

3.1 Debit and Credit: T-Account

The T-account is a visual aid for understanding debits and credits. Debit (from Latin debere , "to owe") is the left side, and credit (from Latin credere , "to trust") is the right side. For an in-depth explanation of the debit concept, debit rules, and practical examples, see our comprehensive guide What is Debit? .

The rules for debit and credit are as follows:

• Asset accounts: Increases with debits, decreases with credits.
• Debt accounts: Decreased by debit, increased by credit.
• Equity accounts: Decreased by debit, increased by credit.
• Revenue accounts: Decreased by debit, increased by credit.
• Cost accounts: Increases with debits, decreases with credits.

Section 4: Financial statements

Financial statements are the end product of the accounting cycle and provide a snapshot of a business's financial health.

4.1 Income Statement

Shows the financial performance of the business over a period of time. It presents revenues, operating expenses , and other costs, as well as the resulting net profit or loss. An important part of the income statement is the operating statement , which focuses specifically on the operating income and costs from the core business, and provides valuable insight into the company's operating profitability.

4.2 The Balance Sheet

The balance sheet provides a summary of a business's assets, liabilities, and equity at a specific point in time. It is a direct representation of the accounting equation and one of the most important financial documents for understanding a business's financial position. For an in-depth explanation of the structure, components, and practical applications of the balance sheet, see our comprehensive article What is a Balance Sheet in Accounting? .

To understand all aspects of accounting and balance sheet analysis, including accounting principles, valuation, and practical handling, we recommend our detailed guide to balance sheet accounting .

To ensure clarity and consistency in presentation, correct rounding in accounting is essential to maintaining accounting quality and compliance with legal requirements.

4.3 Cash Flow Statement

Reports cash flows from operating, investing, and financing activities over a period of time. It provides insight into how a business generates and uses cash. Changes in working capital (current assets minus current liabilities) are an important component of cash flow from operations.

4.4 Balance sheet

The trial balance is not part of the official annual financial statements, but is a critical internal control tool. It is a list of all accounts in the general ledger with their final debit or credit balance. Its purpose is to verify that the total debit amount equals the total credit amount, ensuring the mathematical accuracy of the accounting before the final reports are prepared. For a detailed review, read our article What is a Trial Balance? .

Section 5: Advanced and Specialized Topics

Beyond the basics, accounting encompasses a number of specialized fields that require deeper expertise.

5.1 Tax accounting

This field focuses on how tax laws affect a business's financial statements. It is not only about paying the correct taxes, but also about strategic planning to minimize the tax burden. Tax accounting often differs from financial accounting due to different rules for recognizing income and expenses.

• Permanent Differences: Costs that are never deductible (e.g. certain entertainment expenses).
• Temporary Differences: Differences between the accounting and tax values ​​of assets and liabilities that will reverse in the future (e.g. different depreciation rates for tangible assets or amortization of intangible assets).

5.2 Audit

Auditing is an independent and systematic examination of a company's financial statements. The goal is to express a reasonable degree of assurance about whether the financial statements give a true and fair view of the company's financial position and performance. The audit process is crucial for building trust with investors, creditors and other stakeholders.

The audit process typically follows four main phases: 1. Planning and Risk Assessment: Understand the business and its environment to identify risks of material misstatement. 2. Internal Controls: Assess and test the effectiveness of the company's internal control systems. An important part of this work is nonconformance management , which ensures that nonconformances are systematically identified, analyzed, and corrected. Another critical element is reconciliation , which ensures that accounting data is consistent with external sources and internal controls. 3. Substantive procedures: Detailed testing of transactions and balances to uncover errors. 4. Reporting: Issue an audit report that concludes the auditor's findings.

Throughout the audit process, auditors document their work in working papers , which form the basis for the audit opinion and ensure quality and traceability in the audit work.

5.3 Management Accounting vs. Financial Accounting

Although both draw data from the same financial system, the two branches of accounting serve very different purposes.

• Financial accounting: Is externally directed and strictly regulated by standards such as IFRS or GAAP. It provides historical information to external stakeholders.
• Management accounting: Is internally directed and completely unregulated. It provides forward-looking information to management for strategic planning, budgeting, and operational control. Examples include cost-volume-profit analyses, budgets, and variance analyses. An important tool in management accounting is departmental accounting , which allocates costs and revenues to different departments to measure profitability and efficiency at the departmental level.

5.4 Forensic Accounting

This is a highly specialized niche that applies accounting, auditing, and investigative skills to legal cases. Forensic accountants are often called upon to investigate financial fraud, value assets in matrimonial cases, or calculate financial losses in insurance claims. They are “financial detectives” who must be able to present their findings clearly and convincingly in a courtroom.

Section 6: Central Reporting in Norway

For companies operating in Norway, there are several mandatory reports to the authorities that are central to accounting. These ensure correct tax and duty collection as well as correct data for welfare schemes.

6.1 VAT return (Value Added Tax)

Value Added Tax (VAT) is a consumption tax levied on most goods and services. For VAT registered businesses, the VAT return is a periodic report (usually every two months) summarizing output and input VAT.

• Output VAT: VAT collected from customers upon sale.
• Input VAT: VAT paid to suppliers upon purchase.

The difference between output and input VAT determines whether the company owes money to the state or has money to its credit.

6.2 Tax return and tax settlement

All business owners must submit an annual tax return (formerly tax return) which forms the basis for calculating income tax. For companies, this includes a detailed business specification.

After the Tax Administration has processed the tax return, the business receives a tax settlement . This document shows the final calculated tax and determines whether you have paid too much (credit) or too little (residual tax).

6.3 The A message

The A-melding is a monthly, coordinated notification from employers to NAV, Statistics Norway and the Norwegian Tax Administration. It is the practical implementation of the A-ordning , and contains information about employees' salaries, benefits, employment conditions and withholding tax.

The purpose of the A-melding is to simplify reporting for employers and provide the authorities with a more accurate and updated data basis for:

• Calculation of employer contributions and tax deductions.
• Earning pension points and rights to benefits from NAV (e.g. sickness benefits, unemployment benefits).

6.4 CSRD - Sustainability Reporting

For larger Norwegian companies , the Corporate Sustainability Reporting Directive (CSRD) will be an important new reporting obligation. This EU directive, which is implemented in Norway through the EEA Agreement, requires comprehensive reporting on environmental, social and corporate governance (ESG).

CSRD affects Norwegian companies that meet certain size criteria and will be introduced in stages from 2025. Reporting must follow the European Sustainability Reporting Standards (ESRS) and requires external assurance equivalent to the financial statements.

Section 7: The Digital Ecosystem and Legislation

Modern Norwegian accounting is deeply integrated with digital platforms and is strictly regulated by law to ensure quality and verifiability.

7.1 Altinn – The Digital Highway

Altinn is Norway's joint internet portal for digital dialogue between businesses, private individuals and public agencies. For accountants and companies, Altinn is the primary channel for submitting statutory forms such as VAT returns, tax returns and A-melding.

The platform acts as a central hub that validates and distributes data to the correct agency, which significantly streamlines the reporting processes.

7.2 SAF-T: Standardization for Control

SAF-T (Standard Audit File - Tax) is a standardized XML format for exchanging accounting data. All entities with electronic accounting systems must be able to produce a SAF-T file upon request from the Norwegian Tax Administration.

The purpose is to make bookkeeping and tax audits more efficient by presenting the data in a uniform, machine-readable format, regardless of which accounting system the company uses.

7.3 The Accounting Act: The Backbone of Norwegian Accounting

The Norwegian Accounting Act , with its associated regulations, sets the basic requirements for how accounting information should be recorded, documented and stored. The Act establishes the accounting obligation for Norwegian businesses and is based on several key principles:

• The principle of completeness: All transactions should be recorded.
• The reality principle: Accounting should reflect real events.
• The traceability principle: There should be a two-way control path between documentation, accounting and reporting.
• The retention principle: Accounting material must be stored in a safe manner for a specific period (normally 5 years).

For a comprehensive review of all accounting rules and standards that govern Norwegian accounting, we recommend our detailed guide.

7.4 Advance Tax: Pay Tax in Advance

For sole proprietorships and limited liability companies, withholding tax is the primary way to pay income tax. Instead of paying all the tax together the following year, it is paid in installments throughout the income year, based on an expected profit.

• Sole proprietorship (ENK): Pays advance tax in four equal installments.
• Limited liability company (AS): Pays advance tax in two installments, based on last year's tax settlement.

The system ensures that the state receives a more even income and that taxpayers avoid a large tax arrears.

Section 8: Automation and Efficiency

Technology has transformed the accounting industry, and automation is the key to more efficient and accurate accounting.

8.1 Electronic Trading Format (EHF)

EHF is the Norwegian standard format for electronic invoicing, based on the pan-European PEPPOL network. Unlike a PDF invoice sent by email, an EHF invoice is a structured data file that is sent directly from the sender's to the recipient's financial system. You can learn more about invoices in our dedicated article on the topic: What is an invoice? . Another common payment method is a-konto payment , which is used for partial payments based on estimates.

Electronic invoicing is an important part of modern procurement processes , where companies must handle large volumes of supplier invoices efficiently.

The benefits are significant:

• Reduced manual typing: Data is automatically read into the accounting system.
• Faster processing: The invoice arrives immediately and can be approved digitally.
• Increased security: The sender and recipient are verified, which reduces the risk of fake invoices.

8.2 Bank Integration and Reconciliation

Modern accounting systems offer direct integration with your company's bank accounts. This means that bank transactions are automatically imported into the accounting system on a daily basis (often called a "bank feed"), usually via standardized data formats such as CSV files .

This automation dramatically simplifies bank reconciliation . Instead of manually comparing the bank statement with the financial statements, the system can automatically suggest which open invoices a payment applies to, or link a payment to a posted voucher.

8.3 Payroll: From Gross to Net

Payroll is a critical and often complex process that involves calculating wages and statutory deductions for employees. The process must be handled accurately to ensure correct payment and reporting to authorities. Each employee has their own employee ledger that records all payroll-related transactions.

A typical payroll run includes:

• Calculation of gross salary : Fixed salary, hourly wage, overtime, bonuses and other forms of pay such as piecework .
• Calculation of deductions: Withholding tax based on tax card, and any pension deductions.
• Calculation of net salary: The amount paid to the employee.
• Calculation of employer's social security contributions: A tax paid by the employer to the government as a percentage of gross salary . For a detailed explanation of rates, exemptions and calculation, see our guide to employer's social security contributions . The rate varies geographically.

All of this data forms the basis for the A-message.

Section 9: Professional Accounting Services

Given the complexity of modern accounting, many businesses are choosing to outsource their accounting tasks to professional service providers. This is especially true for small and medium-sized businesses that do not have the resources to hire their own accountants.

9.1 When should you consider professional help?

Several factors may indicate that it is time to seek professional accounting help:

• Complex business: If your business has many transactions, multiple VAT codes, or operates in multiple countries.
• Lack of time: When accounting tasks take too much time away from core business.
• Regulatory changes: Frequent changes in tax and accounting rules require updated professional expertise.
• Growth: When the business grows and accounting needs become more complex.

9.2 Chartered Accountants (CARs)

For companies that want maximum security and quality, ARS (Authorized Accounting Firm) is the highest level of professional accounting services in Norway. These companies are authorized by the Norwegian Financial Supervisory Authority and must meet strict requirements for competence, quality assurance and liability insurance.

Benefits of choosing an ARS include:

• Guaranteed professional competence: A minimum of 50% of employees must be certified accountants.
• Quality assurance: Mandatory quality systems and internal controls, including correct certification of vouchers .
• Legal security: Liability insurance of a minimum of NOK 5 million.
• Supervisory authority: Subject to the control and supervision of the Norwegian Financial Supervisory Authority.

Choosing the right accounting service is an important strategic decision that can significantly impact your company's financial health and compliance.