Meaning, Definitions, Characteristics, Functions and Importance of Environmental Accounting

Environmental accounting is a subset of accounting proper, its target being to incorporate both economic and environmental information. It can be conducted at the corporate level or at the level of a national economy through the System of Integrated Environmental and Economic Accounting, a satellite system to the National Accounts of Countries (among other things, the National Accounts produce the estimates of gross domestic product otherwise known as GDP).

Environmental accounting is a field that identifies resource use, measures and communicates costs of a company’s or national economic impact on the environment. Costs include costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs.

An environmental accounting system consists of environmentally differentiated conventional accounting and ecological accounting. Environmentally differentiated accounting measures effects of the natural environment on a company in monetary terms. Ecological accounting measures the influence a company has on the environment, but in physical measurements.

Functions and Roles

External Functions

By disclosing the quantitatively measured results of its environmental conservation activities, external functions allow a company to influence the decision-making of stakeholders, such as consumers, investors, and local residents.

Internal Functions

As one step of a company’s environmental information system, internal function makes it possible to manage environmental conservation cost and analyze the cost of environmental conservation activities versus the benefit obtained, and promotes effective and efficient environmental conservation activities through suitable decision-making.

Benefits/Importance

While environmental accounting can focus on environmental management accounting or financial accounting, the most prominent benefits come from the application of environmental management accounting methods. This type of accounting focuses on gathering, estimating and analyzing costs associated with the use of energy and physical materials like timber, metal or coal. Standard accounting practices tended to place these costs in the catch all category of overhead, but environmental management accounting allows accountants to apply activity based cost principles to more accurately associate these costs to various projects or events. Decision makers who can see exactly where these natural resources are used across various projects can locate areas of synergy that allow them to reduce the amount of wasted materials at the program or enterprise level.

Relevance

Environmental accounting should provide valid information related to a company’s environmental conservation costs and benefits from associated activities which contributes to the decision-making of stakeholders.

Reliability

Environmental accounting should eliminate seriously inaccurate or biased data and aid in building the trust and reliability of stakeholders.

Neutrality

Information that is disclosed taking a fair and impartial stance.

Prudence

Information that may be vague or unclear should be handled carefully and the nature, scope and grounds on which it is based should be made clear.

Completeness

The scope of environmental accounting should extend to all material and significant information for all environmental conservation activities.

Understandability

By achieving understandability of disclosure of necessary environmental accounting data, environmental accounting should eliminate the possibility of any mistaken judgment about the company’s environmental conservation activities.

Comparability

Environmental accounting makes it possible for a company to make year-on-year comparisons. Information provided should be comparable with different companies in the same sector.