Environmental Accounting

Updated on May 2, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Environmental Accounting Definition

Environmental accounting refers to the method that involves organizations utilizing conventional principles of accounting and finance to factor in environmental costs in their business results. The primary goal of this approach is to assist organizations in managing and understanding the potential trade-offs between conventional environmental and economic goals.

Environmental Accounting Definition

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This technique is essential for businesses to be responsible toward society and remain sustainable. It allows them to comprehend how their actions impact the environment and know the associated costs by factoring in the environmental problems in their financial decisions and reports. This makes businesses more accountable and transparent. The approach has different types like sustainability and full cost accounting.

Key Takeaways

  • Environmental accounting refers to an approach taken by organizations to track the effects of their actions on the environment. It incorporates environmental conservation and management principles into cost-benefit analyses and reporting practices.
  • There are different kinds of environmental accounting, like environmental management and full cost accounting.
  • Some environmental accounting benefits include the disclosure of resource utilization and environmental protection.
  • There are various disadvantages of environmental accounting, such as the non-recognition of the expenses a company incurs to protect the environment and the inconsistent approach concerning the treatment of natural capital.

Environmental Accounting Explained

Environmental accounting refers to a kind of accounting that involves including environmental costs in organizational results. It allows businesses to provide their external stakeholders with the necessary information concerning financial performance. In other words, this accounting approach helps prepare financial reports for lenders, investors, and other parties interested in such information.

Typically, businesses utilize three methods to carry out this accounting process. They are managerial, financial, and national income accounting. Organizations, regardless of their size, can implement this technique. That said, a business’s senior management team needs to support such practices. This team is best served if different cross-functional teams are developed to administer the procedure.

The cross-functional teams comprise employees across every business line, including sales, finance, procurement, and manufacturing. Such teams ensure all environmental accounting procedures and policies are followed and communicated.

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Objectives

Some key objectives of this approach are as follows:

  • Fostering stakeholder participation and engagement with regard to environmental decision-making.
  • Encouraging accountability and transparency concerning the management of environmental effects and utilization of natural resources
  • Offering a detailed view of the economic activities’ true benefits and costs by incorporating social and environmental considerations
  • Supporting the switch to a green economy and promoting sustainable development
  • Integrating the environmental benefits and costs into decision-making procedures and national accounts.

Types

The different types of this accounting approach are as follows:

#1 – Environmental Management Accounting

It focuses on resource management and internal decision-making through the identification, analysis, and measurement of environmental costs and the benefits of an organization’s operations. Moreover, it concentrates on incorporating the data into the management systems to enhance environmental performance.

#2 – Sustainability Accounting

This involves measuring and reporting on an organization’s social, environmental, and economic performance, utilizing indicators like energy and resource, social impact assessments, and greenhouse gas emissions. This accounting method’s objective is to offer a holistic view of an organization’s sustainable development. Moreover, it aims to promote stakeholder engagement and spot areas for improvement.

#3 – Full Cost Accounting

This technique involves computing a service or product’s overall social, environmental, and economic costs, including hidden charges, which are generally not considered when conducting financial accounting. This process enables a more detailed assessment of the actual consumption and production cost. Moreover, it can help organizations make more informed business and policy decisions to minimize negative environmental effects.

Besides these, there are some forms of this accounting approach, like —

# 4 – Environmental National Accounting

This national-level accounting process specifically focuses on externality costs, environmental costs, and more.

#5 – Environmental Financial Accounting

It specifically focuses on reporting the environmental liability costs besides other important environmental costs.

Examples

Let us look at a few environmental accounting examples to understand the concept better.

Example #1

Suppose Company ABC wants to utilize environmental accounting to improve its corporate reputation. So, it starts utilizing an environmental profit and loss account, which evaluates the impact of its products and operations. Moreover, as part of the accounting approach, it develops an index that assesses the company’s products’ social and environmental influence. The index examines multiple categories and factors in the entire life cycle of the products.

Example #2

In July 2023, Sphera received an award for the SpheraCloud Environmental Accounting software. The company designed this solution for industries subject to various strict regulations. The software gives a broad data set collection, computation and management functionalities for organization-wide missions at a depth and scale unchallenged across the industry. These facilities establish an auditable record for business’ GHG/air emissions in addition to waste and water management.

Through the creation of transparency into environmental data, companies can ensure compliance and thus create enterprise-wide efficiencies to prepare all regulatory reports better. Moreover, by establishing transparency, organizations can make better performance-related predictions and quickly intervene when required to help eliminate environmental risks and enhance performance.

Advantages And Disadvantages

Let us look at the benefits and limitations of this accounting approach.

Advantages

  • This accounting method encourages innovation and enhances resource efficiency.
  • It discloses details regarding the utilization of a nation’s natural resources. Simply put, it reveals the cost of the total amount of resources a company uses and the income it generates by using them.
  • This technique helps gauge overall contributions made by multiple companies or corporations to fulfill their social responsibilities.
  • It offers environmental protection by helping organizations to become more environmentally friendly.
  • This approach can improve customer loyalty and enhance corporate reputation. 
  • Another key environmental accounting benefit is that it helps follow environmental regulations the government sets.

Disadvantages

  • A noteworthy limitation of environmental accounting is the non-recognition of the expenditure incurred to safeguard the environment.
  • The national accounts system treats the slow depletion of any physical asset, like equipment or a plant, as depreciation. That said, the exhaustion of natural capital, specifically the forest, is considered income. Thus, the approach is inconsistent.
  • There isn’t any clear definition of environmental costs. This means companies are not reporting and monitoring such costs.

Difference Between Conventional Accounting And Environmental Accounting

Individuals new to the accounting field can find conventional and environmental accounting confusing. They must know their key differences to understand their meaning in purpose fully. Hence, let us look at them.

Conventional AccountingEnvironmental Accounting
It deals with the economic unit’s physical aspects. This concept deals with the relationship between the environmental and financial aspects.
Its objective is to save money and time against serious business mistakes. This form of accounting aims to determine the favorable and unfavorable effects of the actions conducted by an organization.  
The output includes management accounting reports and financial statements. This accounting method’s output includes environmental reports. 

Frequently Asked Questions (FAQs)

1. What are the elements of environmental accounting?

There are various elements of this accounting approach. Some of them are as follows:
Environmental management accounting 
Life cycle assessment 
Environmental costs and benefits 
Carbon Footprinting 
Environmental performance indicators 
Another key element of this accounting method one must know to comprehend and execute the process is environmental auditing.

2. What are the basic characteristics of environmental accounting?

Let us look at some of the basic characteristics of this type of accounting.
– Identification of costs 
– Comprehensive data collection 
– Performance tracking and benchmarking 
– Stakeholder engagement 
– Meeting the environmental regulations 
– Risk evaluation
– Merger with financial accounting
– Identification of the benefits

3. What are the internal and external functions of environmental accounting?

The internal ecological accounting systems can accumulate information regarding ecological systems for the management’s internal use. Such information is expressed in physical units. On the other hand, external ecological accounting systems can accumulate and reveal information for external shareholders having an interest in environmental issues.

This article has been a guide to what is Environmental Accounting. We explain its objectives, types, advantages, examples, & comparison with conventional accounting. You may also find some useful articles here –

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