Accounting is a data entry and tracking process, summary, analysis, and subsequent documentation. These details apply to corporate financial transactions.
An accounting entity’s operations, usually one year, are the keys to the preparation of financial statements. An organization uses accounting to determine its economic position.
They contribute to decision-making and cost planning and evaluation. In particular, accounts for external companies and customers, creditors, and regulatory bodies are extremely important.
Worldwide professionals use a compilation of “GAAP-Generally Accepted Accounting Principles” and IFRS guidelines to produce these results.
The rules and procedures that businesses ought to obey in reporting financial information are accounting standards. The FASB publishes a formal collection of accounting standards in the U.S. that are known as GAAP.
The ultimate objective of all accounting standards is to ensure the completeness, consistency, and comparability of the financial statements of an organization.
This facilitates the analysis and collection of valuable information from financial statements of the firm, including trend information, over time by investors.
It also makes it easier for multiple organizations to compare financial statistics. The rules of accounting also aim to prevent accounting fraud by enhancing clarity and identifying red flags.
Publically listed stock market companies in the US must annually submit commonly recognized accounting standards or GAAP-compliant financial statements to stay listed on the stock exchange.
CEOs and their independent auditors in publicly listed firms have to report the financial statements and associated notes that have been prepared according to the GAAP.
The standards of accounting help to manage the world of accounts under general rules and guidelines. GAAP is working on standardizing and regulating accountability concepts, assumptions, and practices.
Some standards are developed but some of the most remarkable are the principles of income appreciation, matching, materiality and continuity.
The ultimate aim of structured accounts is to make sure that the details disclosed in the reports are not only correct but also reliable, and comparable to the financial accounting consumers.
Accounting rules vary in various countries. International Financial Reporting Standards (IFRS) were issued by the IASB. These principles are applied in more than 120 countries, including the EU.
The US government body for protecting customers and keeping order in financial markets, the Securities and Exchange Commission (SEC), has stated that the US is going to not turn to IFRS shortly.
However, as accounting problems arise, the FASB and the IASB continue to work together to issue similar regulations on certain topics. 3 In 2014, for example, revised revenue recognition requirements were jointly announced by the FASB and the IASB.
Following are the underlying essential accounting principles.
1) Completeness and Consistency
Completeness is guaranteed by the concept of materiality since the financial statements must take care of all material transactions. Consistency means the use of accounting rules for an organization over time.
If accounting rules allow different approaches to be chosen, a firm can choose the same form of accounting over time or make known in the footnotes for its financial statements its shift in accounting.
Comparability means that consumers of Financial Staff may check the financial position of various firms along with the assurance of compliance with the same rules on accounting principles.
Accounting data is not pure or specific and guidelines are developed such as GAAP to mitigate the adverse consequences of incoherent data.
Without GAAP, it will be incredibly difficult, even within the same sector, to compare financial statements of firms, making comparison very difficult. Faults and defects will thus be more difficult to detect.
3) Recognizing Revenue
This principle states that at the time of completion of the transaction, revenue acknowledgment shall take place. Whether or not it receives payment or currency.
Most notably, it should be completed and payable to the sales of products or services. At the same time, the related costs should also be booked.
4) Objectivity and Full Disclosure
All pertinent facts should be completely revealed to its customers in the account books of an individual. In addition, facts should not be deliberately hidden.
The idea and goal are to allow people to make good and knowledgeable choices based on the reports. Moreover, the facts in the accounting books should be objective, truthful, and trustworthy.
They should therefore be free of the reporter’s prejudice. In particular, all transactions should be supported by sufficient proof such as valuations, receipts, invoices, etc.
Five Accounting Heads
The five main accounting heads or categories are;
These heads are used as the basis for debiting and crediting accounts. The main accounting equation used as the basis of accounting is;
“Assets = Liabilities + Equity”
A journal entry for a corporate organization is the foundation of all accounts. On each account, it consists of a debit and a credit. And all debits are always to be proportional to the amount of all credits. If the two overlap, so journal entries won’t be in equilibrium.
This will lead to an accountability gap. Both journal entries are then transferred to their respective directory accounts. Unless it is first produced, each booklet normally has an opening balance. Balances are taken here for the previous year.
Every leader account will have a closing balance at the end of the accounting period because of transactions during the current accounting period. The next move is to make an entity’s financial statements. Therefore, everyone must have a proper ledger.
The three most common financial statements are;
- Statement of P&L
- Statement of Financial Position
- Cashflow Statement
These above-mentioned principles are just the basics of accounting. Accounting goes beyond the principles and rules of accounting and steps into ethical boundaries where the real challenge begins.
As accounting practices vary from other countries around the world, analysts should be careful to compare the financial statements of firms from various countries. In more developed countries, there is little anxiety over differing accounting standards.
However, care should be taken since certain sets of accounting rules do allow for several manipulations and loopholes that companies might exploit.