Overview of Accounting Principles and Processes

Aug 7, 2024

Accounting and Bookkeeping

Main Topics

  • Difference between Accounting, Bookkeeping, and Accountancy
  • Definition of Accounting and its importance
  • The process of Accounting and its various stages: Recording, Classification, Summarizing, Interpretation, and Communication
  • Objectives of Accounting
  • Advantages and limitations of Accounting
  • Different types of Accounting: Financial Accounting, Cost Accounting, Management Accounting, Tax Accounting, Social Responsibility Accounting
  • Users of Accounting: Internal and External

Difference between Accounting, Bookkeeping, and Accountancy

  • Bookkeeping: The art of recording business transactions
  • Accounting: The process of summarizing, analyzing, and reporting the data recorded by bookkeeping
  • Accountancy: Comprehensive knowledge of accounting principles and techniques

Definition of Accounting

  • According to the American Institute of Certified Public Accountants (AICPA): "Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character, and interpreting the results thereof."

The Process of Accounting

  • Recording: Entering business transactions in their original form
  • Classification: Categorizing transactions into different accounts
  • Summarizing: Summarizing ledger balances, preparing trial balance
  • Interpretation: Analyzing and interpreting the results
  • Communication: Conveying the results to the relevant parties

Objectives of Accounting

  • To know the financial position of the business
  • To estimate profit and loss
  • To determine tax liability
  • To evaluate business progress
  • To detect errors and frauds
  • To provide information to various parties

Advantages of Accounting

  • Assistance to management
  • Providing complete and systematic records
  • Information on business profits and losses
  • Determination of tax liability

Limitations of Accounting

  • Dependence on personal judgment
  • Based on concepts and conventions
  • Provides incomplete information
  • Lack of qualitative information

Types of Accounting

  • Financial Accounting: Estimating profit and loss, preparing the balance sheet
  • Cost Accounting: Estimating production costs
  • Management Accounting: Assisting management in decision-making
  • Tax Accounting: Determining tax liability
  • Social Responsibility Accounting: Recording the business’s responsibility towards society

Users of Accounting

Internal Users

  • Owners of the firm
  • Management
  • Employees

External Users

  • Investors
  • Creditors
  • Employees
  • Tax authorities
  • Government agencies
  • General public
  • Competitors

Conclusion

Accounting not only provides insight into the financial status of the business, but it also plays a crucial role in the operation and management of the business. It is a systematic process that records, classifies, summarizes, interprets, and communicates financial information of the business.