The Basic Accounting Principle for Beginners

What does the word “accounting” refer to? Accounting is a method or a process of managing and reporting the overall financial sheet of an organization. It is also referred to as bookkeeping in general narratives. It includes basic accounting principles wherein tasks such as analyzing, recording, managing, and assisting the financial structure is carried out in an institution.

It is one of the vital operations of a business. It helps keep track of each transaction and ensures healthy cash flow and account management. It plays a crucial role in uplifting the right information that enables business owners to make decisions with the utmost confidence.

Are you a beginner struggling with accounting tasks? In this article, we will walk you through basic accounting principles that will help you get started with accounting right away. This article reads a few Basic Accounting Principles that any beginner in the field of accounting should know.

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Basic Accounting Principles

Accounting principles are standardized ideas or a specific set of rules. It has to be followed by bookkeepers or accountants who perform accounting in a business involving any transactions. The standard accounting principles practiced in India are given by Indian Accounting Standard (IndAS).

Accounting principles in India have been continually helping the country reform the accounting and taxation system. It has made it easier for the government to ensure consistent achievements in the accounting department. Standardized rules ease the readability between two entities and enable them to experience smooth transaction quality.

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Main Terminologies in Accounting

Income Statement

Income statement dominantly deals with the generation of revenue amount gained by a business. Alongside this, it also deals with the expenses that are necessary to bring in that revenue to the company. An income statement can be generated weekly, monthly, or annually depending upon the owner’s business requirements.

An income statement helps business owners and accountants generate the net-profit using the financial documenting of the institution. It also helps develop the expenses met to bring in creating revenue that further increases the profitability during the business period of the company.

Balance Sheet

A balance sheet, as directed by the name, is a statement generated by an accountant that is used to achieve a balance in the company’s assets that are enduring after transactions that occur during a certain business period.

The balance sheet helps enhance the overall credibility of the business at the end of all the transactions that take place in a month or a year. It mirrors the exact liability and equity of the stakeholders in the vision of improvements.

Financial Statement

The financial statement is the backbone of a business as it projects each economic operation that occurs throughout a business’s lifecycle. It helps business owners generate and record the transactions and financial compliances of all the entities engaged with the company.

A financial statement enables businesses to record the financial structure of profits, losses, investments, invoices, taxes paid, ITC claims, etc. It is imperative as it acts as a deciding factor of a business’s existence.

Basic Accounting Concepts

Accounting is a significant component of any business. Managing accounting tasks effectively helps gain new investors, clients, and expand the budget. Successful business accounting enables business owners to retain current employees. However, accounting requirements vary from one business to another.

Not all accounting methods work well for a business or industry. If you want to know which accounting methods best suits your business type, it is vital to understand various accounting types. Professionals can choose to specialize in strategies that best suit their organizational goals.

Below, we have coupled various accounting methods that might help professionals and businesses work effectively.

Financial Accounting

Financial accounting is a type of accounting that involves the numerical value analysis of the business’s cash flow. It typically processes the generation of the financial statement that is audited annually.

Annual financial statements of any business involve the summarized sheet of transactions that occurs throughout an accountable business period. It is also engaged in the overall management of bills, create invoices, GST taxes, and transactions that measures the credibility of a business.

An annual financial accounting statement must be provided by a Certified Professional Accountant (CPA). It acts as evidence that validates the terms of legal influence concerning the government and its taxation policies.

Annual audits are also performed externally in specific to have a bridge of assurance between the investors/lenders and the company, in case of the debt compliance. Thus, the annual financial statement is a mandatory process that every business must organize periodically.

The department of accounting concerning financial statements is generally managed by a certified Financial Accountant (CFA)/Chartered Accountant (CA), who is typically known best for the designation or a bookkeeper in small invested companies.

Managerial Accounting

The financial accounting statement generated to achieve management related tasks of a business is known as managerial accounting. It utilizes the inputs provided by a financial accountant (as mentioned above), to support the decision-making process of a business.

It specifically concentrates on the areas of a business that include budget management, generation of investment flowcharts, the profits or losses gained in a business period, etc.,

A Certified Management Accountant (CMA), uses the annual financial statement of a company to generate an annual or quarterly based report of a business. It is used as an informative tool to predict the performance of the business or to foresee the futuristic performance stats.

Cost Accounting

Cost accounting is more of a cost-based accounting where the CMA, FA, business owners, analysts, etc., use the relevant inputs to decide the value of goods or services offered. Generally, cost accounting is misguided to be a synonym of financial accounting as both deals with the numerical values of the products or services provided.

However, the reality is that financial accounting is a result of the economic credibility of the business. Wherein, cost accounting determines the economic credibility of a company by using the outcome of financial accounting and managerial accounting.

Auditing

Auditing is one of the vital types of accounting that provides credibility to financial statements. It ensures that the data provided to the shareholders are accurate and true. Both internal and external accounting are categorized under public accounting.

External auditing allows businesses to present financial statements to a third party. A third party usually provides economic feedbacks as financial statements are an exact representation of GAAP.

Internal auditing defines the effectiveness of the auditing processes. It helps an auditor review the responsibilities of an employee, manage policies, and approve procedures concerning various projects. The feedback provided allows businesses to turn into a profitable and efficient unit.

Tax Accounting

Tax accounting enables the business to remain compliant with appropriate tax coding while filing annually. It allows business owners to foresee and plan future return filing. It helps taxpayers rid of the compliance burden, helping them to understand the implications of decisions concerning the taxes. Usually, businesses either hire a tax accountant or implement an invoice generator software to streamline financial recording.

Accounting Information System

An accounting information system ensures effective management of accounting procedures. It helps the business owner to update their technology on time. It makes it easier for the employees to monitor the existing system that determines the successful production of the organization within the given timeframe. The accounting information system helps take effective decisions concerning the IT department that instills continuous tech processes.

Fiduciary Accounting

Fiduciary accounting enables businesses to outsource accounting procedures. Individuals entrusted to handle the financial accounts are obligated to manage operations on behalf of clients concerning real estate, investments, funds, etc. You can easily rely on them to provide accurate financial information to your clients, including the accounts summary, scheduled receipts, losses, gains, and assets that are at their disposal.

Forensic Accounting

Forensic accounting deals with the reconfiguration of financial information of a business. It notifies if a report is not available to review. Forensic accounting aims to accumulate all financial information and accurately record credits, debits, and cash transactions in the annual financial statements. Professionals who deal with forensic accounting work on legal procedures involving claims, frauds, and disputes.

Public Accounting

Public accounting is adopted by businesses that deal with clients that require financial advice concerning their unique accounting requirements. Public accounting assists the processes of auditing and tax returns. It enables enterprises to make legal decisions. You can tailor the procedures of technology installation under public accounting.

Government Accounting

Government accounting enables businesses to make financial planning and resource allocation concerning the federal, state, and local governments. It is the type of accounting that ensures that the accounting standards adopted by a business complies with the Government Accounting Standards Board (GASB). GASB is responsible for the significant development of accounting procedures in a state or local government. It helps monitor the government budget and budget allocation.

Note: Accounting principles are entirely different from that of accounting policies. The difference is that the accounting policies can be defined as the rules followed by using the above accounting principles to each product or services provided that are generated under the GST policies of the nation.

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The Basic Accounting Principles for Beginners

Accounting principles are a set of rules and guidelines that a business must follow while reporting the financial data. In India, basic principles determine the entire suite of accounting standards. Here, we have furnished some of the most popular accounting principles that are vital for small businesses in India.

Principle of Consistency

Any accountant or a person designated to manage accounting activities should be well aware of the principles that he/she adapts. Once a business implements certain principles, they have to be constant with it, unless, a well-recognized and better functional principle stops by the way.

Changing the principles based on personal opinions might cause severe obstacles in the readability between the entities. As long as transactions are concerned, it will be jeopardized with the complications that might arise.

Principle of Accuracy

As mentioned above, money is an asset that nobody wants to jeopardize. Thus, an accountant or business owner must focus on streamlining the invoicing process at the initial stages. Otherwise, they might have to face the consequences where minor errors might hurt the actual cashflow.

Principle of Revenue

Businesses must adhere to the revenue recognition principle while establishing GST compliances. An income is generated while passing on the ownership of a taxable product to another entity. No business can merely accumulate income by receiving money; a transaction must be carried out as per the guiding principles.

Principle of Costing

The principle of costing eradicated the clog created by the misassumptions concerning the “costs” and “values”. Cost is the actual price of a product, wherein, value is the current price of the work that might be increased or decreased compared to the original cost. It usually depends on the demand of the product under the “present scenarios”.

The principle of costing determines an accountant’s actions. One must always mention the historically recorded costs on any asset/product while generating the statement of assets. It helps get rid of the confusion in understanding the asset’s value.

Principle of Full Disclosure

The principle of disclosure states an accountant to disclose/mention each transaction strategy completely. The disclosure aims at providing accurate information to stakeholders, costumers, investors, and other readers of the financial statement. Mishandling financial information and statements can create chaos that might lead to legal procedures of fraud. Thus, businesses adhere to the principle of disclosure to avoid any such consequences.

Principle of Matching

The principle of matching is a generally accepted accounting principle that binds the accountant to follow a particular method of accounting. It ensures that the financial details recorded are generated despite occasional changes under the vision of accounting improvements. The principle of accounting aims to avoid the errors entailing the financial statement or reports.

Principle of Conservatism

The principle of conservatism ensures that businesses pay attention to the possible losses that might occur in the compliances. It helps a business owner to foresee and anticipate the potential complications.

The principle of accounting can be adopted in reporting procedures that involve more than one solution for generating a financial statement. Yet, an accountant can never hinder any possible way of presenting the statement to its owner as he/she is the final decision maker of any deal.

It is essential to have that statement of possible losses to overcome the losses if any within a manageable time. Whereas the profit gained, the statement can be issued once assured, because it’s the losses that need repairs.

Principle of Ongoing Concern

The principle of ongoing concern is also known as the “Non-Death Principle” according to the Indian standards of accounting. The principle mainly ensures a company’s existence and functionality without a predefined end date.

It means according to this principle; it assures that a business continues to exist unless and until the owner of the company discloses the probability of having it closed due to the financial breakdown (if any).

The principle of ongoing concern enables accountants to study the financial statements of the business at any time. Thus, by following this principle, an account can forecast the possibilities of the business’s existence in days to come.

Principle of Economic Entity

The principle of economic entity supports accountants to manage financial statements of the business effectively. It ensures that there are no misinterpretations of the owner’s liabilities with that of the business’s assets.

The principle dictates an accountant to maintain different bank accounts and financial records of an owner and his/her business, respectively. The principle of economic entity determines rules that create a borderline between personal and professional life, ensuring strong work ethics in a small or large-scale business.

Principle of Reliability

The principle of reliability is an ethical or legal principle that deals with financial information in the business statements. It helps verify the linked evidence certified by the designated person. It ensures that a business is transparent towards its clients and taxation policies.

Conclusion

Basic accounting principles play a vital role in ensuring the profitability of a business as it eradicates all the possible mistakes that can occur in the accounting procedures. The principles mentioned above are incorporated in various accounting frameworks. It enables the accounting standard to govern and treat the reporting of transactions.

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