What is Accounting? What Are Its Types?
Accounting is that which tells how your business records, organizes, and understands its financial information. It is one of the key functions of all businesses. It can be handled by a bookkeeper or an accountant at a small firm or in large-scale finance departments with the number of employees at larger companies. The reports generated by various streams of accounting, such as cost and managerial are invaluable in helping management make informed business decisions.
It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.
Types of Accounting
- Financial Accounting
Every year companies will generate their financial statements that other peoples like investors, lenders, government agencies, auditors, potential buyers, etc, can use to learn more about the company’s financial health. Preparing the company’s annual financial statements is called financial accounting.
Managerial accounting is very much similar to financial, there are two important exceptions are :
- The statements produced by managerial are for internal use only.
- They’re generated much more frequently—often on a quarterly or monthly basis all depends on the company policy.
If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.
When your accountant provides you with advice for how to do the most out of your tax return, that’s is known as tax accounting. Tax is all about making sure that you don’t pay more tax than you are legally required to by the IRS.
Cost accounting is that when you’re trying to figure out how to increase your margin, or deciding if raising prices is a good idea. Cost involves analyzing the costs associated with producing an output in order to make better decisions about pricing, spending, and inventory. It feeds into managerial, because managers use cost accounting reports to make better business decisions, and it also feeds into financial accounting because costing data is often required when compiling a balance sheet.
Credit accounting involves all companies’ unpaid bills and liabilities and makes sure that a company’s cash isn’t constantly tied up in paying for them. Credit can be one of the most difficult kinds of accounting to do well because it usually involves telling someone something they don’t want to hear.
Importance of Accounting
- It helps you to grow as much as you can.
- It is essential for securing a loan
- You need to do accounting to get investors or sell your business
- It helps you get paid
- It keeps saves you from fines
- It helps you pay the right amount of taxes at the right time.
Accounting principles contain some rules and guidelines regarding financial statements while making accounting records. Accounting principles are the key by which companies can arrange their financial data in a systematic manner.
Companies must follow the guidelines of accounting principles while preparing financial reports.
Accounting principles are techniques that guide accountants or bookkeepers on how to maintain records with the help of it. If they follow those guidelines from the start, they reduce the chances of errors.
Purpose of accounting principles
- The main purpose of accounting principles is to give surety to the owners that accounting reports are well-formed and compatible.
- This helps the company members in many ways such as owners, to find out the company’s strength, and investors, to find out the budget for investment by using helpful information from financial records.
- With the help of accounting principles, you can compare the previous and current data of the company and judge it accordingly.
- Accounting principles’ motive is to make drastic changes in accounting data instantly.
- This principle prevents the company from external and internal frauds.
- Accounting principles disclose the company’s financial errors and also clear them immediately.
- Investors can easily analyze the data with other company’s actual data with the help of accounting principles.
Every country has different accounting standards such as:
- In the United States, GAAP is accepted by the Financial Accounting Standards Board (FASB).
- In Europe, the IFRS is accepted by the International Accounting Standards Boards (IASB).
- Sometimes, FASB and IASB may be merged for work on some important topics temporarily.
Some basics of accounting principles
Revenue principle describes the moment when the owner earned revenue at the time of selling the services and it is recorded on a credit side.
The Expense principle describes the moment when the expense is incurred at the time of purchasing the goods or services from the vendor and it is recorded on the debit side.
The matching principle
The matching principle is an important principle that maintains the accounts. The cash basis and accrual basis of accounting are the matching principles. Expenses and revenue should be matched with the cost of a specific period, which means if we are maintaining the accounting of the year so we will get the revenue of the same specific year and even cost is concerned with the specific year. If we calculate the other specific year’s expenses and revenue so we are not able to calculate the actual amount of profit, we need to take revenue and expenses of the same period.
It doesn’t matter whether you have received revenue or not but earned and paid expenses or not but incurred, But still, it should be related to that specific year.
We can say the historical cost concept to cost principle.
According to this principle, all non-current assets or assets of the business are recorded on the original cost such as land&building, furniture. These assets should be recorded by their original price with considering depreciation and ignoring marketing fluctuation.
Whatever assets you are having or whatever assets you are having in the business, you should record all those assets at their original cost with depreciation value but ignoring the market fluctuations.
The accrual concept is completely based on the accrual basis of accounting.
Under the accrual system, expenses are recorded when they have been incurred and revenue is recorded when it has been generated.
Ultimately, an accrual basis shows the expense and income when expenses will be considered to be incurred and income will be generated. Besides this, the overall process is the services. If you get the service, it means expenses have been done whether you have paid or not, and when you gave the services, your revenue has been generated at the same time.
Going concern concept principle
This principle says that however your business is running and going in the direction of profit and loss, you need to assume it should continue in the foreseeable future (future period) until they bind up.
If you do not assume that business doesn’t continue in the foreseeable future we will never create non-current assets or fixed assets. Now those assets you are having, those assets creation is recorded according to the going concern principle.
Money measurement principle
Under accountancy, you will record only those transactions which are measurable in terms of money, and those transaction terms are in monetary terms, ie. financial transactions. So the common unit of measurement accountancy is money.
Consistency means stability in your words. Under accounting, the consistency principle shows that once you have applied accounting principles, then you must follow all the guidelines of accounting principles to keep your business stable in the business industry.
In business, you need to separate your financial and economic statements or records for judging at the end and can analyze the profit or loss. Due to separated records, the owners and dealers can easily understand their own recorded data.
Types of Vouchers in accounting
- Debit or Payment Voucher – Where cash goes out
- Credit or Receipt Voucher -Where cash goes in
- Non-cash or Transfer Voucher – Only for credited vouchers (Purchase and Sale)
- Supporting Voucher – evidence of any documentary transaction (such as bills, tokens, tickets, passes, etc).
What are Vouchers in accounting
Vouchers are the exporting document that is used in the accounting process so that you can control your payments and verify the payment to the vendors, and check how much you gave the orders of raw material and have been received by matching with the records, and how much you have paid to the vendor for the order.
Vouchers have a separate file for recording all business payment so that owners can check in the files after reading the voucher number in the book of accounts
Vouchers are a confirmation statement written which should be necessary to be prepared by the company to verify the purchased goods or services.
Who prepare the vouchers
Accountants need to prepare accounting vouchers in different forms so that in the future, owners can easily determine the payments that have been made and invoices that have been received by the supplier. It is prepared from business-related business transactions such as bills, invoices, purchase receipt, bank receipt, cash and other proofs which are related to purchase transactions.
At the time of preparing vouchers, accountants need to be alert for verifying the other business transaction records so that they can avoid useless mistakes. Vouchers are a really important part of the whole accounting system and one little mistake could create a huge problem in a transaction.
Follow instructions by accountants at the time of preparing vouchers
Vouchers contain some important details such as date, time, amount, signature, transaction name so for taking out this information an accountant needs to verify all the other business documents and record accurate things in an accurate position so that errors cannot happen.
- Accountants need to be concerned about one thing, ie approval. Yes, approval must be made for creating the vouchers.
- Accountants need to mention and clarify to the owners what type of vouchers they are using to prepare vouchers.
- Should always match credit and debit balance, equality shows that the vouchers have been recorded accurately.