Accounting Basics for Beginners: Key Concepts and Terms Explained

Learn accounting basics for beginners. Understand key concepts, terms, and principles to build a strong foundation in financial accounting.

 Table of Contents Of Discussion...............

1. Introduction.....
2. Definition of Accounting...
3. Purpose of Accounting...
4. Types of Accounting and Areas of Practice...
5. Types and Forms of Businesses are run in Accounting...
6. Forms of Business Organization run in Accounting...
7. Scope of Accounting...
8. Accounting process...
9. Accounting Concepts....
10. Basic Accounting Equation Or Formula...
11. Classification of Accounts...
12. Accounting Systems...
13. Accounting Frameworks and Organizations Body...
14. Accounting Professional bodies...

(1)Introduction:

Accounting is a system of recording information about a business. Accounting also provides information for decision-making in the business world. The information that is collected is primarily numerical. 

The accounting system is used to maintain records for all businesses, whether multinational corporations or small businesses. An accountant (or bookkeeper) collects documentation and records this information, categorizes it (i.e. organizes the different bits of information under certain categories), and presents it in specific formats.

Accounting information is finally presented in the form of financial statements –

the key reports of a business. The early development of accounting dates back to ancient Mesopotamia and is closely related to developments in writing, counting, and money and early auditing systems by the ancient Egyptians and Babylonians. By the time of Emperor Augustus, the Roman government had access to detailed financial information.

(2) Definition of Accounting:

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities, and owners' equity. Technical definitions of accounting have been published by different accounting bodies.

The American Institute of Certified Public Accountants (AICPA) defines

accounting as: “ 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

financial character, and interpreting the results thereof ”.Extensively Types of accounting and accounting information users are two types –Internal users & External users.

Types of internal users include:

A company's senior and middle management use accounting information to

run the business. Employees who use accounting information to determine a company's profitability and profit-sharing.

Managerial accounting provides information that is useful in running a company by internal users. Such reporting is usually accomplished through custom-designed (or managerial) reports.

Types of external users include:

Investors (i.e., owners), use accounting information to make buy, sell, or keep decisions related to shares, bonds, etc.

Creditors (i.e., suppliers, banks), who utilize accounting information to make lending decisions.

Taxing authorities (i.e., Internal Revenue Service), need accounting information to determine a company's tax liabilities.

Customers may need accounting information to decide which products to buy from which companies.

Financial accounting provides information that is designed to satisfy the needs of external users. Such reporting is usually done in the form of financial statements.

The AICPA also provided this definition: "Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action."

The American Accounting Association (AAA) defined accounting as: "the process of identifying, measuring and communicating economic information to permit informed judgment and decision by the user of the information."

Based on the above definitions and the very nature of accounting as the language of business, it is evident that the basic purpose of accounting is to provide the information needed by users in making economic decisions.

These users include current and potential investors, management, lenders, creditors, the government, employees, customers, and the general public. These users have varied interests and therefore have different information needs.

(3)Purpose of Accounting:

The purpose of accounting is to pile up and report on financial information systems about the financial position, performance, and cash flows of a business. This information is then used to make decisions about how to manage the business, invest in it, or lend money to it. This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplier invoices or through more specialized transactions, which are called journal entries.

After  financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following important parts :

1. Income statement
2. Balance sheet
3. Statement of cash flows
4. Statement of retained earnings
5. Disclosures that accompany the financial statements.

Financial statements are assembled under certain sets of rules, known as accounting frameworks, of which the best known are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

The results shown in financial statements can vary somewhat, depending on the framework used. The framework that a business uses depends upon which one the recipient of the financial statements wants. Thus, a European investor might want to see financial statements based on IFRS, while an American investor might want to see statements that comply with GAAP.

The accountant may generate additional reports for special purposes, such as determining the profit on the sale of a product, or the revenues generated from a particular sales region. These are usually considered to be managerial reports, rather than financial reports issued to outsiders.

(4)Types of Accounting and Areas of Practice:

Accounting is a vast and dynamic profession and is constantly adapting itself to the specific and varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater to the diversity of needs of its users. The main types of accounting are as follows:

Financial Accounting for financial reporting, is the process of producing information for external use usually in the form of financial statements. Financial Statements reflect an entity's past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles). GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction. This generally includes accounting standards (e.g. International Financial Reporting Standards), accounting conventions, and rules and regulations that accountants must follow in the preparation of the financial statements.

Management Accounting produces information primarily for internal use by the company's management. The information produced is generally more detailed than that produced for external use to enable effective organization control and the fulfillment of the strategic aims and objectives of the entity. Information may be in the form of budgets and forecasts, enabling an enterprise to plan effectively for its future, or may include an assessment based on its past performance and results. The form and content of any report produced in the process are purely upon management's discretion. Cost accounting is a branch of management accounting and involves the application of various techniques to monitor and control costs. Its application is more suited to manufacturing concerns.

Governmental Accounting also known as public accounting or federal accounting, refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state-owned and privately owned institutions. Governmental accounting ensures the financial position and performance of the public sector institutions are set in a budgetary context since financial constraints are often a major concern of many governments. Separate rules are followed in many jurisdictions to account for the transactions and events of public entities.

Tax Accounting refers to accounting for tax-related matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction. Often these rules are different from the rules that govern the preparation of financial statements for public use (i.e. GAAP). Tax accountants, therefore, adjust the financial statements prepared under financial accounting principles to account for the differences with rules prescribed by the tax laws. Information is then used. tax professionals to estimate the tax liability of a company and for tax planning purposes.

Forensic Accounting is the use of accounting, auditing, and investigative techniques in cases of litigation or disputes. Forensic accountants act as expert witnesses in courts of law in civil and criminal disputes that require an assessment of the financial effects of a loss or the detection of financial fraud. Common litigations where forensic accountants are hired include insurance claims, personal injury claims, suspected fraud, and claims of professional negligence in a financial matter (e.g. business valuation).

Project Accounting refers to the use of an accounting system to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management. It is a specialized branch of management accounting with a prime focus on ensuring the financial success of company projects such as the launch of a new product. Project accounting can be a source of competitive advantage for project-oriented businesses such as construction firms.

Social Accounting is also known as Corporate Social Responsibility Reporting and Sustainability Accounting, refers to the process of reporting the implications of an organization's activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies. Social Accounting is still in the early stages of development and is considered to be a response to the growing environmental consciousness amongst the public at large.

(5)Types and Forms of Businesses are run in   Accounting:

Major 3 Types of Business

There are three major types of businesses:

1. Service Business

A service-type of business provides intangible products (products with no physical form). Service type firms offer professional skills, expertise, advice, and other similar products. Examples of service businesses are schools, repair shops, hair salons, banks, accounting firms, and law firms.

2. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price. They are known as "buy and sell" businesses. They make a profit by selling the products at prices higher than their purchase costs. A merchandising business sells a product without changing its form. Examples are grocery stores, convenience stores, distributors, and other resellers.

3.Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the intention of using them as materials in making a new product. Thus, there is a transformation of the products purchased. A manufacturing business combines raw materials, labor, and factory overhead in its production process. The manufactured goods will then be sold to customers.

Hybrid Business

Hybrid businesses are companies that may be classified into more than one type of business. A restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders (service). Nonetheless, these companies may be classified according to their major business interest. In that case, restaurants are more of the service type – they provide dining services.

(6)Forms of Business Organization in Accounting:

These are the basic forms of business ownership:

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set up

and is the least costly among all forms of ownership. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner of the business and cannot pay them. The sole proprietorship form is usually adopted by small business entities.

2.Partnership

A partnership is a business owned by two or more persons who contribute resources to the entity. The partners divide the profits of the business among themselves. In general partnerships, all partners have unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited partners.

3. Corporation

A corporation is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock.

The owners (stockholders) enjoy limited liability but have limited involvement in the company's operations. The board of directors, an elected group of stockholders, controls the activities of the corporation.

In addition to those basic forms of business ownership, these are some other types of organizations that are common today:

Limited Liability Company

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is not considered a corporation. Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation.

Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group are called members. Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are water and electricity (utility) cooperatives, cooperative banking, credit unions, and housing cooperatives.

(7)Scope of Accounting:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. The primary objective of accounting is to help us collect financial data and to record it systematically to derive correct and useful results from financial statements.

To ascertain profitability: With the help of accounting, we can evaluate the profits and losses incurred during a specific accounting period. With the help of a Trading and Profit & Loss Account, we can easily determine the profit or loss of a firm.

To ascertain the financial position of the business: A balance sheet or a statement of affairs indicates the financial position of a company on a particular date. A properly drawn balance sheet gives us an indication of the class and value of assets, the nature and value of the liability, and also the capital position of the firm. With the help of that, we can easily ascertain the soundness of any business entity.

To assist in decision-making: To take decisions for the future, one requires accurate financial statements. One of the main objectives of accounting is to make the right decisions at right time. Thus, accounting gives you the platform to plan for the future with the help of past records.

To fulfill compliance of Law: Business entities such as companies, trusts, and societies are being run and governed according to different legislative acts. Similarly, different taxation laws (direct-indirect tax) are also applicable to every business house. Everyone has to keep and maintain different types of accounts and records as prescribed by corresponding laws of the land. Accounting helps in running a business in compliance with the law.

(8)Accounting Process:

The accounting cycle refers to the specific tasks involved in completing an accounting process. The length of an accounting cycle can be monthly, quarterly, half-yearly, or annually. The accounting cycle, also commonly referred to as the accounting process, is a series of procedures in the collection, processing, and communication of financial information like the following image:

Accounting Cycle Steps description :

1. Identifying and Analyzing Business Transactions & Events

The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process.

For example, a personal loan made by the owner that does not have anything to do with the business entity is not accounted for. The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded. The first step includes the preparation of business documents, or sources documents.

2. Recording in the Books of original -Journals

A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited). To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books. Journals are also known as Books of Original Entry.

3. Posting to the Ledger

Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances. After posting all transactions to the ledger, the balances of each account can now be determined.

For example, all journal entry debits and credits made to Cash would be transferred into the Cash account in the ledger. To calculate the increases and decreases in cash; thus, the ending balance of Cash can be determined.

4. Unadjusted Trial Balance

A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterward, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits.

When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only to test the equality of total debits and total credits and not to determine the correctness of accounting records.

5. Adjusting Entries

Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered into the books. Adjusting entries are prepared to update the accounts before they are summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.

6. Adjusted Trial Balance

An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made.

7. Financial Statements

When the accounts are already up-to-date and equality between the debits and credits has been tested, the financial statements can now be prepared. The financial statements are the end-products of an accounting system.

A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

8. Closing Entries

Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically. The accounts are closed to a summary account (usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only. 

(9)Accounting Concepts :

The most important concepts of accounting are as follows:

1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accrual Basis of Accounting
5. Cost Concept
6. Dual Aspects Concept
7. Accounting Period Concept
8. Matching Concept
9. Time Period (Periodicity)
10. Monetary Unit Assumption
11. Other Principles Derived from the Above Concepts

The first two accounting concepts, namely, Business Entity Concept and Money

Measurement Concepts are the fundamental concepts of accounting. Let us go

through each one of them briefly:

Business Entity Concept

According to this concept, the business and the owner of the business are two different entities. In other words, I and my business are separate.

For example, Mr. A starts a new business in the name and style of M/s Independent Trading Company and introduced a capital of $ 2,00,000 in cash. It means the cash balance of M/s Independent Trading Company will increase by a sum of $ 2,00,000/-. At the same time, the liability of M/s Independent Trading Company in the form of capital will also increase. It means M/s Independent Trading Company is liable to pay $ 2,00,000 to Mr. A.

Money Measurement Concept

According to this concept, “we can book only those transactions in our accounting record which can be measured in monetary terms.”

Example

Determine and book the value of the stock of the following

items:

Shirts $ 5,000/-

Pants $ 7,500/-

Coats 500 pieces

Jackets 1000 pieces

Value of Stock =?

Here, if we want to book the value of stock in our accounting record, we need the value of coats and jackets in terms of money. Now if we conclude that the values of coats and jackets are $ 2,000 and $15,000 respectively, then we can easily book the value of the stock as $ 29,500 (as a result of 5000+7500+2000+15000) in our books. We need to keep quantitative records separately.

Going Concern Concept

The going concern concept is a fundamental principle of accounting. The going concern concept of accounting implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. Simply put, it is an assumption that the company will stay in business and that the value of its assets will endure. This underlying principle is also known as the continuing concern concept.

The going concern concept of accounting is of great importance for accountants because if a company is a going concern, it must prepare its financial statements in accordance with applicable financial reporting frameworks such as generally accepted accounting principles applicable in the United States of America (US-GAAP) and international financial reporting standards (IFRS).

An example of the application of the going concern concept of accounting is the computation of depreciation on the basis of the expected economic life of fixed assets rather than their current market value. Companies assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated.

Another example of the going concern assumption is the prepayment and accrual of expenses. Companies prepay and accrue expenses because they believe that they will continue operations in the future. The going concern concept is applicable to the company’s business as a whole.

The auditors conduct their own evaluation to see whether the going concern assumption is appropriate or not at the time of auditing financial statements even if the company claims to be a going concern.

Some Examples :

(1). A company manufactures a Calculator known as Calculator -A. Suddenly, the government imposes a restriction on the manufacture, import, export, marketing, and sale of this Calculator in the country. If Calculator -A  is the only product that the company manufactures, the company will no longer be a going concern.

(2). The Small company is unable to make payments to its creditors due to a very weak liquidity position. The court grants the order of liquidating the company upon the request of one of the company’s creditors. The company is no longer a going concern because sufficient evidence is available to believe that the company cannot continue its operations in the future.

(3). The National company is in serious financial trouble and cannot pay its obligations. The government gives the National company a bailout and a guarantee of all payments to creditors. The national company is a going concern despite of its current weak financial position.

Accrual Basis of Accounting Concept :

The accrual basis of accounting is the concept of recording revenues when earned and expenses as incurred. Accrual basis accounting is the standard approach to recording transactions for all larger businesses. This concept differs from the cash basis of accounting, under which revenues are recorded when cash is received, and expenses are recorded when cash is paid. 

For example, a company operating under the accrual basis of accounting will record a sale as soon as it issues an invoice to a customer, while a cash basis company would instead wait to be paid before it records the sale. Similarly, an accrual basis company will record an expense as incurred, while a cash basis company would instead wait to pay its supplier before recording the expense.

The accrual basis of accounting is advocated under both generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). Both of these accounting frameworks provide guidance regarding how to account for revenue and expense transactions in the absence of the cash receipts or payments that would trigger the recordation of a transaction under the cash basis of accounting.

Cost Concept

The cost Concept requires one to initially record an asset, liability, or equity investment at its original acquisition cost. The Concept is widely used to record

transactions, partially because it is easiest to use the original purchase price as objective and verifiable evidence of value. A variation on the concept is to allow the recorded cost of an asset to be lower than its original cost if the market value of the asset is lower than the original cost. However, this variation does not allow the reverse - to revalue an asset upward. Thus, this lower cost or market concept is a crushingly conservative view of the cost Concept.

Dual Aspect Concept

The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double-entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements. The concept is derived from the accounting equation, which states that:

Assets = Liabilities + Equity

The accounting equation is made visible in the balance sheet, where the total amount of assets listed must equal the total of all liabilities and equity. One part of most business transactions will have an impact in some way on the balance sheet, so at least one part of every transaction will involve either assets, liabilities, or equity.

If management wants to have its financials audited, it must accept the dual aspect concept and maintain its accounting records using double-entry accounting. This is the only format that auditors will accept if they are to issue opinions on financial statements.

Accounting Period Concept

An accounting period is a period of time such as the 12 months of January 1 through December 31, the month of June, or the three months of July 1 through September 30. It is the period for which financial statements are prepared. 

For example, the income statement and the cash flow statement report the amounts occurring during the accounting period, and the balance sheet reports the amounts of assets and liabilities as of the final moment of the accounting period.

While companies are required to prepare financial statements for each annual accounting period, most companies also prepare financial statements for each monthly accounting period. This monthly feedback can be valuable for the company's management.

Matching Concept

The matching principle requires that revenues and any related expenses be recognized together in the same period. Thus, if there is a cause-and-effect relationship between revenue and expenses, record them at the same time. If there is no such relationship, then charge the cost to expense at once. 

Here are several examples of the matching principle:

Commission. A salesman earns a 5% commission on sales shipped and recorded in January. The commission of $5,000 is paid in February. You should record the commission expense in January.

Depreciation. A company acquires production equipment for $100,000 that has a projected useful life of 10 years. It should charge the cost of the equipment to depreciation expense at the rate of $10,000 per year for ten years.

Employee bonuses. Under a bonus plan, an employee earns a $50,000 bonus based on measurable aspects of her performance within a year. The bonus is paid in the following year. You should record the bonus expense within the year when the employee earned it.

Wages. The pay period for hourly employees ends on March 28, but employees continue to earn wages through March 31, which are paid to them on April 4. The employer should record an expense in March for those wages earned from March 29 to March 31. Recording items under the matching principle typically requires the use of an accrual entry. 

An example of such an entry for a commission payment is:

                                                                Debit          Credit

Commission expense                             5,000

      Accrued expenses                                                5,000

In this entry, the commission expense is charged before the cash payment to the salesperson actually occurs, along with liability in the same amount. In the following month, the company pays the commission, and records the following:

entry :

                                                               Debit          Credit

Accrued expenses                                  5,000

       Cash                                                                    5,000

The cash balance declines as a result of paying the commission, which also eliminates the liability. Because the use of the matching principle can be labor-intensive, company controllers do not usually employ it for immaterial items.

For example, it may not make sense to create a journal entry that spreads the recognition of a $100 supplier invoice over three months, even if the underlying effect will impact all three months. Instead, such small items are charged to expense as incurred. If you do not use the matching principle, then you are using the cash method of accounting, where revenue is recorded when cash is received and expenses when they are paid.

Time Period (Periodicity)

The time period assumption, also known as the periodicity assumption, means that the indefinite life of an enterprise is subdivided into time periods (accounting periods) which are usually of equal length for the purpose of preparing financial reports on the financial position, and performance and cash flows. An accounting period is usually a 12-month period – either calendar or fiscal. A calendar year refers to a 12-month period ending December 31. A fiscal year is a 12-month period ending on any day throughout the year, for example, April 1 to March 31 of the following year. The need for timely reports has led to the preparation of more frequent reports, such as monthly or quarterly statements.

Monetary Unit Assumption

The monetary unit concept states that you only record business transactions that can be expressed in terms of a currency. Thus, a company cannot record such non-quantifiable items as employee skill levels, the quality of customer service, or the ingenuity of the engineering staff. The monetary unit concept also assumes that the value of the unit of currency in which you record transactions remains relatively stable over time. However, given the amount of persistent currency inflation in most economies, this assumption is not correct - for example, a dollar invested to buy an asset 20 years ago is worth considerably more than a dollar invested today because the purchasing power of the dollar has declined during the intervening years. The assumption fails completely if an entity records transactions in the currency of a hyperinflationary economy. When there is hyperinflation, it is necessary to restate a company's financial statements on a regular basis.

Other Principles Derived from the Above Concepts

Some of the other principles followed in accounting include:

Revenue Recognition Principle – In accrual basis accounting, revenue or income is recognized when earned regardless of when received. It means that income is recorded when the service is fully performed or when a sale occurs, even if the amount is not yet collected.

Expense Recognition Principle – Also under accrual basis accounting, expenses are recognized when incurred regardless of when they are paid. In other words, expenses are recorded when used (incurred), even if they are not yet paid.

The Conservatism Principle-The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but only recognizing revenues and assets when they are assured of being received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulted in a lower amount of profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset, recognize the transaction resulting in a lower recorded asset valuation.

The Consistency Principle-The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. Only change an accounting principle or method if the new version in some way improves reported financial results. if you make such a change, fully document its effects and include this documentation in the notes accompanying the financial statements.

The Full Disclosure Principle-The full disclosure principle states that you should include in an entity's financial statements all information that would affect a reader's understanding of those statements. The interpretation of this principle is highly judgmental since the amount of information that can be provided is potentially massive. To reduce the amount of disclosure, it is customary to only disclose information about events that are likely to have a material impact on the entity's financial position or financial results. 

(10)Basic Accounting Equation Or Formula:

Definition: The basic accounting formula forms the logical basis for double-entry

accounting. The formula is: Assets = Liabilities + Shareholders' Equity

The three components of the basic accounting formula are:

 Assets. These are the tangible and intangible assets of a business, such as cash, accounts receivable, inventory, and fixed assets. Liabilities. 

These are the obligations of a business to pay its creditors, such as accounts payable, accrued wages, and loans. Shareholders' equity. There are funds obtained from investors, as well as accumulated profits that have not been distributed to investors. In essence, a business uses liabilities and shareholders' equity to obtain sufficient funding for the assets it needs to operate. The basic accounting formula must balance at all times. If not, a journal entry was entered incorrectly and must be fixed before financial statements can be issued. 

This balancing requirement is most easily seen in the balance sheet (also known as the statement of financial position), where the total of all assets must equal the combination of all liabilities and all shareholders' equity. The basic accounting formula is one of the fundamental underpinnings of accounting since it forms the basis for the recordation of all accounting transactions. In essence, if both sides of the basic accounting formula do not match at all times, there is an error in the accounting system that must be corrected. The following table shows how a number of typical accounting transactions are recorded within the framework of the accounting equation:

The basic accounting formula only relates to the double-entry bookkeeping system, where all entries made are intended to balance using this formula. If you are using a single entry system, the formula does not apply.

(11)Classification of Accounts :

It is necessary to know the classification of accounts and their treatment in a double-entry system of accounts. Broadly, the accounts are classified into three categories:

> Personal accounts

> Real accounts

     o Tangible accounts

     o Intangible accounts

>Nominal accounts

Let us go through them each of them one by one.

Personal Accounts : 

Personal accounts may be further classified into three categories:

Natural Personal Account : 

An account related to any individual like David, George, Ram, or Shyam is called as a Natural Personal Account.

Artificial Personal Account : 

An account related to any artificial person like M/s ABC Ltd, M/s General Trading, M/s Reliance Industries, etc., is called as an Artificial Personal Account.

Representative Personal Account

A representative personal account represents a group of accounts. If there are a number of accounts of similar nature, it is better to group them into salary payable account, rent payable account, insurance prepaid account, interest receivable account, capital account, drawing account, etc.

Real Accounts :

Every Business has some assets and every asset has an account. Thus, an asset account is called a real account. There is two types of assets:

    > Tangible assets are touchable assets such as plants, machinery,

         furniture, stock, cash, etc.

    > Intangible assets are non-touchable assets such as goodwill, patent,

       copyrights, etc.

Accounting treatment for both types of assets is the same.

Nominal Accounts

Since this account does not represent any tangible asset, it is called a nominal or fictitious account. All kinds of expense accounts, loss accounts, gain accounts, or income accounts come under the category of nominal accounts. For example, rent account, salary account, electricity expenses account, interest income account, etc. 

(12)Accounting Systems:

There are two systems of accounting followed :

   > Single Entry System

   > Double Entry System

Single Entry System:

The single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. In this system of accounting, only personal accounts are opened and maintained by a business owner. Sometimes subsidiary books are maintained and sometimes not. Since real and nominal accounts are not opened by the business owner, preparation of profit & loss account and balance sheet is not possible to ascertain the correct position of profit or loss or financial position of the business entity.

Double Entry System:

The double-entry system of accounts is a scientific system of accounts followed all over the world without any dispute. It is an old system of accounting. It was developed by ‘Luca Pacioli of Italy in 1494. Under the double-entry system of account, every entry has its dual aspects of debit and credit. It means assets of the business are always equal to liabilities of the business.

Assets = Liabilities

If we give something, we also get something in return and vice versa. Rules of Debit and Credit under Double Entry System of Accounts.

The following rules of debit and credit are called the golden rules of accounts:

(13)Accounting Frameworks and Organizations :

IAS: The international accounting standards (IAS) were an older set of standards stating how particular types of transactions and other events should be reflected in financial statements. In the past, international accounting standards were issued by the Board of the International Accounting Standards Committee (IASC); since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) and has been issued by the International Accounting Standards Board (IASB). Although IASC has no authority to require compliance with its accounting standards, many countries require the financial statements of publicly-traded companies to be prepared in accordance with IAS.

IFRS: Accounting provides companies, investors, regulators, and others with a standardized way to describe the financial performance of an entity. Accounting standards present preparers of financial statements with a set of rules to abide by when preparing an entity’s accounts, ensuring this standardization across the market. 

Companies listed on public stock exchanges are legally required to publish financial statements in accordance with the relevant accounting standards.
International Financial Reporting Standards (IFRS Standards) is a single set of accounting standards, developed and maintained by the International Accounting Standards Board (the Board) with the intention of those standards being capable of being applied on a globally consistent basis—by developed, emerging and developing economies—thus providing investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers. 

IFRS Standards are now mandated for use by more than 100 countries, including the European Union, and by more than two-thirds of the G20 ( The G20 is an international forum for the governments and central bank governors.)
The G20 and other international organizations have consistently supported the work of the Board and its mission of global accounting standards. 

IFRS Standards are developed by the Board, the standard-setting body of the IFRS Foundation—a public-interest organization with award-winning levels of transparency and stakeholder participation. Its 150 London-based staff are from almost 30 different countries. The Board’s 12 members are appointed and overseen by 22 Trustees from around the world, who are in turn accountable to a Monitoring Board of public authorities.

Generally Accepted Accounting Principles: Generally accepted accounting principles (GAAP) refer to a set of rules, standards, and practices used in the accounting industry for preparing and standardizing financial statements issued outside a company. The standards help investors and creditors better compare businesses. Many countries and multinational companies would like the differences between GAAP and IFRS eliminated. Blending the two would help comparisons between businesses based in different regions. Advocates believe the merger would simplify management, investment, transparency, and accountant training.

The main difference between the standards is that IFRS is principles-based and GAAP relies on rules and guidelines.

Accounting Principles Board: The Accounting Principles Board (APB) was a group that issued authoritative pronouncements about accounting theory and the practical application of accounting. The APB was organized and overseen by the American Institute of Public Accountants and operated from 1959 to 1973. Membership varied between 18 and 21 members, with most participants coming from major accounting firms. 

(14)Accounting Professional bodies :

Professional bodies represent the interests of their members by lobbying governments and providing the framework for self-regulation where this is permitted by statute. Professional bodies are also responsible for administering training and examinations for students and members.

The primary bodies in each country are affiliated with the International Federation of Accountants, while a few do not belong to IFAC as they operate more like specialist bodies helping the work of accountants and auditors, such in the field of taxation, forensic auditing, and systems auditing. An example of the body is

• American Institute of Certified Public Accountants (AICPA) ,
• Canadian Institute of Chartered Accountants (CICA),
• Certified General Accountants Association of Canada (CGA),
• Chartered Accountants Australia and New Zealand (CAANZ),
• Chartered Institute of Cost & Management Accountants (CICMA),
• Chartered Institute of Management Accountants (CIMA),
• Chartered Institute of Public Finance and Accountancy (CIPFA),
• Institute of Cost and Management Accountants of Bangladesh (ICMAB),
• Institute of Chartered Accountants of Bangladesh (ICAB),
• Institute of Chartered Accountants of India (ICAI),
• Institute of Chartered Accountants of Pakistan (ICAP),
• Institute of Cost and Management Accountants of Pakistan (ICMAP),
• Institute of Public Accountants (IPA).
• CPA Australia,
• Florida Institute of CPAs,
• Guild of Industrial, Commercial and Institutional Accountants, Canada (ICIA),
• Hong Kong Institute of Certified Public Accountants. Etc.

Conclusion: So Accounting plays a vital role in running a business because it helps track income and expenditures, ensure statutory compliance, and provide investors, Organization management, and government with quantitative financial information which can be used in making internal or external business decisions.