Basic Accounting Principles, Methods & Types

Learn of the basic accounting principles, methods and types followed by a qualified accountant in his professional services.

The Basic Accounting Principles

These are rules of the Financial Accounting Standards Board, usually followed in conjunction with other government agencies. Accountants need to adhere to the established accounting principles as closely as possible. They need to set standards to ensure they produce proper accounting. They look for intelligibility and comparability of accounting data for different companies. Below is a list of the four basic principles with a brief explanation of each.

The accrual principle:

Businesses need to capture and report revenue at the time it is earned and realized by the company. They call this method period accounting. The purpose of this cost principle is to actually show what work has been completed in the accounting period. It is to show what a company accomplishes on an accrual basis.

The matching principle:

This principle allows a real-time analysis of income and expenses. The application of this historical cost principle will show the company’s performance during a period. Similar to the accrual principle, expenses, in this case, can only be recognized and reported if the revenue to which these expenses relate was received.

The disclosure principle:

The accounting of a company is necessary so as to make the assessment of a company’s financial status easy. However, there must be full disclosure of financial and accounting records so that there is no inappropriate expenses or erroneous options.

Basic Rules of Accounting

These methods are the set of rules, or “generally accepted accounting principles”, that help in determining how and when the receipts and payments reach the financial statements. Accountants use these according to the short term and long term needs of an organization. They calculate the earnings and expenses for a tax year with these methods in accordance with the accounting principles. This ensures entry of the accurate amount of taxable income in the books of accounts.

Organizations apply different procedures depending on the needs and requirements of the organizations, as follows:

Basic concept in accounting:

The equation for basic accounting is the foundation for all the accounting equation as it helps in determining the financial position of the small as well as large organizations. For sole proprietor businesses the assets equal liabilities plus owner’s equity. But for corporation the assets equal liabilities plus stockholders equity. Assets are owned by the company and liabilities represent what the company owes. This helps to show the financial condition of the company.

Double entry accounting:

This is an accounting method that records transactions into two accounts which includes debit entries and credit entries. It is important that the debit entries and credit entries match, therefore it is necessary to follow the full disclosure principle for transactions. This ensures the use of correct balances for creating financial statements that will help you know the profits or loss of the organizations.

Accrual accounting principles:

This method records transactions on the accrual basis where financial events take place, regardless of whether the payment takes place or not. The method lists transactions in books of accounts even if the payment is not made. This helps to show the net worth of the organizations in financial terms. Businesses with inventory that sells on credit use this procedure so the receipts and payments of the business should match during a financial year.

Cash accounting:

The cash accounting method is where the monetary unit records incomes and expenses in the books of accounts as they occur during the period of accounting. Therefore, this involves recording all the payment received under the revenue recognition principle and expenses incurred in cash. It is an easy accounting for small businesses. These businesses do more transactions involving cash that do the large organizations where accrual methods are used. This is the best way of tracking the cash of the business by the recording of income and expenses as soon as they takes place.

Cash flow accounting:

This is a very simple and popular accounting method of calculating the actual flow of cash of organizations. A positive level of cash is an indication about the financial well being of an organization. There is monthly, quarterly as well as yearly calculation of the flow of cash where the use of the cash in an organization reflects the financial standing of the organizations. The cash flow statement is less important than the balance sheet or income expense statement. It helps in calculating the net cash of an organization.

A Look at Different Types of Accounting

There are several types of this system in operation today to aid in the making of good business decisions. Day-to-day accounting is commonly referred to as book keeping. Bookkeepers record transactions include payroll, credit, assets, taxes, payables, receivables, etc on the accrual or cash basis of specific period of time. The accounting system entails the recording of all transactions that a business does on a particular day, whether debits and credits.

Each type has its own functions and benefits for the business. The main types of accounting include business, management, forensic accounting, financial accounting, as follows:

Business Accounting:

Get a clear definition of accounting for business with its principles of ethics and system that are necessary for efficient operation. Accounting is guided by a standard set of principles. These principles work for all types of businesses. The standards help to ensure that there is unity in business transactions whether recording or reporting. This enables clear understanding of financial records whatever the type of business. Following the principles of this system is important for all businesses. It allows the business entity to report easily to the government and loan agencies. This is a science that addresses the collection, classification and manipulation of financial data for either individuals or organizations. It offers a way of assessing the assets, liabilities as well as the cash holdings of business owners. In the accounting equations, the credits and debits must balance.

Financial Accounting:

Learn the procedures that accountants follow for reporting and recording transactions according to established standards. It is instrumental in any organization to provide a means of ensuring financial stability. You will learn a lot more about the balance sheet and financial statements. Such terms as the general ledger, accrual, accounts receivable, accounts payable as well as the income statement will also be detailed. You will also learn how to record goods or services and how to calculate cost of goods sold. These accounting books will teach you how to come up with the total amount of financial transactions, assets and liabilities, and cash. Read more.

Forensic Accounting principles:

Learn the forensic accounting definition – the clear meaning showing the different aspects and expertise relevant to such an undertaking. When you decide to study in this field, you will be able to master all the rules. This will help you to communicate financial information in a comparable and comprehensible manner. Today, the system has been made easier thanks to the use of software.

Management Accounting:

Learn the meaning of management accounting including its techniques and also the functions and required carefulness necessary for success. The main purpose of such accounting is to provide useful and relevant information to management for the set time period. It helps them to make wise decisions about an organization and its operations. They are able to use the financial statement to decide such things as how to invest company’s money.

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