Basic Accounting Principles, Methods & Types

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


Basic Accounting Principles

These are rules of the Financial Accounting Standards Board, usually 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, intelligibility, and comparability of accounting data for different companies. Below is a list of the four basic accounting principles and 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. This method is called period accounting. The purpose of this cost principle is to actually show what work has been completed in the accounting period. It is not to show what a company accomplishes in future.

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 that an assessment of a company’s financial status is easily made. However, there must be full disclosure of financial and accounting records so that there is no inappropriate expenses or erroneous options.


Accounting Methods

Accounting methods are the set of rules or accepted accounting principles that help in determining how and when the receipts and payments reach the financial statements. These are used according to the short term and long term needs of an organization. The earnings and expenses for a tax year is calculated with these methods in accordance with the generally accepted accounting principles. This ensures that taxable income can be determined and it is accurately entered into the books of accounts.

There are different accounting methods that are used in organizations which depends on the needs and requirements of the organizations as follows:

Basic accounting:

The equation for basic accounting is considered as 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:
It is an accounting method where every transaction is recorded into two accounts which includes debit entries and credit entries. It is important that the debit entries and credit entries match. This ensures that correct balances are given for creating financial statements that will help you know the profits or loss of the organizations.

Accrual accounting:

This is an accounting method where the transactions are recorded on the accrual basis that financial events take place regardless of whether the payment is made or not. This method lists transactions in books of accounts so even if the payment is not made, it will help in knowing the net worth of the organizations in financial terms. This method is used for businesses with inventory that sells on credit and 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 method that is generally used by 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 flow of the business because income earned and expenses paid are recorded as soon as it takes place.

Cash flow accounting:

This is a very simple and popular accounting method where the actual cash flow of organizations are calculated. A positive level of cash flow is an indication about the financial well being of an organization. The cash flow is calculated monthly, quarterly or yearly 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 statement. It helps in calculating the net cash flow 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. Transactions include payroll, credit, assets, taxes, payables, receivables etc. The accounting system entail the recording of all transactions carried out by a business 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:

Business accounting definitionGet 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 and the cash flow for business owners. In the accounting equations, the credits and debits must balance.

Financial Accounting:

Analyst checking for use of proper financial accounting proceduresLearn the procedures that accountants follow for reporting and recording of transactions according to established standards. It is instrumental in any organization and provides 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 and the income statement. 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 flow.

Forensic Accounting:

Team reading forensic accounting definition - the clear meaningLearn 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:

Man reading strategic management accounting informationLearn the definition including its techniques, 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 use the financial statement to decide such things as how to invest company’s money.

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