In accounting, transactions are recorded in a systematic way based on procedures and standards known as accounting practice. A company must adhere to these accounting practices in order to produce legally required financial statements including the income statement, the balance sheet, the cash flow statement, and the statement of stockholders’ equity.
Accounting practice refers to the application of accounting principles and methods to record, classify, and summarize financial information for a business or organization. Financial transactions are recorded in a systematic and consistent manner, financial statements and reports are prepared, and these reports are used to take business decisions. In short, accounting practice is the process of using financial data to provide information about the financial performance and position of a business or organization.
For example, a business owner might review the income statement to see how much revenue the business has earned and how much profit it has made, and then use this information to decide whether to invest in new equipment or expand the business.
The main objectives of accounting practice are to provide information that is useful for making business decisions and to comply with legal and regulatory requirements. More specifically, some of the key objectives of accounting practice include:
Companies use a variety of accounting methods in their accounting practices. A cash accounting system and an accrual accounting system are the two primary accounting methods.
In cash accounting, revenue and expenses are recorded as they are received and paid, in other words, transactions are recorded only when cash is spent or received.
Accrual accounting is based on the matching principle. In this accounting method, revenue and expenses are recorded when a transaction occurs rather than when cash is paid or payment is received.
There are several different types of accounting practice, including:
This type of accounting involves the preparation of financial statements and reports that are intended for external users, such as investors, creditors, and regulators. The purpose of financial accounting is to provide information about a business or organization’s financial performance and position and help external users make informed decisions.
This type of accounting involves the preparation of internal reports and analyses. These are then intended for use by managers within the business or organization. In managerial accounting, information is provided that can be used to make operational and strategic decisions.
This type of accounting involves the preparation of tax returns and the calculation of taxes owed to the government. Tax accounting ensures that a business or organization pays the right amount of taxes and complies with tax laws.
This type of accounting involves the independent examination and verification of financial statements and reports. A business or organization’s financial statements are audited to ensure they accurately represent their financial performance and position.
This type of accounting involves the use of accounting principles and methods to investigate financial irregularities, such as fraud, embezzlement, and mismanagement. The purpose of forensic accounting is to uncover financial misconduct and provide evidence for legal proceedings.
Accounting principles are rules and concepts that apply to accounting activities. The Financial Accounting Standards Board (FASB) has issued a set of accounting principles, standards, and procedures known as GAAP. These set of principles provide a framework for the preparation and presentation of financial information and help to ensure that the financial statements and reports of a business or organization are reliable, consistent, and comparable.
Some of the key accounting principles include the following:
This principle assumes that a business or organization will continue to operate for the foreseeable future and that its assets and liabilities can be measured in monetary terms. This assumption allows for the preparation of long-term financial statements, such as a balance sheet.
This principle states that assets should be recorded at their original cost and that any subsequent increases or decreases in their value should not be recognized in the financial statements. This principle ensures that the financial statements are based on objective and verifiable information, rather than on estimates or judgments.
This principle states that expenses should be matched with the corresponding revenues in the period in which they were incurred. This principle allows for the preparation of an income statement that shows the net profit or loss of a business or organization.
This principle states that the same accounting methods and assumptions should be used from one period to the next unless there is a good reason to change them. This principle ensures that the financial statements are comparable over time, and allows users to easily analyze the financial performance and position of a business or organization.
Accounting practice is the set of accounting methods, technical procedures, and internal controls used for the processing of financial information within a company or organization.