Accounting 101

There are several definitions of accounting. Accounting may be defined as (1) a service activity wherein its primary function is to supply quantitative information essentially financial in nature that is all about economic entities which may be significantly useful in decision making for top management. Another definition Accounting may also be defined as (2) the art of recording, classifying and summarizing in a considerable manner and in terms of money, business transactions, activities and events, which are part of a financial character and later on interpreting the results of the reports. Another definition of accounting is (3) the process of identifying, measuring and communication economic information to allow knowledgeable judgments and decisions by all users of the information.

The world of accounting follows certain guidelines and procedures that compose of acceptable accounting practice at a given time. These set of guidelines and procedures are known as GAAP which means generally accepted accounting principles. The basics of accounting principles are as follows.

Accounting

Adequate Disclosure. This accounting principle states that all relevant information which would affect the understanding and evaluation or assessment of the user of the accounting entity should be disclosed in the financial statements.

Accounting 101

Consistency Principle. As the name, consistency, implies, there should be consistence. Firms should use the same accounting method from period to period in order to attain comparability over time within a single enterprise. Nevertheless, companies are allowed to change as long as it is justifiable and be disclosed in the financial statements.

Expense Recognition Principle. In this principle, it is stated that expenses should be recognized in the accounting period wherein goods and services are used up to generate revenue and not when the entity pays for those services and goods.

Historical Cost. This principle states that purchased assets should be recorded at their actual cost and not what management thinks they are worth as at reporting date.

Materiality. It should be noted that financial reporting is only concerned with information that is significant enough that will likely affect assessments and decisions. Materiality is dependent on the size and nature of the item judged in the particular situations of its omission. Upon deciding as to whether an item or collection of items is material, the nature as well as the size of the item is assessed together. Either of the nature of the item or the size may be the determining factor, depending on the circumstances.

Objectivity Principle. Records and statements in accounting are based on the most reliable information available in order for them to be as accurate and as useful as possible. Information that is considered reliable may be verified and confirmed by independent observers. It is mainly ideal in accounting that all records are based on information, which flows from activities that are documented by objective evidence. Without the objectivity principle, accounting records may be based on opinions and impulses that may be subject to dispute.

Revenue Recognition Principle. In revenue recognition principle, revenue is to be recognized in the accounting period when services are rendered or performed or when goods have been delivered.

Accounting 101

Michael Russell
Your Independent guide to Accounting

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