Accounting is a process that helps in keeping a track of the financial activities of an organization. It is an information system used to record, classify and summarize financial transactions for analysis and interpretation. Accounting process entails obtaining, analyzing, classifying, and recording financial data. All of these activities are aimed at producing summary reports such as income statements and balance sheets.
To properly understand the accounting process, it is important to know the general principles and concepts of accounting. The most widely accepted principles are the cost principle, the full disclosure principle, the matching principle, the revenue recognition principle, the economic entity principle, and the going concern principle.
The cost principle states that most assets are recorded at their acquisition cost. This is the amount it costs to acquire the asset and to make it ready for its intended use. All transactions must be recognized at their fair value or the amount that would be received upon the sale of the asset. This cost principle is used to record the cost of supplies, inventory, and other assets.
The full disclosure principle requires that all material information must be publicly disclosed in an organizations financial statements. This principle helps stakeholders and potential investors make informed decisions. All financial information must be presented to allow for meaningful analysis and comparison with other organizations.
The matching principle requires that all expenses must be identified and matched with the corresponding revenues. This allows the company to accurately reflect its performance. For instance, all of the costs associated with a product, such as the raw materials, labor, overhead, and marketing expenses must be matched with the revenue produced by the sale of the product.
The revenue recognition principle states that revenue should not be recognized until it is realized or realizable. Therefore, revenue should only be recorded when it is collected or with reasonable assurance that it will be received. This helps ensure that income is reported accurately and in a timely manner.
The economic entity principle states that transactions should be accounted for and reported separately from the individual conducting the transactions. This represents the separation of the finances of the organization from the finances of the individual owners.
Finally, the going concern principle assumes that the company has no intention of liquidating in the near future and that it will continue to operate as it always has. As long as the going concern principle applies, the company can use the accrual method of accounting to match costs with associated revenues.
The accounting process is a powerful tool for measuring and communicating financial activity. By understanding the general principles, concepts, and procedures of accounting, an organization can ensure that its financial information is accurate and useful for decision-making.
