Students of accounting learn not only how to apply accounting skills but also how to use those skills to resolve financial issues for the business or individual clients they cater to.
Accounting skills are not just learned, some of them are inherent in students, such as analytical skills, organization skills, critical thinking skills, interpersonal communication, adaptability, spreadsheet proficiency, and writing.
The functions of accounting include:
- Recording financial transactions
- Describing financial transactions
- Translating financial data for executives or shareholders
- Calculating the actual bottom line for a company
- Preparing reporting documents such as the Annual Report
Simple Definition Of Accounting
Accounting: Accounting is the systematic process of recording, summarizing, analyzing, and interpreting financial transactions and information of a business or organization. It involves measuring and communicating financial information to various stakeholders, including investors, creditors, and management, to assist in decision-making and evaluating the financial performance and position of an entity.
- GAAP (Generally Accepted Accounting Principles): GAAP refers to a set of accounting principles, standards, and guidelines that are widely recognized and accepted within a particular country or jurisdiction. GAAP provides a standardized framework for financial reporting, ensuring consistency, comparability, and transparency in financial statements. It includes principles, concepts, and detailed rules that dictate how financial transactions should be recorded, classified, and reported.
- IAS (International Accounting Standards): IAS stands for International Accounting Standards, which were a set of accounting standards issued by the International Accounting Standards Committee (IASC). IAS aimed to establish consistent accounting principles across different countries and facilitate international financial reporting. However, the IAS has been superseded by IFRS.
- IFRS (International Financial Reporting Standards): IFRS is a set of globally recognized accounting standards issued and maintained by the International Accounting Standards Board (IASB). IFRS provides a common framework for financial reporting, allowing companies to present their financial statements in a consistent and comparable manner across different jurisdictions. IFRS improves transparency, relevance, reliability, and comparability of financial information, enabling stakeholders to make informed decisions based on the financial statements.
Both IAS and IFRS share the objective of enhancing the quality and consistency of financial reporting. However, IFRS has replaced IAS and represents the current global accounting framework, adopted by many countries worldwide.
It's important for companies to comply with the applicable accounting framework based on their jurisdiction and any specific requirements they need to adhere to. These frameworks are regularly updated to reflect changes in business practices, financial reporting needs, and evolving economic conditions.
Basic Accounting Terms
Here are some basic accounting terms:
- Assets: Resources owned by a company that has economic value, such as cash, inventory, equipment, and property.
- Liabilities: Debts or obligations of a company, including loans, accounts payable, and accrued expenses.
- Equity: The residual interest in the assets of a company after deducting liabilities. It represents the ownership interest of the shareholders.
- Revenue: The income earned by a company from its primary business activities, such as sales of goods or services.
- Expenses: The costs incurred by a company to generate revenue and operate its business, including salaries, rent, utilities, and marketing expenses.
- Accounts Receivable: Amounts owed to a company by its customers for goods or services provided on credit.
- Accounts Payable: Amounts owed by a company to its suppliers or vendors for goods or services received on credit.
- Income Statement: A financial statement that shows a company's revenue, expenses, and net income or net loss over a specific period of time.
- Balance Sheet: A financial statement that presents a snapshot of a company's assets, liabilities, and equity at a specific point in time, providing an overview of its financial position.
- Cash Flow Statement: A financial statement that shows the inflows and outflows of cash from operating, investing, and financing activities, providing insights into a company's liquidity and cash management.
- Depreciation: The systematic allocation of the cost of a long-term asset (such as equipment or buildings) over its useful life, reflecting the wear and tear or obsolescence of the asset.
- Accrual Accounting: An accounting method that recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.
- GAAP (Generally Accepted Accounting Principles): A set of accounting standards and guidelines used to ensure consistency and comparability in financial reporting.
- Trial Balance: A list of all the general ledger accounts with their respective debit and credit balances, used to ensure that the total debits equal the total credits.
- Double-entry Accounting: The principle that every financial transaction affects at least two accounts, with debits and credits recorded to maintain the balance of the accounting equation.
Operating Principles of Modern Accounting
Students of finance and management usually have foundational course modules that introduce them to new information on accounting as a discipline. Accounting courses start with an introduction to the basic accounting concepts summarized here.
Principle of Revenues
Business revenues are earned and recorded at the point of sale (PoS). This concept is sometimes called the “revenue recognition principle.”
Principle of Expenses
The expense principle, or expense recognition principle, states that an expense occurs at the time at which the business accepts goods or services from another entity.
Principle of Matching
The matching principle states that you should match each item of revenue with an item of expense. When the principles of revenue, expense, and matching are put in practice by businesses, the latter are operating under the accrual accounting method.
Principle of Costs
According to the cost principle, the historical cost of an item in the books should be used and not the resell cost. Examples include: a real estate business or a vehicle business should list the historical costs of the property or the car and not the current fair market value of the property.
Principle of Objectivity
This principle lays down how businesses should use only factual, verifiable data in the books, never a subjective measurement of values. The subjective data may seem better than the verifiable data. However, it is always good to use verifiable data.
Get Your Financial Accounting Basics Right
The overarching objective of financial accountancy jobs is the production and dissemination of financial information about the company in the form of income statements, balance sheets, profit and loss accounts, and other related financial data. These data are passed on to finance auditors. The information may be shared with potential investors, creditors, and other interested parties.
Financial Accounting
The discipline of accounting is broadly classified into management accounting and financial accounting. For the purposes of this article, let us explore the various aspects of financial accounting.
Financial accounting is the area of accounting that stakeholders, such as the Income Tax Department, stockholders, prospective stock buyers, business owners and boards of directors, are most interested in.
Financial accounting may take the form of a balance sheet, an income statement, and a statement of cash flows. The data for these statements are generated from tools such as a business' general ledgers and journals that record financial transactions.
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Financial ratios are calculated based on the information from the above three statements. Financial ratios can be of different types.
- Liquidity ratios, such as the current ratio, is a demonstration of how quickly assets can be converted by a business into cash.
- Leverage ratios, such as debt to assets, debt to capital, or equity, demonstrate how debts are used to finance business operations.
- Efficiency ratios, such as the asset turnover ratio, demonstrate how assets and finances that are used by a company to monitor its assets and finances.
Golden Rules of Management Accounting
Accounting must be uniform since economic entities are compared to understand their financial statuses. To bring about said uniformity, accountants operate according to certain principles and rules.
The 3 Golden Rules of Accounting
Once you have earned all the necessary qualifications of chartered accountancy and memorized the basics of accounting from your accounting course, it is time to practice the three golden rules of accounting. These rules are available for reference for students who usually don't learn them in their accounting course.
1. Debit the receiver and credit the giver
This rule comes into play when accountants are dealing with clients with personal accounts. In short, the rule lays down, "if you receive something, debit the account. If you give something, credit the account."
2. Debit what comes in and credit what goes out
For clients with real accounts (e.g. asset or a liability or equity account), use the second golden rule. This rule lays down, "when something comes into your business (e.g., an asset), debit the account. When something goes out of your business, credit the account."
3. Debit expenses and losses, credit income and gains
This rule is applied for clients with nominal accounts (revenue, expense, and gain and loss accounts). Accountants using this rule debit the account if the business has an expense or a loss or credit the account if the business needs to record income or gain.
More on Accounting Principles
The Generally Accepted Accounting Principles (GAAP), as laid down in the United States, are also largely followed in India. A team of working professional accountants follows these principles of accounting while handling the financial transactions of its clients.
- Conservatism: As the name suggests, this guiding principle allows accountants to 'play it safe' in situations where there are two acceptable solutions. By doing so, accountants can anticipate future losses, rather than future gains.
- Consistency: Once an accounting method or principle is decided to be used in a business, accountants must stick with it and follow this method throughout the accounting periods.
- Cost: A business accountant must record the assets, liabilities, and equity of the firm at the original cost at which they were bought or sold. The real value may change over time (e.g. depreciation of assets/inflation) but will not be reflected for reporting purposes.
- Economic entity: The accountant must maintain and treat the transactions of businesses separately from that of its owners and other businesses.
- Full disclosure: The team of accountants working for a company must obtain any important information that may impact the reader’s understanding of a business’s financial statements.
- Going concern: This principle is based on the assumption that a business will continue to exist and operate in the foreseeable future, and not liquidate. Following this principle allows the accountant to defer some prepaid expenses (accrued) of the business to future accounting periods.
- Matching: This principle is especially applicable to accrual accounting and lays down that each revenue recorded should be matched and recorded with all the related expenses, at the same time.
- Materiality: Accountants must be sure to include and report all material items in the financial statement.
- Monetary unit: It is the job of the accountant to only record business transactions that can be expressed in terms of a stable unit of currency.
- Reliability: This principle helps to determine which financial information should be presented in the accounts of a business.
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Most Popular Career Options in Accounting In India (2023)
In India, the field of accounting offers various career options across different sectors. Here are some of the most popular career options in accounting in India as of 2023:
- Chartered Accountant (CA): Becoming a Chartered Accountant is one of the most sought-after career paths in accounting. CAs provide services related to audit, taxation, financial reporting, and financial advisory to clients. They work in diverse sectors, including public accounting firms, corporate organizations, government agencies, and consulting firms.
- Certified Public Accountant (CPA): While the CPA designation is recognized globally, it is gaining popularity in India as well. CPAs specialize in areas such as auditing, taxation, financial accounting, and management accounting. They typically work in public accounting firms, multinational corporations, and financial institutions.
- Financial Analyst: Financial analysts analyze financial data, conduct research, and provide insights to support investment decisions, financial planning, and risk management. They work in investment banks, asset management firms, consulting companies, and financial research organizations.
- Tax Consultant: Tax consultants specialize in tax laws and regulations and assist individuals and businesses in managing their tax obligations. They provide services such as tax planning, compliance, and representation during tax assessments and audits. Tax consultants may work in public accounting firms or operate as independent practitioners.
- Cost Accountant: Cost accountants focus on analyzing and controlling costs within an organization. They provide insights into pricing decisions, budgeting, cost management, and product profitability analysis. Cost accountants work in manufacturing companies, service industries, and consulting firms.
- Internal Auditor: Internal auditors assess and evaluate the effectiveness of an organization's internal controls, risk management processes, and compliance with regulations. They provide recommendations to improve operational efficiency and mitigate risks. Internal auditors work in corporate entities, government organizations, and consulting firms.
- Forensic Accountant: Forensic accountants investigate financial fraud, embezzlement, and other financial irregularities. They analyze financial records, trace assets, and provide expert testimony in legal proceedings. Forensic accountants work in law enforcement agencies, forensic accounting firms, and consulting organizations.
- Financial Controller: Financial controllers oversee financial operations within an organization, including financial reporting, budgeting, financial analysis, and internal controls. They ensure compliance with accounting standards and regulations. Financial controllers are typically employed in large corporations and multinational companies.
- Management Accountant: Management accountants provide financial information and analysis to support internal decision-making within an organization. They focus on cost analysis, budgeting, performance evaluation, and strategic planning. Management accountants work in both private and public sector organizations.
- Government Accountant: Government accountants handle financial management and accounting functions in government agencies and public sector organizations. They ensure proper utilization of public funds, compliance with regulations, and financial transparency.
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Top 10 Accounting Companies In India in 2023
- Deloitte India: Deloitte is one of the "Big Four" accounting firms and offers a wide range of services including audit, tax consulting, advisory, and risk management. It has a significant presence in India, serving clients across industries.
- PricewaterhouseCoopers (PwC) India: PwC is another renowned member of the "Big Four" accounting firms. It provides audit and assurance, tax consulting, advisory, and business consulting services to clients in various sectors.
- Ernst & Young (EY) India: EY is a globally recognized professional services firm providing assurance, tax, consulting, and transaction advisory services. EY has a strong presence in India and serves clients ranging from multinational corporations to local businesses.
- KPMG India: KPMG is one of the "Big Four" accounting firms, offering a wide range of services such as audit, tax advisory, and consulting. KPMG India serves clients from diverse sectors, including financial services, healthcare, and manufacturing.
- Grant Thornton India: Grant Thornton is a leading global accounting and consulting firm, providing audit, tax, and advisory services. It has a significant presence in India, serving clients ranging from large corporations to small and medium-sized enterprises (SMEs).
- BDO India: BDO is a global network of accounting firms, offering a comprehensive range of services including audit and assurance, tax consulting, and advisory services. BDO India serves clients across various sectors, including manufacturing, technology, and financial services.
- RSM India: RSM is a global network of audit, tax, and consulting firms. RSM India provides services to clients in sectors such as manufacturing, real estate, healthcare, and hospitality, offering a range of financial and advisory solutions.
- M/s S.R. Batliboi & Associates LLP: S.R. Batliboi is a member firm of EY Global, providing audit and assurance, tax, and advisory services. It serves clients across industries, including banking, automotive, consumer products, and energy.
- M/s Walker Chandiok & Co LLP: Walker Chandiok & Co is an Indian member firm of Grant Thornton International, offering audit, tax, and advisory services. It serves clients from diverse sectors, including technology, infrastructure, and manufacturing.
- M/s Price Waterhouse India: Price Waterhouse India is a member firm of the PwC network, providing audit and assurance, tax, and advisory services. It serves clients across industries, including banking, telecommunications, and pharmaceuticals.
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