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
Understanding Accounting Concepts and Conventions
Financial transactions, handling finance, and accounting have been around for as long as money itself. Before the evolution of the English language, accounting records were maintained on clay tablets, in pictorial language. Historians believe that the need to record trade and business transactions gave rise to the development of accounting systems.
Accountants apply accounting knowledge and problem-solving skills to support individuals and businesses through financial issues.
In fact, accounting standards have only been codified in the English language a few centuries ago. Nowadays, advanced accounting software is used by a chartered accountant (an accounting professional) to conduct their work for financial markets institutions. Students are introduced to these in the undergraduate accounting classes by their accounting teacher.
A Definition of Accounting
Pacioli, the father of modern accounting, defined his system of accounting as "the practice of recording a business transaction in two equal parts called debit and credit entries. Debit refers to the left column and credit refers to the right column in an accounting journal.”
The primary focus of accounting is the presentation of financial information as general-purpose financial statements. These statements include balance sheets, income statements, and so on. They are disseminated to people outside the company and are prepared according to the generally accepted accounting principles or GAAP.
GAAP are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting.
Investopedia defines accounting as the recording, organization, and understanding of financial information. The process of accounting includes summarizing, analyzing, and reporting financial transactions to oversight agencies, regulators, and tax collection entities.
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 their 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.
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, 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.
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.
How to Become a Chartered Accountant in India
To study accountancy, students should ideally demonstrate attention to detail, an excellent grasp on numbers, and strong organizational skills. These skills should complement the commitment and dedication of students to pursue the profession.
An accountant is responsible for the management and analysis of transactions and capital holdings – the world of business essentially rests on their shoulders.
Students must acknowledge and accept how course modules help them learn and relearn the subject to accommodate the changing nature of markets and laws, whether the course is offered by a national business school or an international business course
The first year of an accounting degree course lays the foundation for students to learn the overall role and functions of an accountant, including the company structure and business computing. In the second or third year of a course, students may also be offered paid work placements.
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Types of Degrees in Accounting
For an undergraduate study in accounting or a professional course in accounting and finance, students must explore their options thoroughly. Professional accountants, undergraduate students in economics, professional managers - there are modules of study available for everyone.
Certificate or Diploma in Accounting
A diploma course in accounting usually takes a year to complete, ending with a final year exam or a series of exams to assess the progress of candidates throughout the course calendar. A certificate course, on the other hand, may require just three or four courses, laying the foundation necessary to start a job.
Bachelor's Degree in Accounting
To become a certified public accountant (CPA), the minimum course requirement is a bachelor's degree in accounting. Under the present COVID-19 restrictions, candidates can also online accounting degree courses.
Master's Degrees in Accounting
Master's degree courses in accounting are in high demand with the increasing competitiveness in the job market has become more competitive. For this reason, colleges and universities are offering online master's degrees in accounting.
MBA in Accounting
Many accountants today choose a Master of Business Administration (MBA) with an accounting specialization. These new combinations of subjects emphasize management along with advanced accounting skills, giving finance professionals more preparation for leadership positions.
Ph.D. in Accounting or Doctorate in Business Administration
DBA is a professional degree, intended for people who want to professionally work in the field of accounting and finance management. DBA focuses more on leadership and the use of accounting knowledge and expertise in an administrative capacity.
A Ph.D. in accounting is meant for accountants who want to take up teaching jobs at the college or university levels or conduct their own research. The course focuses more on research, writing, and teaching skills. Candidates can consider either degree if they wish to work as professional corporate consultants, entrepreneurs, or an accounting guru.
Apart from these various courses of study, students of accounting - undergraduate or research degree - can also pursue specialized training programs in accounting software, learn how to support businesses in getting their finances right, and many other modules of study.
Undertake extensive research of courses on offer for your specific study goals. There are also free online accounting courses on offer. The level of the degree course in accounting is optional and depends on the undergraduate students and professional candidates.