Chartered accountant jobs are very popular in India, especially management accounting in business. For any accountancy graduate, accounting in business or corporate accounting is looked upon as the highest echelon of accounting services.
It is the job of an accountant to present the financial information of an economic entity to all its stakeholders. The accountant must ensure the complete accuracy of this financial data.
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.
An accountant is responsible for the generation of three reports, over a specific, predetermined period of accounting. Typically, accountancy reports are of the following types:
This is a summary of the assets and liabilities of a company at a given point in time, providing a clear idea about the company's financial standing.
To qualify as a professional accountant, one must be able to compile reports on the gross proceeds, expenses, and profit and loss of a company. These components together form the income statement of the company.
Typically, accountancy services compiling the report, aim to address the business' income and expenses, both through regular operating activities or by ‘non-operating’ activities.
The management of a company uses the income statement to help determine their financial standing and decision-making. This is why accountants must put their best accounting skills forward to compile the report.
Statement of Cash Flows
Chartered accountants must also conduct analyses of the flow of cash into and out of the business. This report also includes income, profits, and losses from any investments made in the name of the company name. In this case, ‘cash’ also includes credit payments upon completion of payments.
Classification of Accounts
To fully grasp the meanings of the principles of accounting, accountants must first learn of the different types of accounts. This classification applies to all types of general ledgers in accounting.
A real account is a general ledger account relating to assets and liabilities other than people accounts. These accounts are carried forward, beyond the year-end. A bank account is an example of a real account. Real accounts are also referred to as permanent accounts.
A personal account is a general ledger account connected to all persons like individuals, firms, and associations. A creditor account is a typical example of a personal account.
A nominal account is a general ledger account pertaining to all income, expenses, profits, and losses. An interest account is an example of a nominal account. Nominal accounts are also called temporary accounts.
Furthermore, for accountancy purposes, business transactions are divided into three categories:
- Personal transactions are recorded in a personal account.
- Transactions related to business assets are covered in a real account.
- Transactions related to expenses, losses, incomes, and profits are covered in a nominal account.
Debits and Credits
A team of accountants at a firm is also responsible for overseeing the debits and credits of the firm. Debits and credits are equal but opposite entries in your accounting books. They affect the five core types of accounts, namely:
- Assets: Resources owned by the firm whose economic value can be converted into cash
- Expenses: Costs incurred during business operations
- Liabilities: Amounts owed to another person or another business firm (e.g., accounts payable)
- Equity: The assets of a firm minus its liabilities
- Income and revenue: Cash earned from sales
Debits increase an asset or expense account or decrease equity, liability, or revenue accounts. Credits increase equity, liability, and revenue accounts and decrease asset and expense accounts.
Accountants make a debit entry on the left side of an account. On the other hand, credits are entered on the right side of an account. Chartered accountants must record the credits and debits for each financial transaction.
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 will teach you what don't learn in accounting classes.
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 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.
The skills of accountants serve to 'account' for all transactions of an economic entity, every year. To do this, an accountant or a team of accountants working for a firm must obtain the journal entries and summarize them into ledgers. This summary is compiled in accordance with the Golden Rules of accounting, as outlined in this article.
Remember, the accountant must first ascertain the type of account before applying the rules. The rules are foundational in nature and hence, the nomenclature. Like the letters or symbols of a language, knowledge of these rules is necessary for the accountant, with all their training, to practice accountancy.