There
are several forms of accounting, ranging from auditing to tax return
planning. Accountants appear to specialize in one of these fields,
contributing to the following different career tracks:
- Financial Accounting, or financial reporting, is the process of producing information for external use usually in the form of financial statements. Financial Statements reflect an entity's past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles). GAAP refers to the standard framework of guideline for financial accounting used in any given jurisdiction. This generally includes accounting standards, accounting guidelines, and rules and regulations to be observed by accountants when preparing financial statements.
- Management Accounting is concerned with the process of accumulating accounting information for internal operational reporting. It includes such areas as cost accounting and target costing. Cost accounting is a branch of accounting management which includes the use of different techniques to monitor and control costs. This implementation is more applicable to the issues of manufacturing.
- Tax Accounting is concerned with the proper compliance with tax regulations, tax filings, and tax planning to reduce a company's tax burden in the future. Accordingly, tax accountants adjust the financial statements prepared under the principles of financial accounting to account for differences with the rules prescribed by tax laws.Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.
- Social Accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting. Social Accounting is reported primarily in the form of environmental reports that accompany the company's annual reports.
- Forensic Accounting involves the reconstruction of financial information when a complete set of financial records is not available. This skill set can be used to reconstruct the records of a destroyed business, to reconstruct fraudulent records, to convert cash-basis accounting records to the accrual basis, and so forth. This career tends to attract auditors. Forensic accountants act as expert witnesses in civil and criminal law courts who require an assessment of the financial effects of a loss or a financial fraud detection.
What is the Accounting Cycle?
The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements.
Steps in the accounting cycle
Accounting cycle involves a systematic process which is as follows :
- Transaction
- Journal Entries
- Posting in General Ledger
- Trial Balance
- Worksheets
- Adjusting Entries
- Financial Statements
- Closing the Books
Transactions: Financial transactions start the process. If there were no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.
Journal Entries : A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited).
To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books.
Transactions are recorded in chronological order and as they occur.
Journals are also known as Books of Original Entry.
Posting to the General Ledger : The journal entries are then posted to the general ledger where it is possible to see a summary of all transactions to individual accounts.
Trial Balance: A total balance is calculated for the accounts at the end of the accounting period (which may be quarterly, monthly, or annually, depending on the company).
Worksheet: The bookkeeper must search for errors and make corrective adjustments that are tracked on a worksheet when the debits and credits on the trial balance are not matched.
Adjusting Entries : At the end of the company’s accounting period, adjusting entries must be posted to accounts for accruals and deferrals. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.
Financial Statement : The balance sheet, income statement, and cash flow statement can be prepared using the correct balances.
Closing : The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because sales and expense reports are accounts that reflect results for a specific period of time. Balance sheet accounts are not closed because at some point in time they display the financial position of the company.
PROCESS OF ACCOUNTING CYCLE
Accounting cycle involves a systematic process. It begins when an accounting transaction takes place in a company and need arises for its recording. Hence the accounting cycle initiates with the recording of transactions and posting its journal entries in the general ledger. With the completion of the posting of entries in the general ledger, the accounting person prepares an unadjusted trial balance.
The main objective of the trial balance is to verify the total credit debits. After the modification of these entries, other corrections are made. Followed by financial statements, revised trial balance is prepared after filing updated entries.
PURPOSE OF ACCOUNTING CYCLE
The main purpose of the accounting cycle is to record all the transactions systematically without missing an entry. It leads to the accuracy of all financial records. The accountant prepares the financial statements considering accounting records and cycle.
So it serves as a financial statements stepping stone or platform.
Golden Rules of Accounting
One of the most famous and commonly used terms in the field of accounting and finance is “Three golden rules of accounting”. These rules are used to prepare an accurate journal entry which forms the very basis of accounting and act as a cornerstone for all bookkeeping.
To understand the Golden Rules of Accounting we must first understand the types of accounts.
There
are three types of accounts:
- Real Account
- Personal Account
- Nominal Account
Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year end and are carried forward.
The
example of assets on which the Real Account is applicable:-
Land and
Building, |
Furniture |
Plant
and Machine |
Vehicles |
Cash |
Trademarks |
Copyright
The
accounting rule of real account goes like |
“Debit
what comes in, |
credit
what goes out” |
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A Personal account is a General
ledger account connected to all persons like individuals, firms and
associations.
If the
person/ group of persons/ legal body is receiving something from the business
then – Debit the receiver
If the
person/ group of persons/ legal body is paying something to the business –
Credit the payer or giver
Example
of accounts on which the Personal Account is applicable: –
Examples
of Persons: – Suman, Pooja Shah, Rahul Rao, Aman, Amit . Etc.
Examples
of Artificial persons: – Ashok And Sons., Bank A/c (SBI), Reliance
Industries Ltd. Etc.
Examples
of Representative persons: – Outstanding Salary, Prepaid Expenses,
Accrued Income, Pre- received Income, Etc.
The
accounting rule of personal account goes like |
“Debit
the receiver, |
Credit
the giver”
A Nominal account is a General
ledger account pertaining to all income, expenses, losses and gains. Some
common e.g. are,
Electricity
Expenses, |
Telephone
Expenses, |
Interest
Received, |
Profit
on Sale of Machines, etc.
If it’s
an expense or loss for the business – Debit |
If it’s
an income or gain for the business – credit
The
accounting rule of nominal account goes like |
“Debit
all expenses and losses, |
credit
all incomes and gains”
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Golden
rules of accounting with examples : |
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1. Seema
Mishra started business with cash Rs. 1,00,000. |
2.
Purchase goods for cash Rs. 50,000. |
3. Sold
good to Ankita for Rs. 10,000. |
4. Sold
goods for cash Rs. 12,000. |
5. Paid
to Ronak Shah Rs. 25,000. |
6. Paid
rent of shop Rs. 17,000.
Sr. No. |
Name of Account |
Type of Account |
Debit/ Credit |
Reason |
1 |
Cash |
Real |
Dr |
Cash Come in |
Seema Mishra |
Personal |
Cr |
Proprietor is a giver |
2 |
Purchase |
Nominal |
Dr |
Purchase is an expense |
Cash |
Real |
Cr |
Cash going out |
3 |
Ankita |
Personal |
Dr |
Ankita is a receiver |
Sales |
Nominal |
Cr |
Income if the business |
4 |
Cash |
Real |
Dr |
Cash Come in |
Sales |
Nominal |
Cr |
Income if the business |
5 |
Ronak |
Personal |
Dr |
Ronak is a receiver |
Cash |
Real |
Cr |
Cash goes out |
6 |
Rent |
Nominal |
Dr |
Rent is an expense |
Cash |
Real |
Cr |
Cash goes out |
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