Understanding accounting

Understanding accounting and its main principles

Accounting is a system of financial reporting that identifies, records and communicates the economic events of an entity. What is meant by this?

Recognize: An accountant must be able to identify whether an event is relevant to an entity’s accounting requirements and whether or not it can be recognized. Some events are easy to identify, such as sales or services rendered to a customer. Others, such as asset write-offs, are not so obvious and must be calculated based on specific criteria.

Recordkeeping: Accounting provides a universal and structured framework for recording identified economic events. Consistent reporting across all entities enables a more accurate assessment of an entity’s financial position and meaningful comparisons between entities.

Communicate: The most important aspect of financial reporting, communicating financial information, distinguishes financial reporting from accounting. Accounting provides a set of tools in the form of reports that interested parties can use to analyze the impact of economic events on an entity. Accounting and Bookkeeping Services in Australia

The process of communicating data about a company’s economic performance allows an accountant to inform those who need to know. Stakeholders – including shareholders, board members, and employees – rely on the information communicated by accounting systems to understand a company’s economic performance, its current status, and the course to be chosen for the future.

Because the accounting needs of internal and external users differ, accounting can be divided into management accounting, which provides reports for internal users such as managers and employees, and financial accounting, which provides reports for external users such as shareholders.

Compromising influences

When reporting on the economic performance of a company, it is assumed that all information recorded is accurate and unbiased. Unfortunately, in practice this is not always the case, and the information can become distorted and inaccurate for a variety of reasons. There are two important factors that affect financial reporting: Corporate governance and ethics.

Corporate governance, i.e., the management and control of companies, is an important factor influencing financial reporting. It determines a company’s short- and long-term goals, its direction, and its economic activities. This is particularly important for companies where the owners (shareholders) are not actively involved in the management of the company, as is the case with most modern for-profit companies.

Basic Assumptions


Generally accepted accounting principles (GAAP) are recognized standards and definitions that establish a “language” of accounting so that there is a common basis that everyone can follow and understand. BAS Agent in Australia

Individual countries have individual GAAPs, often administered by specially established bodies. In Australia, for example, the Australian Accounting Standards Board sets the standards, while in the U.S. several agencies, including the Securities and Exchange Commission, are involved in setting the standards. GAAP varies from country to country, but recent efforts to set internationally recognized standards have been made by the International Accounting Standards Board, which issued International Financial Reporting Standards (IFRS).

The most common accounting standards include:

1. The acquisition principle

It is common practice for accountants to record assets at cost – known as the acquisition principle – to minimize errors associated with speculation. Valuing an asset at its cost is reliable and minimizes errors associated with estimates of market value.

2. Assumption of the monetary unit

The conventions of the monetary unit assumption mean that only transactions that have a monetary component are relevant to the accounting process. Non-monetary factors may affect an entity’s performance, such as employee morale, but if it is not possible to express them in monetary terms, they are therefore excluded from the reporting process.

3. Economic unit – assumption

An economic unit is an individual or collective in a society and can be an individual, a private company, a charity, a social association, or even a government. The economic entity assumption assumes that the economic activities of an entity remain separate from those of its owners.

In accounting, the economic entity assumption is generally associated with three types of entities: proprietary corporations, partnerships, and companies.

Ownership companies are businesses owned and operated by an individual. The owner is entitled to all profits, but is also liable for all debts incurred by the business.

Partnerships are businesses with two or more owners, who set out in a form of partnership agreement how the business will operate and how profits will be distributed. Depending on the partnership agreement, the individual partners may or may not participate in the day-to-day operations of the business. As a rule, each partner has unlimited liability for the debts of the company.

Companies are independent legal entities with transferable shares to regulate ownership. The shareholders are not usually involved in the management of the company, are usually entitled to a share of the profits if distributed, but have limited liability and no liability for the debts of the company. Accounting Consulting Firms in Australia


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