What are the types of accounting?

Accounting is defined as a method for recording and documenting the financial information of any company or financial institution. The importance of accounting lies in facilitating the understanding of financial information by organizing and arranging it, showcasing the financial results of the institution, indicating whether it is making a profit or a loss. Types of accounting include financial accounting, managerial accounting, tax accounting, cost accounting, and credit accounting. The principles of accounting are a set of standards and rules that govern the accounting world, unifying definitions, assumptions, and rules used in the field of accounting.

Below are the main principles of accounting:

Principle of Regularity

The principle of regularity indicates that accountants are committed to applying all applicable accounting rules and laws, which involve multiple accounting activities in the company or institution where they work.

Principle of Consistency

This principle standardizes the process of data entry and report preparation, ensuring that all accountants enter accounting data and information uniformly, which reduces errors and avoids discrepancies among them. If standards are updated, all accountants will be aware of them, and explaining the reasons for these changes fosters acceptance of updates in the accounting system. Institutions using a specific system for long periods can compare results over time. If a principle or method changes, it should aim to improve the usefulness of financial results.

Principle of Integrity

According to this principle, all accountants must present the financial position of the institution honestly and transparently to reflect the correct financial status. The information provided by the accountant should be truthful and accurate.

Principle of Stability of Methods

This principle emphasizes the necessity of having a consistent approach in the procedures for preparing financial reports. It is closely related to the principle of consistency, ensuring that a single stable method is used for all financial matters and accounting, preparing the institution’s financial reports in the same fundamental ways without change.

Principle of Non-Compensation

This principle obliges the accountant to disclose all financial data of the institution, whether positive or negative, without expecting compensations or offsetting debt through the original budget or revenues. This principle states that no entity or institution should anticipate financial compensations and should provide accurate reports as they are.

Principle of Continuity

This principle assumes that the institution will continue its operations in the future and will not cease. The institution’s work will continue as it has originally based on the fundamental rules established; this means that the institution’s future operations should align with what happened and was built in the past.

Principle of Periodicity

The periodicity principle involves distributing accounting entries over appropriate time periods determined by the institution based on its needs. The institution must report its financial results during specified periods, which can be monthly, quarterly, or annually. This period will be adopted in the coming years to compare company profits from one year to another, and based on this comparison, accounting procedures will be devised to support continuous and unified production of financial data over the specified time period.

Principle of Materiality

The principle of materiality requires that the financial reports of the institution be clear and capable of revealing its true financial health. Consequently, elements or materials that do not significantly impact the results can be disregarded. In global systems like the stock market, any element representing at least 5% of total fixed assets is considered separately from the balance sheet. However, an element representing less than this percentage can be considered material if it alters net profit to a loss, leading to its inclusion in financial statements alongside other significant elements.

Principle of Honesty in Transactions

The principle of honesty in transactions mandates that the person selling or purchasing a good or service must provide complete and accurate information. Financial consultants bear the responsibility of acting with utmost good faith when dealing with clients. In transactions between two parties, a credit contract is signed containing a clause requiring both parties to act with the highest degree of honesty and faith towards each other. This principle is fundamental in insurance law.

Principle of Historical Cost

This principle focuses on recording the historical cost of a specific item, indicating the cash equivalent or cash paid for purchasing that item. Original cash is not adjusted for inflation, and historical cost is recorded in the institution’s financial statements. This principle serves companies and institutions by recording the historical cost of goods or services and reporting it on the balance sheet, providing the goods with their true value without exaggeration, ensuring objectivity. This principle is one of the tests auditors conduct on major assets.

Principle of Revenue Recognition

This principle states that the institution’s revenues should be recorded upon their arrival without delay. Thus, when a product is sold or a service rendered that is due for payment, it should be recorded and reported immediately, regardless of whether the money has been received.

Principle of Economic Entity Assumption

This principle states that the institution or business activity should be separated from the financial activities of its owner, considering the business activity of the institution as a separate entity. This principle relies on an accounting principle that distinguishes between transactions conducted by the institution and those belonging to the owner. This principle can also be applied in separating departments within institutions or companies, allowing each unit to maintain its own records and transactions, being responsible for them. It is not limited to large institutions but can also be applied in smaller entities with multiple functions.

Principle of Matching

This principle involves matching the revenues earned by the institution with the expenses incurred in a specific period. This requires institutions to adopt the accrual accounting basis. It is crucial to match income with expenses during the same period in which income is generated, regardless of whether the payment has been made. Expenses are compared with revenues over a specific time frame to report the profit achieved, and the principle of matching is based on cause-and-effect relationships. If matching is not feasible, expenses will be recorded immediately.

Principle of Monetary Unit Assumption

This principle means that all commercial transactions that can be expressed in monetary terms can be recorded, assuming that this currency remains relatively stable over time. For example, when looking at American bank statements, the figures indicate value in dollars rather than the number of physical units. Accounting principles are a comprehensive set of guidelines and laws that regulate and govern accounting practices across all financial sectors. They are issued by the Financial Accounting Standards Board and obligate certified public accountants to follow several procedures and fixed rules that all accountants must implement. They serve as the foundation for all accounting information pertaining to any financial institution, ensuring the institution’s rights are protected from loss or error.

How does the accounting cycle operate in detail?

The accounting cycle refers to a series of interrelated and sequential financial procedures and operations, each of which relies on the previous operation and serves as a precursor to the next. The accounting cycle involves recording accounting entries in journals, followed by posting to the ledger and balancing accounts according to accounting principles. Subsequently, the accounts payable and receivable are balanced to prepare the trial balance. Year-end adjustments are made to correct errors in accounting records to prepare financial statements, which include the income statement, balance sheet, cash flow statement, and profit and loss statement, as well as disclosure statements that provide details enhancing the information in the financial statements, enabling stakeholders to evaluate the entity’s activities during the relevant financial period.

Accounting activities are conducted through a sequential and orderly series of processes, known as the accounting cycle, where the operations within the accounting cycle are consecutive; each operation depends on the preceding one, and each operation serves as a precursor to the following one.