Basic Accounting Procedures

Introduction to Accounting and Its Basic Procedures

Accounting is an academic field that can be defined as a process of reporting, recording, summarizing, and interpreting economic data. Introduction to accounting is essential for any organization as it helps in making better decisions that lead to effective choices. This is done by providing information on the financial status of the business.

According to the American Institute of Certified Public Accountants (AICPA), accounting is the art of recording, classifying, and providing a summary in an essential manner and in terms of money, transactions, and events. These transactions and events have, at least in part, a financial character. The results of these events and transactions can later be interpreted.

These days almost everybody uses accounting. Hence, a good knowledge of accounting can be beneficial for all students. One can also look at accounting as a language of finance. And if one wants to learn this language of finance, then he or she needs to learn its basics and important aspects. Some of those aspects are given in a list below.

  • Economic Events

Economic events are basically consequences an organization has to undergo whenever any number of monetary transactions are involved. For example, purchasing new machinery, machine installation on-site, and transportation.

  • Measurement, Identification, Recording, and Communication

The accounting system must be outlined in a manner that the right data is identified, measured, recorded, and communicated to the right individual and at the correct time.

  • Organization

This refers to the level of a business operation and the size of activities.

  • Interested Users of Information

Interested users of information refer to communicating important financial information to the customers. This is according to what will be used for making the right decision.

Also, apart from all of this, there are also some basic accounting procedures. Those accounting procedures are:

  • Double Entry System.

  • Traditional Approach.

  • Journal and Journalising Approach.

  • Modern Approach to Classification.

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The Basic Accounting Procedures

In this section, readers will be able to understand the basic accounting procedures in more detail. Those basic accounting procedures are:

  1. Double Entry System

There are two main methods that can be used for accounting. These methods are single entry systems and double entry systems. Usually, the double entry system is used for higher quality accounting purposes. It is an important accounting mechanics process and system.

It should be noted that the double entry system of accounting mainly deals with either two or more accounts. These accounts are dealt with for every single business transaction. Students should remember that the double entry system is a basic and very fundamental concept that encompasses both accounting and book-keeping currently.

Also, every financial transaction has an equal and opposite effect in, at the very least, two accounts. The equation for this can be mentioned  as:

Assets = Liabilities + Equity

There are also several advantages of using the double entry accounting or system. If you want to learn what those benefits are, then go through the list that is given below.

  • A double entry system helps in enhancing the accuracy of the accounting. This is done with the help of a trial balance device.

  • Profit and loss that one suffered during a year can be calculated through details.

  • An organization can follow the double entry system to keep the accounting records in greater detail. This helps the organization in exercising control.

  • Comparison can also be made by referring to the recorded details. The details of the first year can also be compared with the second year. Any deviations that are found during the comparison can be dealt with later.

These are all the major advantages of using a double entry system.

  1. Traditional Approach

The traditional accounting approach is used for classifying the accounts in an organization. Also, there are different classifications that are made for the types of accounts. These classifications of accounts are:

  • Personal Accounts

These accounts are often of natural people, human beings, and artificial people. Personal accounts can also be classified into different types, including natural persons, artificial persons, and representative persons.

  • Impersonal Accounts

These are the accounts that don’t fall under the category of personal accounts. These types of accounts are classified into different kinds, including real accounts and nominal accounts. Real accounts can further be differentiated into tangible real accounts and intangible real accounts.

These are the important types of traditional approaches to accounting.

  1. Journal and Journalising Process

There are several transactions that are carried out in an organization every single day. Some of these transactions can be similar while others can be different. This is why it is not possible to keep all the journalising process without writing it or recording it down.

Further, one has to ensure that nothing is omitted or avoided in these transactions. This is why these transactions are kept in books. And journalising can be defined as the traditional form of keeping records of everything that is happening in an organization.

Also, a journal is the book of primary entry. It is also known as the book of original entry. This means that transactions are first entered in the book and it is also the most vital book of accounts. The transactions should be recorded in a systematic and chronological manner.

Journals can also be used to keep track of all the accounts that are debited or credited. Students should remember that keeping a record of transactions in ‘journals’ is known as ‘journalising the entries.’ There is also a list of activities that are recorded under journal entry.

  1. Modern Approach of Accounting Classification

When it comes to the modern approach, the accounts are either credited or debited. This means that the accounting equation can be used to debit or credit an account. Hence, it is known as the accounting equation approach. There are also several modern rules of accounting.

The basic accounting equation that is valid in this case is:

Assets = Liabilities + Capital (This is known as the Owner’s Equity)

This equation can also be expanded in the form of:

Assets = Liabilities + Capital + Revenues - Expenses

Further, it can also be said that Profit = Revenues - Expenses

It is important for the accounting equations to remain balanced every single time. Further, one should also keep in mind that every equation has a dual aspect. This means that every transaction would either affect the debit side or the credit side.

It is also possible for a transaction to affect two accounts on the debit side or two accounts on the side of credit. This information should help students answer questions like what is a modern approach as we have given a modern system of accounting introduction in this section.

Fun Facts About the Fundamentals of Accounting

Do you know that there are several fundamentals of accounting? Some of those fundamentals are given below in a list.

  • Assets

An asset can be defined as the economic value of an item that is possessed by an organization. In other words, assets can also be defined as items that can be transformed into cash. These items can also generate income for the enterprise shortly. Assets are useful when it comes to paying any expenses of the business debt or entity.

  • Liabilities

Liability is defined as the economic value of an obligation or debt that an organization has to pay some other organization or individual. It can also be explained as the obligations that come out of previous transactions. These are payable by the enterprise. This payment is possessed by the organization.

  • Owner’s Equity

This is one of the third most important segments of a sole proprietorship's balance sheet. And one of the primary aspects of the accounting equation is:

Assets = Liabilities + Owner’s Equity

This equation shows the investment made by the owner in the trade minus the withdrawal made by the owner from the trade plus the net income of the business that is concerned.

One might also find it interesting to note that Luca Pacioli is the father of modern accounting.

FAQs on Basic Accounting Procedures

Question 1. What is a Double Entry System of Accounting? Explain Through its Advantages.

Answer: Some of the main advantages of the double-entry system of accounting are:

  • Scientific System

This system of recording transactions is far more scientific. It is also useful to achieve the objective of accounting. This is very different from other systems.

  • A Full Record of the Transactions

There is a full record of every transaction because both aspects of transactions are considered. These records are important to compute the loss and profit.

  • Checking Arithmetical Accuracy of the Accounts

This system helps in the preparation of a trial balance. One can check the arithmetical accuracy or correctness of these records.

Question 2. What are the Qualitative Characteristics of Accounting Information?

Answer: Qualitative characteristics can be defined as the attributes that help in accounting information. These attributes improve the usefulness and understandability of:

  • Reliability: It implies that the information must not contain any material error. Personal bias should also be absent.

  • Relevance: The accounting of information should also be relevant to the requirements of the decision-making of the organization and its members.

  • Understandability: It states that all information should be disclosed in financial statements. This should be done in a manner that is easy to understand.

  • Comparability: Over time, both inter-firm and intra-firm comparisons should be possible.