What Is Accounting? A Definitive Guide For Nigerians

Accounting is the process of consolidating financial information in order to make it plain and understandable to all stakeholders and shareholders. The primary purpose of accounting is to accurately record and report an organization’s financial performance.

How Accounting Works

The primary aim of accounting is to record and report on a company’s financial transactions, financial performance, and cash flows.

Accounting standards increase the trustworthiness of financial statements. The income statement, balance sheet, cash flow statement, and statement of retained earnings are all part of the financial statements. Standardized reporting enables all stakeholders and shareholders to evaluate a company’s performance. Financial statements must be transparent, trustworthy, and accurate.

Importance Of Accounting

#1. Maintains a record of business transactions.

Accounting is crucial because it preserves a systematic record of the financial information of a firm. Users can compare current financial information to past data when records are kept up-to-date. It allows consumers to measure a company’s success over time by keeping complete, consistent, and accurate information.

#2. Management decision-making is made easier.

Accounting is very crucial for internal organization users. Internal users may include those responsible for the organization’s planning, organization, and management. Accounting is required by the management team when making critical choices. Business decisions can range from deciding whether to expand geographically to enhancing operational efficiency.

#3. Results are communicated

Accounting facilitates the communication of firm results to diverse users. The key external users of accounting information are investors, lenders, and other creditors. Investors may decide to purchase stock in the company, whereas lenders must assess their risk before lending. Companies must develop credibility with these external consumers by providing relevant and credible accounting information.

#4. Complies with legal requirements

Accounting ensures that financial assets and liabilities are reported accurately. Tax administrations such as the U.S. The Internal sales Service (IRS) and the Canada Revenue Agency (CRA) examine a company’s stated gross sales and net profits using standardized accounting financial statements. Accounting systems aid in ensuring that a company’s financial statements are legally and accurately disclosed.

Types of Accounting

Accounting is divided into two types: financial accounting and managerial accounting.

#1. Financial Accounting

Financial accounting entails creating accurate financial statements. The goal of financial accounting is to measure a company’s performance as accurately as possible. While financial statements are intended for external consumption, they may also be used to assist internal management in making choices.

Accounting principles and standards that are extensively used in financial accounting include US GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). Accounting standards are crucial because they enable all stakeholders and shareholders to easily understand and interpret the financial statements produced year after year.

#2. Managerial Accounting

Managerial accounting examines the data obtained by financial accounting. It refers to the process of preparing business operations reports. The reports are designed to help the management team make strategic and tactical business choices.

Managerial accounting is a procedure that helps a firm maximize efficiency by examining accounting data, determining the best next steps to take, and communicating these future steps to internal business managers.

Cost accounting is an example of managerial accounting. Cost accounting focuses on a precise breakdown of costs in order to achieve effective cost control. Managerial accounting plays a critical role in decision-making.

How Managerial Accounting Works For Managers

Managerial accounting seeks to improve the quality of information provided to management regarding business operations measures. Managerial accountants use information on the cost and sales revenue of the company’s goods and services. Cost accounting is a broad subset of managerial accounting that focuses on capturing a company’s entire costs of production by measuring variable and fixed costs at each stage of production. It enables organizations to detect and decrease needless spending while increasing earnings.

Planning, decision-making, and controlling are the three pillars of managerial accounting. Forecasting and performance tracking are other important components. Through this approach, managerial accountants give information to assist businesses and departments in these critical areas.

What are Accounting Principles?

These principles, as the name implies, are the standards and guidelines by which a corporation should publish its financial statistics. The following are the top six basic accounting principles:

The Basic Accounting Principles

Here is a list of basic accounting concepts that the corporation frequently adheres to. Let us have a look at them:

#1. The principle of accrual

Accounting transactions should be recorded in the time in which they occur, not when the cash flow is earned. As an example, suppose a corporation has offered things on credit. According to the accrual principle, sales should be recorded during the time rather than when the money is collected.

#2. The principle of consistency

If a corporation follows an accounting principle, it should stick to that concept until a better one is discovered. If the consistency principle is not followed, the company will jump about and financial reporting will be disorganized. As a result, investors would struggle to discern where the company has been and how it is pursuing long-term financial growth.

#3. The principle of conservatism

Accounting, according to the conservative principle, has two options: report a larger amount or report a smaller amount. The conservatism principle urges the accountant to declare a higher liability amount, a lower asset amount, and a lower net profit amount.

#4. The going concern principle

A corporation would function under the going concern principle for as long as it could in the near or foreseeable future. As a result, by adhering to the going concern principle, a corporation may postpone depreciation or comparable charges for the next quarter.

#5. The matching principle

The matching concept is the foundation of the accrual principle, which we have just seen. According to the matching principle, if a corporation recognizes and records revenue, it should also record all costs and expenses associated with it. If a corporation records its sales or revenues, it should also record its cost of products sold and other operating expenses.

#6. The principle of full disclosure

According to this notion, a corporation should reveal all financial facts so that readers can view the organization clearly. Investors may misunderstand financial statements if the full disclosure principle is not followed because they may not have all of the information necessary to make an informed decision.

What Are Accounting Concepts?

Accounting concepts are theoretical ideas, components, and terminology found in accounting, finance, and economics. These phrases aid individuals, corporations, and organizations in the methodical recording of financial information and transactions. These notions serve as guidance for accountants when preparing financial reports and other papers for individuals and businesses. Companies typically adhere to the accounting rules, principles, and laws of the nations in which they operate. These principles encompass notions and norms that assist organizations in accurately reporting transactions.

Accounting concepts and principles are important because they establish a common framework for understanding specific financial circumstances, regulations, and theories. The ideas are important because they can help clarify the details of complex transactions and aid in the resolution of any disputes that may emerge during the preparation of financial statements. Consider these concepts to be ‘what accountants do,’ and accounting principles to be ‘how they do it.’

Why are Accounting Concepts Important?

Accountants are experts who record a company’s financial transactions. Periodic summaries of these transactions or financial reports provide relevant financial information about a company to management, investors, analysts, and the government. If each company has its own system for drafting and producing summaries and statements, it could lead to inconsistencies and enhance the possibility of fraud and financial mismanagement. Accounting bodies, governments, and regulatory agencies utilize a widely agreed-upon set of standards to standardize accounting practices in order to solve this.

Important Accounting Concepts

Accounting bodies categorize notions as either assumptions or principles. Based on these assumptions and principles, every type of business, whether a sole proprietorship, partnership, or public or private firm, documents its financial transactions. These are some of the most important accounting concepts:

#1. The concept of a business entity

The concept of a commercial entity, economic entity, or distinct entity assumes that a company is independent of its owner. A company may not keep track of its owner’s personal expenses, income, liabilities, or assets. It makes it easier to keep track of a company’s spending, income, and tax deductions. Furthermore, it protects a business owner’s personal funds and aids in the development of their creditworthiness. It more precisely shows cash flow and financial position. This substantial distinction enables stakeholders and creditors to make sound business decisions based on a company’s performance rather than the owner’s financial status.

#2. The concept of a going concern

The going concern concept requires accountants to create financial statements with the presumption that a company will continue to operate for the foreseeable future. A foreseeable future is defined as a period of 12 months from the end date of the reporting period under this concept. If a business owner or management is committed to reducing business activities to zero, the going concern idea cannot be applied to accounting. Accountants may no longer use the idea of going concern if a corporation is:

Incapable of paying dividends
Unable to obtain financing from banks and financial institutions
Suffering from losses and a negative operating cash flow
In a bad financial situation
Unable to repay critical debts
Being subjected to unfavorable legal or regulatory action

#3. The concept of monetary measurement

This is an assumption-based accounting concept that states that businesses should only record transactions that can be quantified and measured in terms of money. They do not include a transaction in their yearly financial statement if it cannot be assigned a monetary value. Though these transactions have an impact on a company’s financial performance, they may not be included in financial statements because monetizing them can be difficult. Employee competence, product quality, employee efficiency, market sentiment, corporate productivity, and stakeholder satisfaction are all examples of non-monetary value.

#4. Accounting period concept

The accounting period idea specifies a timeframe over which a company records and discloses its financial performance for internal and external stakeholders. A company’s accounting period may coincide with its fiscal year. A business might set a timetable for internal reporting, such as three or six months, or generate monthly financial reports to analyze its cash flow condition. Although management can choose a convenient accounting period for internal reporting, investor, government, and tax reporting is normally for a year.

#5. Concept of accrual

Accrual is a fundamental notion that governs how a company records cash and credit transactions. According to this concept, a firm records a financial transaction during the period in which it occurs. It makes no distinction between whether the business pays or receives cash at the moment of the transaction, or whether it pays cash after a certain period of time. A corporation, for example, records a credit purchase at the moment of purchase rather than when it repays the supplier. This aids in the accurate recording and reporting of income, expenses, liabilities, and receivables. In recording financial transactions, all current accounting systems use the accrual concept.

#6. The concept of revenue realization

A seller records prospective revenue from a transaction under the revenue realisation or revenue recognition concept, regardless of whether they have or have not received proceeds. During a sale, ownership of a product passes from a buyer to a seller. A seller records the transaction in their ledger by creating a receivable in the buyer’s name. When an accountant receives the due money in the future, they make another entry.

#7. The concept of full disclosure

The principle of full disclosure requires a company entity to provide relevant information for persons who read financial statements and reports for investment, taxes, or audit purposes. This concept intends to deliver crucial financial information to investors, creditors, shareholders, clients, and other stakeholders. Revenue recognition, depreciation, inventories, taxes, earnings, stock value, leases, and liabilities are all covered by disclosure policies.

#8. The concept of dual aspects

According to the dual aspect principle, every transaction affects two accounts in a business. A company then records both characteristics for appropriate bookkeeping. Every financial transaction contains a credit or debit component, as well as a giver or receiver. If an accounting procedure fails to represent both, the final accounting record may have errors. The dual aspect principle underpins the double-entry accounting system, which is now a standard procedure for auditing and taxation.

#9. The concept of materiality

The materiality concept establishes parameters for determining whether a piece of financial information is material and whether it has the potential to impact the person reading a company’s financial statements. Based on this notion, an accountant or a business can eliminate insignificant transactions that have no influence on final accounting. The materiality idea is vulnerable to subjective interpretation, and the basis for employing it varies with the size of a corporation. A major corporation may round off figures in its final accounting to crores, whereas a small corporation may round off figures to lakhs.

#10. The concept of verifiable objective evidence

Under this notion, a company can only record transactions for which it has documentary proof. A transaction can be biased or untrustworthy without sufficient and reliable documented evidence, and it can extend the extent of financial irregularities. A store employee, for example, may produce a bill for purchases and sales and back it up with sale and purchase invoices.

#11. The concept of historical cost

According to the historical cost principle, a company may report assets and liabilities at their historical cost rather than their current market or sale value. It aids in the preservation of consistent, dependable, and verifiable financial data. Including an entity’s current worth can lead to financial problems.

What Is Accounting Software?

Accounting software records financial transactions for a company, automates accounting operations such as periodic invoicing and transaction classification, and creates reports. You can also use it to manage income and spending and organize your company’s financial information in preparation for tax season. The more data you collect in your accounting software, the more insights you can gain to help your organization.

With built-in reports, online bank feeds, and invoicing capabilities that help you get paid on time, the finest accounting software for small businesses streamlines the process. Aside from functionality, your accounting software should be simple to use and within your budget.

What Role Can Accounting Software Play in Your Small Business?

Not only can centralizing your financial data in an accounting software application make your life easier than manually inputting data into a spreadsheet. Other advantages include the following:

#1. Reduce the number of manual accounting tasks.

Using a spreadsheet to keep track of your company’s financial transactions can be time-consuming and prone to human mistake. Not to mention exhausting. Accounting software eliminates the need for manual data entry by automatically importing bank transactions. Some software packages can even categorize your transactions depending on previous activity or bank regulations that you set up.

One of the most significant advantages of accounting software is the elimination of the need to manually balance debits and credits. Each transaction, according to the double-entry accounting method, results in a debit to one account and a credit to another. If you don’t have a background in bookkeeping, this can be perplexing. Most accounting software automatically debits and credits accounts, so you don’t have to think about it.

#2. Organize your financial data.

Accounting software typically has an integrated chart of accounts for arranging transactions. When you enter a transaction, you assign it to a certain account. Assets, liabilities, equity, expenses, and revenue are the five basic account kinds. You can then create sub-accounts. For instance, perhaps you have a separate sub-account within the expenses account for equipment charges.

Organizing your finances allows you to observe how different parts of your business are operating and to understand where your money is coming from and going. It also guarantees that your reports are as thorough as possible.

#3. Reporting provides financial information.

Accounting software contains built-in reports that automatically extract data from the relevant accounts, eliminating the need to prepare financial reports. For example, the balance sheet report focuses on your equity, assets, and liabilities accounts. The cash flow statement, which shows how cash flows through your organization, and the income statement, which shows sales and expenses, are two other important reports.

Some accounting software packages allow you to schedule financial reports to be emailed to you on a regular basis. You may also be able to personalize reports by filtering for specific time periods or even departments inside your company.

#4. Connect with your accountant.

Accounting software facilitates collaboration with your accountant or bookkeeper. Typically, you may provide them with online access to your books so that they can double-check the information and make any necessary modifications. Just make certain that you use accounting software that they are comfortable with.