Modern Accounting And Its Principles

By Author: Daniel Owen
Total Articles: 916
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Accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it.

Accounting generally involves 5 major activities:

To collect financial information To record and store financial information
To aggregate and organise financial information
To present and report financial information to the public or anyone else in a way that is relatively easy to understand
To keep companies and their managers/owners honest and truthful

Accounting is the degree of measurement of financial transactions which are transfers of legal property rights made under contractual relationships. Non-financial transactions are specifically excluded due to conservatism and materiality principles.

At the heart of modern financial accounting is the double-entry bookkeeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits, providing a ...
... simple way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Rome of Greece.

According to critics of standard accounting practices, it has changed little since. Accounting reform measures of some kind have been taken in each generation to attempt to keep bookkeeping relevant to capital assets or production capacity. However, these have not changed the basic principles, which are supposed to be independent of economics as such. In recent times, the divergence of accounting from economic principles has resulted in controversial reforms to make financial reports more indicative of economic reality.

Critical approaches such as social accounting challenge conventional accounting, in particular financial accounting, for giving a narrow image of the interaction between society and organizations, and thus artificially constraining the subject of accounting. Social accounting in particular argues that organizations ought to account for the social and environmental effects of their economic actions. Accounting should thus not only embrace descriptions of purely economic events, not be exclusively expressed in financial terms, aim at a broader group of stakeholders and broaden its purpose beyond reporting financial success.

Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).

Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.

Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.

About Author:

Daniel Owen writes about Accounting. To know more about Accounting, visit http://www.businessmagnet.co.uk