Accounting

Overview


Accounting is the process of recording all the transactions of a firm that affects its value, or the mix of assets and liabilities that comprise its value. Typically this means, that whenever a transaction occurs that involves the exchange of cash (or assets convertible to cash) for some service, product or asset, it is recorded in the firm's accounting system.

Principles of Accounting


The principles of accounting state the priniciples and assumptions that should guide accountants as they prepare a firms books.

  • The Entity Principle
  • Historical Cost Principle
  • The Faithful Representation Principle
  • The Going Concern Principle
  • Stable Monetary Unit Principle

In addition to the high level items listed above, accountants may also adhere to the following:

  • Matching Principle - in accrual accounting, expenses are matched and recorded against revenues that they generate. (that is, in the same period)
  • Materiality - company's need to only strictly account for items that are significant to the business.

Accounting Equation


Accounting creates a set of accounts that measure the financial activities of the firm. At the top level, there are three primary accounts:

  • Assets - things that are owned by a business that have a positive value to the firm
  • Liabilities - amounts that are owed by the firm to someone else.
  • Equity - the difference between the two, that is, assets minus liabilities and represents the value that is owned by the owners of the firm.

After re-arranging terms, the fundamental accounting equation is
{% Assets = Liabilities + Equity %}

A Chart of Accounts is a comprehensive listing of the accounts in a firm's books and categories to which each account belongs. For example, the Cash account is an account within the chart. It can be classified as a Current Asset, which can be further classified as an Asset, both of which are categories defined within the chart of accounts.

The Accounting Cycle


  • The Recording Process: is the initial process of recording business transactions in a company's books.
  • Adjusting the Accounts : at the end of the accounting cycle, a company's accountants will adjust the books in order to account for material changes in the asset/liabilities of a company that do not occur through a recordable transaction.
  • Closing the Books : finishes the accounting cycle.

The Financial Statements


A company's financial statements summarize the information in the company's books. They consist of the following four statements.

  • Income Statement
  • Retained Earnings
  • Balance Sheet
  • Statement of Cash Flows

The preparation of financial statements typically occurs at the end of each quarter. That is, preparation does not require that the books are closed. In fact, even at the end of the year, the financial statements are prepared prior to closing.

Accounting for Investments and Securities


Investments and securities pose complex challenges for accounting.

  • Accounting for Investments deals with the unique issues that occur when accounting for assets such as stocks and bonds.
  • Accounting for Derivatives
    • Hedge Accounting
  • Accounting for Credit Risk and Impairment

Accounting Analytics


  • Budgeting : describes the process used to create a budget and the various budgeting forecasts.
  • Querying Accounting Data Often times a company will wish to analyze its accounting data in ways that are not found in the company's financial statements. Generally, this requires getting access to the raw data and then querying it.
  • Cost Allocation is a process of taking the expense data in a company's books and allocating it to various products, services, or customers in order to help in the profit optimization process.
  • Forensic Accounting