accounting terms

accounting terms

Introduction to Accounting Terms

1. Basic Accounting Terms

Budget is an estimate of costs, an organized financial forecast of operations, resources, property, and liabilities. Actually, a budget is an estimate of income and expenditure for a specific period of time or for a given project and is used as a tool for decision making. Every manager of a firm will prepare their own budgets. Many varieties of budgets are formulated by the firms and used for the dual purpose of controlling financial operations and future planning management.

The term “accounting” encompasses a wide range of activities. Some people define accounting as a body of theory and methods that helps in processing and communicating information. Others define accounting as the “art of recording, classifying, and summarizing in a significant manner.” Some accounting definitions are provided as economic quantum and means of recording. Also, some people define accounting for taxation as the “method of computation and reporting.”

There are many accounting terms used in business as well as in the accounting profession. Some basic accounting terms are important to understand for any business professionals. Here is a list of accounting terms, their meanings, and their uses.

2. Financial Statements

There are four basic financial statements, classified into statements which relate primarily to the entity’s self-stated objectives (such as income and cash flow statements), and statements which reflect the value of the economic unit’s capital (such as balance sheets). While these forms are the traditional or basic financial statements as reflected in the accounting process, almost all business organizations create other regular reports which evidence or evaluate activities associated with the organization’s objectives. They include segmental and product reports for decentralized operations, controlled entities (subsidiaries, divisions and joint ventures), and interim records of the entity’s quarter or current year economic activities, such as earnings prediction and internal cash flow presentation.

Financial Statements: Because we cannot expect all interested parties (such as managers, employees, government, or stockholders) to have access to an organization’s original financial records, the data has to be summarized and organized to do the financial reports. Financial statements are the most common means of communicating information to those interested parties. Financial statements are the basic and formal annual reports of the results of an economic unit’s operations. Accountants are often asked to report not merely on the past performance of an economic entity but rather on its economic viability and future prospects. Information about the income, expenses, assets, and debts tells the reader a great deal, but not the whole story. In fact, what financial statements evidence are flows of resources during some designated time period. In a certain sense, because the statements are an end product of the accounting process, they leave many questions unanswered as to both substance and method, and we need to understand and appreciate many accounting principles and rules underlying these statements.

3. Costing and Budgeting

Overheads are those indirect costs incurred during the production process that cannot be attached to individual products because it would be unmanageable to do so. These indirect costs need to be absorbed into the price of the products to show the true costs of production. Manufacturing overheads are, therefore, apportioned to the cost units produced by using an overhead rate. Budgeting is an estimate of costs, revenues, and resources over a specified period. Budgeting is the combination of the control function of accounting, known as budgetary control, and the developing function of is known as budgeting. An estimate of the likely future events, not fixed targets. Budgets are typically prepared annually or for a period of years and are static or fixed budgets. However, a budget is a financial control tool that works to reduce the risk of not meeting objectives. Differences between actual and expected results are revealed by cost variances, and so the manager can investigate and adapt processes as needed to meet the objectives.

Costing involves the determination of the total cost of production, from the capture of resources through to the delivery of goods and services to customers. Costing is central to management accounting, both from the point of view of the manager and the corner from managerial accounting such as cost classification and behavior, activity-based costing and costing of the service sector as well as job order and operation costing for manufacturing account. The total cost of production includes the cost of resources that have been consumed in the production of goods or services. The total cost of resources consumed also includes the factory overhead or what are sometimes referred to as production overheads.

4. Auditing and Assurance

An assurance engagement is an engagement where a third-party assurance practitioner or an assurance team has been engaged for expression of a conclusion designed for improving the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an entity against the criteria using judgment. The criteria may be the suitable measurable, supported by detailed guidance in the form of technical pronouncements or developed by regulation or by the responsible party. The expression of a judgment reflects the collective professional expertise and experience of the assurance practitioner or an assurance team that is reasonable in the circumstances. An assurance engagement is not to be characterized as an assurance sentence. Unlike auditing, the concept of assurance has not been restricted to any specific level; it can be given beyond the financial statements in the form of assurance on the system of internal control. The engagement that requires the use of significant judgment is said to be an assurance service.

An audit is a process that provides the highest level of assurance or confidence about the fairness of the financial statements. In an audit, the auditor would examine evidence on a test basis which would be obtained primarily from direct correspondence or observation followed by the evaluation of internal financial control to give effect to the examination evidence. On the basis of the examination, audit gives the report on the fairness of the financial statements. This report may be in the form of an unqualified report, qualified report, adverse report, or disclaimer report. The qualification might range from the problems in the application of accounting principles to uncertainties about future tax consequences from investments, which are too material or significantly “confined” to curtail the examiner from very clearly saying about the fairness of the financial statements, but which do not totally destroy or weaken his faith in the fairness of the financial statements. However, this does not involve minor mistakes and immaterial omissions in the financial statements. On the other hand, an unqualified report is issued only when the financial statements of the company are maintained in all respects, fairness.

5. Advanced Accounting Concepts

They require the presentation of the income statement and a statement of comprehensive earnings. The latter should contain the total comprehensive earnings for the period, which include all gains and losses that are disclosed on a statement of stockholder’s equity and on a Statement of Total Recognized Gains and Losses, as presently required in UK standard. The other common requirement is for the auditors to express an opinion on whether the financial statements, taken as a whole, present fairly, in all material respects, a company’s financial position. There are other requirements, usually involving engaging the independence and integrity of public accountants and the conduct of his or her audit. While these often come under attack or are amplified to satisfy public ad mischief, they are areas that have also proven successful in maintaining the integrity of the reporting system through periods of outbreaks of actual accounting irregularities, which we will be examining later, in our work.

Advanced Accounting Concepts – There are some mechanical issues which are proceeded to reconcile the various fiscal reports which were discussed in prior sections. The accountants are incorporating operating in different countries and should have knowledge of various adjustments to cope with the difference in operating and reporting rules and requirements with the financial institutions. Let me point out some of the more important areas of international accounting which require some adjustments in the actual financial statements before they are looked at by investors and regulators in effective way. Referring the accounting principles as generally accepted, in our country, it refers to the principles promulgated by the Financial Accounting Standards Board.