Introduction to Accounting

The Concept of Accounting

Accounting can be defined as a process through which the financial information is identified, recorded and communicated to users in order to make appropriate decisions. When a financial transaction occurs and is identified, we then record it in the books according to accounting principles and assumptions, so that useful financial information is obtained and communicated to decision-makers in the company or entity.

Objectives of Accounting

• Recording any financial transaction occurring in the company.
• Determining the result of the company, whether profit or loss, for a specific period of time.
• Determining the financial position of the company, i.e. determining its assets and liabilities at specified period of time.
• Providing the necessary financial information and reports to various departments in order to plan, control and making appropriate decisions.

Financial Statements

Financial statements are an essential source of financial and accounting information that is useful for making decisions, The financial statements that are prepared are as follows:

Income Statement

The income statement is a statement that is prepared to know the result of the company's business, whether profit or loss, by matching the revenue to expenses for a specific period of date.

Statement of Owner's Equity

The Statement of Owner's Equity is a statement that is prepared to know the changes that occurred to the equity of the company's owners at specific date.

Statement of Financial Position (Balance Sheet)

The statement of financial position, and also known as the balance sheet that is prepared to know the company's assets and liabilities at specific date.

Cash Flow Statement

The Cash Flow Statement is a statement that is prepared to know the [inflows] receipts and [outflows] payments from and to the company, for a specific period of date.

Notes to the Financial Statements

These notes considered to be an integral part of the financial statements, and these notes provide detailed and additional information about items of the financial statements and the accounting policy used when preparing the financial statements.

Accounting Information's Users

Users benefiting from the accounting information are categorized into two sections:

Internal users

• Owners of the project.
• Managers.
• Auditors.
• Employees.

External users

• Investors.
• Banks.
• Governmental entities.
• External auditor

Accounting Assumptions

Accounting assumptions are information and ideas whose authenticity cannot be verified, but must be a matter of agreement in order to understand the financial information and statement, The generally accepted accounting assumptions are:

Separate-Entity Assumption

According to this assumption, the business entity has personality independent from its owners, and its transactions and property are separated from the transactions and property of its owners.

Monetary Unit Assumption

According to this assumption, the monetary unit is considered a means of measuring and recording all accounting transactions, such as the dollar.

Going Concern Assumption

According to this assumption, it is assumed that the business entity established will continue to carry on its activities and businesses for several years to come, unless events emerge lead to its liquidation.

Accounting Period

According to this assumption, the age and activities of the business entity are divided into equal time periods, so as to measure the results of each period alone, instead of waiting until it is liquidated, the accounting period is most often one year and is called a fiscal year.

Accounting Principles

They are the general framework used for recording the accounting transactions that are based on accounting assumptions, among the most important accounting principles are the following:

Historical Cost Principle

According to this principle, the original cost price is used for recording assets and liabilities, even if any change in their market value occurs in the future.

Revenue Recognition Principle

Revenue is recognized if a couple of conditions are satisfied:

• The sold goods are delivered or the service is provided to others.
• There is a real swap transaction between the business entity and others.

The Matching Principle

According to this principle, the company's net profit or loss income is identified by matching revenue with expenses within the fiscal period. There are two principles the business entity uses to record revenue and expenses; namely, the cash basis and the accrual basis. When the cash basis is used, the revenue received and expenses paid are recorded, whether they related to the current financial period or are related to other financial periods, while according to the accrual basis, the revenue that related to the current financial period are recorded, whether received or not, and the expenses related to the current period are recorded, whether paid or not.

Conservatism Principle

According to this principle, the expected losses are taken into account before their occurrence, while expected profits are ignored until they are actually realized.

The Disclosure Principle

According to this principle, the accountant is required to disclose all the financial information of the business entity during the fiscal period, and provide the necessary clarifications and notes, and not to hide any financial information that leads to misleading users of the financial statements.

Consistency principle

According to this principle, the business entity should apply the accounting principles and methods consistently for all fiscal periods, in order for the company's activities to be compared from period to period in a correct way. If the business entity decides to change the accounting method or principle adopted, it must disclose that in the financial statements.

Branches of Accounting

Financial Accounting

It is centered on analyzing, recording and communicating the financial information to decision makers within the specified period of time.

Cost Accounting

It is concerned with providing the financial information related to the cost of production or the product, and submitting the necessary reports to the management for planning, control and making appropriate decisions.

Management Accounting

It provides the necessary information and reports to the administrative bodies to help make decisions and compare the actual performance with the planned performance.

Government Accounting

It is concerned with providing the financial information related to the government, such as revenue and expenses, making budgets and monitoring the public funds.

Tax Accounting

It is concerned with providing the financial information related to the tax on the income of companies and individuals or on goods and services.

Accounts Auditing

This branch is responsible for auditing and reviewing the accounts, accounting records and books, and verifying the use of accounting principles and assumptions upon preparing the financial statements.