The act of keeping records of events, be it personal or professional, has always been a part of us. History points us to evidence of how people kept records of crops and growth of herds in the past. They employed different strategies that helped them in decision making on whether to expect a surplus or a shortage of crops in a season. These different strategies for record-keeping have been translated into today’s accounting and bookkeeping systems which are used in the world of business.
Accounting is a definition of the process involved in keeping records of transactions of a business. Whereas, the transactions are recorded, outlined or summarized, analyzed and evaluated by subject-matter experts and specialists and used as a basis for decision making.
Bookkeeping is a part of the process in accounting. It is a definition for the process of recording the transactions.
Accountants are trained to apply the processes and to use transactions recorded by bookkeepers to analyze and evaluate and to make decisions based on the records.
Accounting has become a universal profession and almost every business employs such services. As such, there are a number of principles and procedures that have been defined as the basis of accounting and associated duties. These principles and procedures define the accounting standards. The accounting standards are put in place to promote and support uniformity and to ensure transparency in accounting practices.
The Generally Acceptable Accounting Principles (GAAP) is a standard used for financial accounting in the United States of America and beyond.
The International Financial Reporting Standards (IFRS) form an accounting standard used by non-US GAAP businesses. The IFRS is set by the International Accounting Standard Board (IASB). The IASB clarifies all acceptable accounting policies and procedures for businesses.
The accounting standards encompass all different aspects of a business’s operation. Principles and procedures are set regarding activities like the methods allowed for calculating depreciation on an asset, determining what asset is even depreciable, measuring outstanding shares and many others.
In any situation where the Accounting Standards, GAAP and IFRS, fail to set out the relevant provisions in the policies for specific or particular transactions, there are a number of guidelines used to determine how organizations are supposed to record such transactions. These guidelines are known as the Accounting Conventions. Generally, the Accounting Conventions are not legally binding as the Accounting Standards, GAAP and IFRS. However, they are instituted to ensure uniformity and consistency in the practice.
The convention explains the need for accountants to be cautious when estimating the value for an asset. It urges accountants to use the lower value of an asset when they are confronted with two different values.
The convention urges accountants to apply a single accounting method throughout the accounting cycle. A change in accounting methods makes it very difficult for the internal and external stakeholders of an organization to assess the financial or operational development over a period of time.
3. Full Disclosure
It explains the need for an organization to reveal any and all details of the transactions, regardless of the effect on the operations of the organization, to ensure transparency.
This convention is very synonymous to full disclosure. It urges organizations to reveal any and all details of importance. The transactions are used in the financial statements with an impact on decision making. As a result, organizations are encouraged to prepare and provide the necessary details.
Accounting is very well known for the use of specific or particular terminologies. The most important terminologies are outlined or summarized in the following paragraphs.
The term is also known as the accounting equation or the balance sheet equation. The financial position of any business is based on assets and liabilities. Owner’s equity which is also known as shareholders equity is the third part on a balance sheet. The accounting equation explains the relationship between the three elements and states that Assets = Liabilities + Owner’s Equity.
It defines the material and non-material possessions of an organization. In other words, resources with economic value which are expected to provide a benefit in the future. They are grouped into fixed and current assets. Fixed assets are the possessions with a longer term (usually more than a year). Examples for fixed assets are buildings, plants, equipment, vehicles and others. Current assets are the resources with a shorter term (usually less than a year). Examples for current assets are accounts receivable, cash and cash equivalents, inventory and others.
It explains what an organization owes to another entity or any borrowed funds the organization uses in operations. The liabilities are book in opposition to the assets. They are grouped into current and non-current liabilities. Current liabilities are short-term obligations (usually due in less than a year). Examples for current liabilities are accounts payable, salaries payable and other obligations in the normal operation. Non-current liabilities are long-term obligations (usually due in more than a year). Examples for non-current liabilities are bonds and loans, deferred taxes and others.
It refers to those assets of an organization that are retained by the owners and co-owners. They are also called shareholder’s equity or owner’s equity. It is the amount that would be returned to the shareholders after the liquidation so long as all assets and liabilities were sold and paid.
The term is also known as sales or revenue received from operations or in other words activities, products and services. It can be differentiated between operating income and non-operating income (which is derived from secondary sources or may not be frequent).
The cost of operations or the cost to create a particular product or service for sale is called an expense. Expenses need to be made to generate income. It can be differentiated between operating expenses (which may come directly from the operations) and non-operating expenses.
7. Debit and Credit
These are accounting entries. Debit is an entry that increases the assets or expense account and decreases the liability and equity account. It is recorded at the left side of the accounting entry table. Credit is an entry that increases the liability and equity account and decreases the asset and expense account. It is recorded at the right side of the accounting entry table.
The most common types of accounting are outlined or summarized in the following paragraphs.
1. Management accounting
It is the type of accounting that defines the processes of identifying, recording, analyzing and evaluating and reporting transactions for leadership to make decisions. Management accounting also includes other important aspects of the operations such as budgeting, forecasting and planning.
2. Cost accounting
It is a type of accounting which is based on the recording of costs incurred in creating a particular product or service for sale. This information helps leadership to make decisions. It helps businesses to determine the prices of their products and services. In contrast to other types of accounting, cost accounting is not required to comply with the accounting standards.
3. Financial accounting
It is the type of accounting that defines the processes of identifying, recording, analyzing and evaluating transactions for developing the financial statements including income statement, balance sheet and cash flow statement. The financial statements are usually generated annually and they are required to comply with the accounting standards.
The results of accounting and the most relevant financial statements are outlined or summarized in the following paragraphs.
1. Income Statement
This is a financial statement which is issued quarterly or annually. It is also known as the profit and loss statement. Income statements are usually the first financial statement to be generated. It includes a breakdown from the gross revenue, net revenue, variable costs, gross margin, fixed costs, EBIDTA, other costs, EBIT, finance costs to net earnings. The income statement is supported by a sales and cost of sales forecast and a breakdown of the other variable and fixed or direct and indirect costs of the business. Examples for variable costs are raw materials while fixed costs are salaries and wages, rent, utilities such as gas, electricity and water, telephone and internet, supplies and others.
2. Balance Sheet
This is a financial statement that reports on the assets and liabilities as well as owner’s or shareholder’s equity at the last day of the accounting period. This statement basically provides a glimpse of what the company owes and owns as well as the number of shares held by partners and investors. In other words, the balance sheet is a report of the current assets and fixed assets as well as current and non-current liabilities and equity at a specific time. The balance sheet is supported by a schedule for depreciation as well as payment methods, receivables, inventories, payables, spoilage and dividends.
3. Cash Flow Statement
This statement keeps records of the movement of cash in and out of the organization. Cash received are inflows and cash spent are outflows. In other words, the cash flow statement outlines or summarizes the cash and its equivalents entering and leaving the business from operating, investing and financing or funding. The movements of cash are assessed to certify the flexibility and liquidity of an organization. The cash flow gives an insight into the financial performance of the organization.
Accounting is structured and follows a number of steps which are part of accounting cycle. The process of accounting is outlined or summarized in the following paragraphs.
1. Identifying the transactions
A transaction refers to any activity that involves buying or selling. In other words, any act that involves the exchange of products, services or funds. A transaction has to be recorded on a daily basis. They are registered in a journal entry. An activity can be identified depending on the accounting type. In case of the accrual accounting method, an organization only recognizes an activity as a transaction when it occurs regardless of the fact that the products or services have been delivered and payments have been completed. In case of the cash accounting method, an organization only consider an activity as a transaction when the products or services have been delivered, payments have been received and expenses have been paid.
2. Recording the transactions
After the transactions have been identified, they will have to be recorded in journals depending on the occurrence. Each transaction will have to be debited or credited as well as dated for future reference. An explanatory note may be included in the journal for more clarification.
3. Posting journal entries to general ledgers
After the transactions have been properly entered into the journals, they are posted to the record-keeping system of the organization. The general ledger accounts hold financial information which are used to develop the final financial statements.
An unadjusted trial balance entails that all the entries are regrouped into debit and credit for verification. It is done to ensure all entries from the reporting stages are mathematically correct.
5. Preparing adjusting entries
This is the verification stage which is usually carried out at the end of the accounting period. At this stage, final balances of the general ledger are adjusted or amended to reflect the actual revenues and expenses during the accounting period.
6. Creating an adjusted trial balance
After all entries have been fully adjusted or amended for the accounting period, they are regrouped into debit and credit in the adjusted trial balance.
7. Preparing the financial statements
This is the final stage of the accounting cycle which includes the development of the financial statements based on the detailed reports of transactions and their corresponding entries in the journals, ledgers and accounts.
Public and private organizations are encouraged to strictly adhere to the accounting principles and procedures in the State of Qatar. According to the Commercial Law No. 5 of 2002, all listed companies are required to prepare and provide financial statements “in accordance with the accounting principles approved internationally”. Regulations of the Qatar Financial Markets Authority (QFMA) have defined this to mean IFRS. Therefore, the acceptable accounting standards in the State of Qatar are the International Financial Reporting Standards. The QFMA is a regulatory body that supervises the financial market in the country. Other institutions that have been mandated by law to ensure the adherence of the accounting standards include the Ministry of Commerce & Industry, General Tax Authority, Qatar Financial Centre Authority, Qatar Free Zones Authority, Qatar Science & Technology Park, Qatar Financial Markets Authority and Qatar Stock Exchange, among others.
The State of Qatar is home to a number of professional accountancy bodies to promote and support best practices and lessons learned and to help organizations with associated duties. These professional bodies including the Qatar Institute of Financial Accountants and the Gulf Cooperation Council Accounting & Auditing Organization develop and implement high quality international accounting standards.
We maintain relations with subject matter experts and specialists in the private and public sector. Our recommendations depend on the requirements of a client or customer and the complexity of a business or project. In a majority of our cases, we propose or suggest taking it step-by-step and to assess your possibilities.
We recommend to consider directly and indirectly related activities such as financial structuring, budgeting and financial planning, resource planning as well as audits and reviews, tax planning and compliance and the applicable laws in the State of Qatar as well as the best practices in the country.
It would be our pleasure to learn more about your business or project and to discuss the most suitable approach for you!
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