Accounting procedures are rules or standards that are used to prepare, present, and report the financial status of companies. Countries develop standardized procedures to enable companies to report their financial status in a way that is useful to potential investors and creditors, and to the general public. For example, the use of generally accepted accounting principles (GAAP) has been instituted in the United States by the accounting profession to ensure a commonality among companies.
Generally, accounting procedures cover such topics as how to record financial data, summarize financial data, prepare financial statements, and routine accounting matters. Standards are not directly established by governments, but rather by private sector organizations in which the financial profession sets the standards. In the United States, financial reporting is regulated by the Federal Accounting Standards Advisory Board (FASAB).
The International Accounting Standards Committee (IASC) was developed as an independent private-sector organization to encourage uniformity in accounting principles used on a global level. Standardized accounting procedures are important to ensure that financial reports are comparable from country to country. Comparability is critical in the modern global market.
Basic assumptions underlying accounting procedures include the economic entity, going concern, monetary unit, and periodicity. Economic entity refers to the capability of separating the company, its owners, and other companies. In essence, the company is an identifiable unit that can be held accountable for its actions.
The going concern concept has to do with the assumption that the company will continue to exist. Monetary unit refers to the fact that there is an accepted form of measurement of the value of the company and its profits. Periodicity implies that the activities of a business can be measured by specific time periods, whether that is a year, a quarter, or a month.
Four basic accounting principles are generally used to record business transactions: historical cost, revenue recognition, matching, and full disclosure. GAAP regulation in the United States requires that assets and liabilities be accounted for and reported on the basis of the cost. Using the historical cost of the item provides a stable and consistent benchmark for comparing value and determining profit or loss if the item is sold.
Revenue recognition refers to the rule for determining when income is realized as revenue. It assumes that the amount of revenue can be measured and that the activity or activities that must be performed to achieve the income has been completed. In other words, income is recorded when it is recognized and earned by the company.
The most commonly used method of accounting is the accrual method. Under this method, business transactions are recorded as they are made rather than waiting until money is received or paid. In the cash-based system, income is not recorded until the cash is actually transferred. Either of these methods follows the revenue recognition principle; that is, revenue is recognized, recorded, and reported to a governing tax authority.
Matching refers to the expenses occurred by a business. The concept is that expenses are tied to the specific period in which they happened. In addition, they are tied to the income against which the expenses are deducted. Expense recognition is therefore connected to revenue recognition.
The full disclosure principle in accounting procedures has to do with reporting the activities of a business. Procedures call for a company to provide such information that will allow informed decisions by investors and other interested parties. Information is formally presented in financial statements, on balance sheets, and in accompanying supplementary information. Accounting procedures will also give guidelines in the format for these financial statements.