Accounting Practice – Fundamentals, Types, and Importance

Accounting practice refers to the collective procedures and practices of an entity to manage accounting needs. The accounting needs include the day-to-day accounting records as well as compliance with regulatory authorities.

Accounting practice involves several types and control procedures. An entity can follow GAAP or IFRS accounting practices.

Let us analyze the concept of accounting practice in detail.

Accounting Practice – Definition

Accounting practice is the process of recording the financial and accounting activities of an entity.

It can be defined as a systematic approach by following procedures and standards to record the business transactions.

Accounting practice helps an entity create and manage accounting records. These records include operational activities such as recording for expenses as well as strategic decisions such as the choice of accounting methods.

Ana entity follows certain procedures and principles to create consistency in accounting records. Then, it implements internal controls to ensure the procedures and principles are followed effectively.

Businesses can use internal controls, internal auditing, and external auditing functions to ensure an efficient accounting practice.

Objectives of Accounting Practice

Accounting practice serves different stakeholders in a business. These stakeholders come up with different requirements.

A few of the key objectives of accounting practice are listed here.

  • Creation and recording of accounting records.
  • Implementation of accounting methods to maintain consistent accounting data.
  • Presentation of key accounting reports.
  • Presentation of financial statements such as balance sheet, income statement, and statement of cash flow.
  • Compliance with taxation regulatory requirements.
  • Compliance with accounting standards and principles adopted by the business.

The list can be an exhaustive one. The prime objective of the accounting practice is to serve the different needs of different stakeholders with respect to accounting and financial sections.

Methods Used for Accounting Practice – cash and accrual

An entity may choose one of the two accounting practice methods; accrual accounting and cash accounting.

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There are no set rules to choose one accounting method over the other. However, some jurisdictions call for applying one accounting method and others the second one.

Accrual Accounting

The accrual accounting method calls for recording an accounting transaction as and when it occurs. The transaction may or may not involve cash settlement of the transaction.

In accrual accounting, an entity follows the matching principle. The matching principle refers to the recognition of an expense in the same period with the revenue. It gives a clearer picture of the accounting position of an entity.

Cash Accounting

As the name suggests, transactions are recorded as and when cash is paid or received under the cash accounting method. All expenses and revenue transactions are recorded when settled in cash.

The cash accounting method is used mostly by small businesses. Regulatory authorities like the IRS also require businesses to follow accrual accounting methods for larger businesses.

Accounting Practice – Standards and Principles – GAAP and IFRS

A business can choose to follow one of the two accounting standards to follow; the GAAP rules or the IFRS.

The choice can also depend on the jurisdiction of an entity. For instance, businesses in the US follow GAAP rules.

The Generally Accepted Accounting Principles (GAAP) and developed by the Financial Accounting Standard Board (FASB). While the International Financial Reporting Standards are developed by the International Accounting Standard Board (IASB).

Both sets of accounting principles aim to implement the accounting standards and procedures for an entity. There are certain differences in definitions and implementation of key accounting standards. However, both sets of rules ensure the compliance and consistency of accounting principles followed by an entity.

Types of Accounting Practices

Accounting practices are implemented by and in different types of organizations. The accounting practice can be categorized based on the function and usage as well.

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Here are a few key types of accounting practice.

Public Accounting

Public accounting practice refers to a practice where all accounting services are outsourced to a public firm. This practice is followed by large companies and corporations.

Independent accounting firms carry out all accounting services through public accountants such as CPAs and CFAs.

Private Accounting

This practice is executed by appointing a private qualified accountant. Private companies follow this practice of managing accounting records internally.

The implementation is carried out according to the chosen accounting principles. However, all functions are monitored internally.

Government Accounting

As the name suggests, this accounting practice is observed in government institutes. The government appoints qualified accountants to carry out accounting practices in different government institutes.

Financial and Management Accounting

Accounting practice can be categorized by the type of accounting function as well. Two common types are financial and management accounting.

Financial accounting practice keeps the financial accounting records. These records include financial statements, tax compliance, statutory compliance, and financial accounting reports. The practice is carried out by financial accountants.

On the other hand, management accountants cater to the needs of top management for strategic decisions. Management accounting practice involves comprehensive strategic management issues such as policies, procedures, internal controls, and reviews.

Auditing

Internal and external auditors ensure the accuracy of accounting practices implemented by an entity. Auditors also ensure an entity is compliant with regulatory and tax requirements at all times.

Accounting Practice and Controls

One of the key aspects of accounting practice is the effective implementation of controls. Controls can ensure the effectiveness of an accounting practice.

A business can devise and implement different types of controls to achieve successful accounting practices.

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Auditing

As mentioned above, auditing is one of the key control components. Auditors ensure the effectiveness of procedures and controls implemented by a business.

Forensic Controls

Forensics are special audits that are carried out to detect misconduct and malpractices in a business. Forensic auditors specialize in investigative and detective auditing works.

Forensic audits may also include special-purpose audits such as physical inventory controls.

Access Controls

In accounting practice, these controls would refer to physical access to accounting records. For example, not all staff members would be allowed to record or access accounting bills, expense reports, or invoices maintained by the accounts department.

Authorization

Similar to access controls, authorization refers to the segregation of duties and accessibility. It means allowing only authorized persons to access the relevant accounting records.

A business can implement several other types of controls to achieve a smooth operating accounting function as well.

Importance of Accounting Practice

Accounting practice forms the basis of a strong business. Sound accounting practice will result in the strong financial management of a business.

Here are a few important points with respect to accounting practice.

  • Efficient accounting and financial record-keeping.
  • Transparency in accounting and financial processes.
  • Turning accounting data into valuable financial information.
  • Helping the management in understanding key performance indicators of a business.
  • Compliance with tax and accounting regulatory requirements.
  • Performance management and benchmarking by comparing historic results.
  • Financial modelling and forecasting of a business.

The list can be extended to several points. In a nutshell, a strong accounting practice leads to an established business.

Final Thoughts

Accounting practice is the set of procedures and policies adopted by a business. A business can follow cash or accrual accounting methods. It can implement different types of accounting practices.

A business can also implement different controls to ensure the effective implementation of accounting practices.

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