Understanding Accounting: Principles, Processes, and Standards
What is Accounting?
Accounting is a financial information system used for decision-making in businesses and organizations. It studies and reports on the economic and financial structure of organizations, as well as their economic performance, by recording, classifying, and summarizing all relevant economic transactions in monetary terms. According to the American Institute of Certified Public Accountants (AICPA), accounting is the art of recording, classifying, and summarizing financial transactions in a significant manner and in monetary terms, and interpreting the results. Accounting is often referred to as the language of business. It is also commonly defined as the process of identifying, measuring, and communicating relevant financial information about organizations. Therefore, accounting can be seen as a process, a system, a science, a technique, a language, or an art.
The Accounting Process
The aim of accounting is to identify, organize, and summarize relevant economic and financial information of business organizations (companies) and to report (communicate) this information to all different companies’ stakeholders.
Steps in the Accounting Process:
- Identification: Select economic events and transactions.
- Recording: Record, classify, and summarize transactions.
- Communication: Prepare accounting reports, analyze, and interpret them for users.
The accounting process includes the bookkeeping function and provides information about business transactions to the users of accounting information, based on which decisions and judgments are made.
Users and Stakeholders of Accounting Information
Users and stakeholders can be categorized as follows:
- Internal Users: Owners, board members, directors, managers, employees.
- Managerial Accounting: Management reports covering costs, sales, budgets, market share, etc.
- External Users: Investors, creditors, government, auditors, suppliers, distributors, customers, competitors, labor unions, other organizations, general public.
- Financial Accounting: Financial statements showing wealth, net worth, profitability, and liquidity.
Legal, Social, and Ethical Concerns in Accounting
Accounting practices are governed by various standards and regulations.
US Generally Accepted Accounting Principles (USGAAP):
- SEC (Securities and Exchange Commission)
- AICPA (American Institute of Certified Public Accountants)
- FASB (Financial Accounting Standards Board)
International Financial Reporting Standards (IFRS):
- IFRS Foundation
- IASB (International Accounting Standards Board)
European Regulatory Accounting Framework
- ARC (Accounting Regulatory Committee): Composed of Member States of the EU and chaired by a commission of countries’ delegates. They decide whether IFRS are to be adopted or not.
- EFRAG (European Financial Reporting Advisory Group): A group of accounting experts (auditors) from the private sector that advises the Accounting Regulatory Committee in order to properly assess IFRS and their adoption by EU members.
Spanish Regulatory Accounting Framework
- CNMV (Comisión Nacional del Mercado de Valores): In charge of supervising the Spanish Stock Exchange Market, developing market laws for financial securities, and ensuring market transparency.
- ICAC (Instituto de Contabilidad y Auditoría de Cuentas): Independent body of accounting experts (auditors) attached to the Ministry of Economics and Taxes (Hacienda). In charge of improving and updating accounting standards and principles (SGAP).
- AECA (Asociación Española de Contabilidad y Auditoría): Professional institution that studies and recommends best business and accounting practices to CNMV, ICAC, and other economic agents.
Accounting Standards by Company Type
- Listed companies: Consolidated Annual Accounts – IFRS (adopted by EU)
- Group companies: Consolidated Annual Accounts – SGAP (Big companies)
- Individual companies: Individual Annual Accounts – SGAP (SMEs)