Accounting is the process of recording, summarizing, and analyzing financial transactions to provide information for decision making and financial reporting. It helps individuals and organizations track their financial performance and make informed decisions about their resources and investments.
The basic principles of accounting include the principle of consistency, which states that accounting methods and practices should remain the same over time; the principle of materiality, which states that significant and relevant information should be reported; and the principle of conservatism, which states that when there are multiple acceptable options, the one with the least favorable outcome should be chosen.
There are several types of accounting, including financial accounting, which focuses on external reporting to stakeholders; management accounting, which provides information for internal decision making; tax accounting, which deals with tax-related financial reporting; and forensic accounting, which involves investigating financial crimes or disputes.
The key financial statements in accounting include the balance sheet, which reports an organization's assets, liabilities, and equity at a specific point in time; the income statement, which shows an organization's revenues, expenses, and profits over a period of time; and the cash flow statement, which tracks the flow of cash in and out of the organization.
The common accounting methods include the accrual method, which records revenues and expenses when they are earned and incurred, regardless of when cash is exchanged; and the cash method, which records revenues and expenses when cash is actually received or paid. There are also hybrid methods that combine elements of both accrual and cash accounting.