Accounting Methodology
Accounting is a field which involves calculation and allocation of the figures. Why would we say accounting is an allocation of figures or numbers? As we know basically that accounting consist of double entry, double entry is a system for us to allocate the amount or figures for the money to left side (debit) and right side (credit) of a T account.
T account is a system to record the transaction we make, obviously it is only for the transaction that involves figures, we record how much we have (as an asset), how much we initially have for the business ( as a capital) and how much we do not have or owe ( as a liability).
| Debit | Credit | |
| Asset | Liability | |
| Capital |
T account as illustrated above is a good reference to understand which entry of transaction is to be sided to which side (Debit / Credit). It is very crucial for us to understand that which transaction is to be on which side, a wrong transaction could end up making accounting system into wrong directive decision and misinterpretation of the accounts records.
What do we have in our business?
Asset – What is our asset in our business? Most of us know that our asset is Cash (Money we have for doing transaction; buying and selling).
Liability – We might not have enough money, we might borrow or loan to get the things we need to do business (Goods and Products).
Capital – The amount of money we use initially to setup a business.
Our asset record will fall under debit side of the T account, whereas Liability and Capital will fall under credit side of the T account. It is a Financial Reporting Standards (FRS) for us to record the transaction in debit (left side) and credit (right side). A standard practice for all accounting system. As you know what is ABCD to XYZ in alphabetical order that is how the accouting record system in this order too, that is the standard to follow.
Always remember the basic of accounting double entry is (Asset = Capital + Liabilities). By this supremacy definition you will remember which side of your records to be posted into left side or right side of the double entry system. Most of the people forget about this fundamental of accouting and posted the entry into wrong side thus making accounting records wrong. Remember! Asset is always on the left side and Capital or Liabilities are on the right side, this is the function of the T account for us to differentiate which side to be posted. We will discuss more about the double entry system in the later topics. Get the knowledge and get the job.
Accounting methodology refers to the processes and procedures used to record, classify, summarize, and report financial information in accordance with generally accepted accounting principles (GAAP). Here are some of the most common accounting methodologies:
Accrual accounting: This methodology records revenue and expenses when they are incurred, regardless of when the cash is received or paid. This method provides a more accurate picture of a company’s financial performance over a period of time.
Cash accounting: This methodology records revenue and expenses when cash is received or paid. This method is simpler than accrual accounting and is often used by small businesses or individuals.
Double-entry accounting: This methodology records transactions in two accounts, with one account debited and the other credited. This ensures that the accounting equation (assets = liabilities + equity) remains in balance.
Historical cost accounting: This methodology records assets at their original purchase price and does not adjust for changes in market value over time. This method is commonly used for fixed assets and inventory.
LIFO and FIFO accounting: These methodologies are used to value inventory. LIFO (last-in, first-out) assumes that the most recently purchased inventory is sold first, while FIFO (first-in, first-out) assumes that the oldest inventory is sold first.
Straight-line depreciation: This methodology allocates the cost of a fixed asset evenly over its useful life.
Activity-based costing: This methodology assigns costs to products or services based on the activities required to produce them. This provides a more accurate picture of the true costs of a product or service.
These are just a few of the most common accounting methodologies. The appropriate methodology to use depends on the nature of the business and the financial information being reported.