What is Accounting Practice?
Accounting practice is systematic procedure and controls that are used by entity’s accounting department to control over the accounting records & entries as on the basis of accounting records other reports are prepared like financial statements, cash flow statement, fund flow statement, payroll, tax workings, payment and receipts statement, etc. and they are basis of reliance by auditor while auditing the financial statements.
- Accounting practice exists as a daily recording of accounting and financial data. It is control over recording and access to accounting records as accounting is a significant part of any organization, and it should not be manipulated and misused by others. Hence apart from recording organization has to look after the authorization part. For example, employees for data entry should not have access to bank statement views or other reports so that data cannot be misused. There should be proper practice by every organization as it is a basis for many external and internal reporting and decisions.
- It is a systematic procedure and controls that are imposed by any accounting departmentAccounting DepartmentThe accounting department looks after preparing financial statements, maintaining a general ledger, paying bills, preparing customer bills, payroll, and more. In other words, they are responsible for managing the overall economic front of the business. to control the accounting records so that accounting records can be made reliable for all. It is a transparent view of the accounts and transactions of the company.
- There are various controls to be imposed by a company or person responsible for the maintenance of accounting records. For example, Authorization control like bills to be signed by authorized person only or entry barring in storekeeping/ inventory room, or data access restriction to lower and middle-level employees. Accounting practice not only involves recording and access control but also requires recording as per law and generally accepted accounting principlesGenerally Accepted Accounting PrinciplesGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors. or as per Ind AS or IFRS.
Types of Accounting Practice
The different types are as follows:
#1 – Public
In public accounting practice accounts, related services and recording of accounting records is outsourced to the independent firm as some of the financial documents and other information is required to be disclosed to the public. All controls over accounting records are performed by public accountants who are CPA’s (Certified public accountants).
#2 – Private
In private accounting practice, an individual expert is appointed by a business entity to record the accounting and other information in a proper and systematic way. As a person appointed is expert; hence all controls are applied by that expert within the organization.
#3 – Government
The government usually employs the State Auditors or other eligible persons to record, plan, budget, and forecast the accounting, financial, and additional information. All controls over accounting records are imposed by persons employed by Government agencies on this behalf.
#4 – Auditing Practice
Auditors are called as external accountants. They check the practices followed and imposed, and on the basis of that, they decide the degree of reliance on accounting records and then accordingly issue the audit reportThe Audit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements..
#5 – Financial
Financial accountants keep track of the company’s financial transactions. They produce various financial related reports for reporting to shareholders, tax authorities, company law board, SEBI, government, and the public at large. All accounting and other controls related to financial accounts are imposed by financial accountants. They are experts like chartered accountants, company secretary, stock intermediaries, and persons having a finance background.
#6 – Management
All records related to management like their decisions, presence, review, and implementation of plans by top management, appraisal policies, etc. every company employs management accountants/ managers for reviewing, imposing controls and monitoring. Management accountants create reports which are to be used internally for decision making and other internal decisions.
#7 – Forensic
Forensic accountantsForensic AccountantsForensic accounting employs a mix of accounting, auditing, and investigative acumen by recording accounting documents, preparing reports, and performing financial analysis for use in legal proceedings. Thus, it provides an accounting analysis from a litigation perspective. are external accountants like auditors. Forensic accountants verify from the point of view of detecting frauds and another misstatement in accounts. They verify controls in accounting records. The company appoints forensic accountants if it is of opinion that there is significant fraud in or by the management.
#1 – Access Control
Only authorized persons can enter in the accounts department and have access to physical accounting records like bills, bank statements, check issue, etc.
#2 – Authorization Control
Not all persons in the accounting department should have access to all data and reports. Authorization should be limited to the work of an employee. Also, entries are done by data entry staff to be authorized by senior staff.
#3 – Process Control
Each organization has a particular process of recoding the bills and other records. For example, the first bill is issued then goods to be sent to the debtor. Then, if goods acceptance approval came, then the accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. of sales is to be done. So, there should be proper process control over accounting records
Example of Accounting Practice
- Maintain employee attendance records, in-time, out-time to calculate proper salary and overtime, etc.
- Maintain fixed assets register, inventory records register, investment register, canceled cheques and records of cheques issued and deposited, shareholders’ register, etc.
- Keep in record bills of purchases, sales, expenses, and other payments and receipts.
- Record of Payment to Creditors and receipts from debtorsDebtorsA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties..
- On a test basis, perform a manual calculation of depreciationCalculation Of DepreciationThe Depreciation Expense Formula computes how much of the asset's value can be deducted as an expense on the income statement. Formula for Straight-line depreciation method= Cost of an asset - Residual value/useful life of an asset., etc.
- Transparent view of accounting records
- To know the result of business
- To keep the records of expenses, receipts, and payments
- To create a base for other external and internal reports
- To keep the faith of stakeholders
- To follow current accounting practices and rules
- To keep track of old records and compare with current records and identify the weakness etc.
Accounting practice exists as the daily recording of accounting and financial data as per generally accepted accounting principles and as per current law practice. There are various controls to be imposed by business entities to make their accounting records reliable. Accounting records are the basis for many reports like, on the basis of accounting records, internal and external decisions are to be done by the management of the company. AuditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws., after verifying controls in accounting records, create the degree of reliance on those records. For good practice, organizations should keep physical and documentary evidence of all accounting records. Maintenance of accounting records is the basic need of every organization, whether profit-making or non-profit making. Every organization should have proper accounting practices and transparency in records to survive in the long run.
This has been a guide to what is accounting practice. Here we discuss types and controls of accounting practice along with example and importance. You may learn more about financing from the following articles –