Accountant or Qualified/Chartered Accountant?
If you are interested in joining the accounting industry, we are sure you have heard of these terms: accountant, qualified accountant, chartered accountant.
Do you know the difference between these terms? Let’s explore the meaning of these terms. An accountant and chartered or qualified accountant both have similar tasks dealing with things like tax returns and financial statements.
However, chartered or qualified accountant go through more training and has a broader level of responsibility. Another aspect that sets them apart is that chartered or qualified accountant retains a membership with a professional body like ACCA, CIMA or ICAEW. They must have a lot of experience working under a mentoring program for nothing less than three years.
What is accounting and what is the role of accountants in a business? Accounting involves collecting, compiling analysing and reporting financial information. Accountants in business keep track of its operations. They analyse the finances of the business and provide reports in order to help business owners make informed decisions.
Requirements to Work in the Accounting Industry
The tasks of an accountant may vary depending on the organisation , position and which area of accounting you are involved in. However, there are general characteristics and responsibilities all qualified accountants share.
Professional accountants have good communication skills as they are required not only interpret financial information but they have a responsibility to convey it to clients or the management.
Being diligent and detail oriented is a must for a qualified accountant as there is a constant need to keep up to date with the accounting regulations which changes regularly.
They must also understand and put into practice the accounting principles and procedures in order to ensure that everything is legally compliant. After all, it is their responsibility to prevent fraud or theft, and maintain accurate financial information for their employer or clients.
As technology is changing the whole world, it has a impacted the accounting industry as well. Therefore, having good technical skills is essential for a qualified accountant. Being an expert in Excel is a must. Furthermore, being well versed with other accounting softwares like Xero, SQL and UBS is vital.
If you would like to know more about accounting, please read Everything You Need to Know About Accounting.
The Golden Rules of Accounting
Financial accounting is more than just simple bookkeeping. It uses the double entry system of accounting which consists of two aspects which are debit and credit. For each debit, there will be a corresponding credit and vice versa. Knowledge on which accounts to credit and debit is vital.
In order to present an accurate account of transactions and bring about uniformity, there are three Golden Rules of Accounting. Before we understand the golden rules, one must first understand the three different accounts in accounting.
- Nominal account – this related to the profit and loss accounts of a company. The profit and loss account shows the income and expenses of a company for the 12 months.
- Personal account – this can be split to three different types:1. Artificial – this is relating to separate legal entities. These accounts belong to companies and bodies that are not human.2. Natural person – this is relating to human beings. For example, a drawing account by the company’s director. this falls under this category. This is because, it is relating to an actual person instead of a company.3. Representative personal account – this account is relating to both a nominal and / or natural person account. The only difference that sets this account apart from the rest is that, it is relating to the previous or the next year. It is not relating to the current year. For example, in Malaysia, an employer has to set aside funds to pay such as KWSP, SOCSO, EIS. These are normally paid within the first week of the following month. In December when this is recorded in the books, it will be Debit Expenses and Credit Payables. This payable is supposed to be paid in the first week of January.
- Real account – This is relating to the balance sheet accounts involving the assets and liabilities of the company. Unlike a nominal account, this account does not close at the year end, instead its value is carried forward to the next.
Now, lets look at the three golden rules of accounting:
Rule 1: Income and gain will be credited, expenses and losses will be debited
This rule applies to the nominal account. In the profit and loss statement, income and gains are shown as a credit balance while loss and expenses are shown as a debit balance. The reason it is shown as such is because of its relation to capital. When capital increases, it is a debit and vice versa if capital decreases it is a credit. Hence, when capital increases, this means that the capital is debited and the corresponding credit will be an income or gain. When a capital decreases, it will be a credit capital and the corresponding debit will be an expense or loss. The easiest way to look at this is to see how a specific income or expense relates to the capital of the company.
Rule 2: Debit incoming and credit outgoing
This applies to real accounts. As mentioned previously, real accounts are relating to balance sheet items such as asset and liabilities. Assets have debit balances while liabilities have credit balances. Whatever is an incoming to a company is debited while whatever outgoing is credited. The simplest example can be seen in the purchase of an asset. When a company purchases a new asset, it is an addition during the year. This will result in a debit to the asset account. Similarly when a company pays off its bank overdraft, it is a credit to the bank account outgoing fund, and a debit to the overdraft account, hence reducing it.
Rule 3: Debit the receiver and crediting the giver
The principal for this is when there is an incoming fund, we will debit the receiver and credit the giver. For example, when a company pays its vendor, the incoming fund it leaving the company and going into the vendor’s bank account. Essentially the receiver is the vendor so we will debit their account. The giver on the other hand is the company, so it will credit its bank account. The same rule goes for debtors. When a company receives a payment from their debtors, the receiver is the company so we will debit the company’s bank accounts while the debtor, who is the giver, their account will be credited.
These rules define the treatment of all transactions conducted by the business. If one doesn’t follow the golden rules of accounting, passing journal entries and accounting for transactions is impossible.
More On The Principles Of Accounting
Accounting principles are the building blocks of the Generally Accepted Accounting Principle (GAAP). It is vital to have a clear understanding of these principles as they will help you make sense of most accounting topics. Lets look at some of the principles below:
Revenue Recognition Principle
This principle deals with the question of when a revenue will be recognised in the income statement. For example, will revenue be recognised when the sale is made? Or when the goods are received? Or should it be recognised when the money for the sale is received? This principle clearly indicates that a revenue is recognised when it is earned. This is not relating to monetary value. Just because money is received, it does not mean that the revenue can be recognised.
Matching Principle
This principle means that revenue and expenses of a company should be reported in the correct period instead of when they are paid. This principle goes hand in hand with the revenue recognition principle. All expenses and revenue must be recorded on accrual basis. This simply means that if an expenses has not been paid, a company has to accrue the cost to the correct year. This is to ensure that there are no understatement or overstatement of cost and revenue. This avoids manipulation of the accounts. For example, a company obtained services from a consulting company in the year ending 2021 but the invoice for this service was only received in the year 2022. Although the invoice was issued and paid in the year 2022, the cost of this invoice must be accrued in the year ending 2021.
Full Disclosure Principle
This principle basically means that all information that affects the decision of the financial statement’s user must be disclosed in the financial statement. Even those that happen after the year end. This is important because the financial statements are used by a third party to make decisions. For example, a bank will use a company’s financial statements to decide whether to give the company a loan. Generally audited financial statements are only available 2 to 6 months after the year end of the company hence events after should be included. For example, a major manufactuiring company has a financial year end of 31 december 2021. The financial statements were prepared after the year end, on February 2022. In January, one of the company’s biggest manufacturing plant caught fire and sustained major damage and had to be closed. This in turn affected this company’s revenue. This is a material event that must be disclosed in the financial statements as it will affect the users decision making. The whole point for this principle is to ensure that the users are able to make informed decisions
If you would like to learn more about accounting or need help understanding the principles of accounting, take accounting lessons with a private tutor on Superprof.
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