Accounting: Basics, Methods, and Importance

Accounting involves the process of recording, summarizing, reporting and analyzing of the financial transactions of an organization for the purpose of legal compliance. This article extensively explains the scope of legal accounting. 

Key Features of Accounting and Legal Compliance

The following are some of the key features of legal accounting: 

• Preparation of books of accounts in compliance with the relevant legal requirements as provided in the UAE Commercial Companies Law.
• Accurate preparation of financial statements such as profit and loss accounts, balance sheets, cash flow statements etc. in compliance with international accounting standards like IFRS.
• Adhering to the timeline of filing of statutory documents like annual returns, audit reports, income tax returns etc.
• Compliance with laws, regulations, and other legal requirements in auditing the accounts.
• Making all necessary disclosures and notes in the financial statements as may be legally required.
• Ensuring that laws against money laundering are observed when entering transactions.

Methods of Accounting

There are some techniques for doing accounting which are: 

• Double-Entry Bookkeeping: The most widely used technique ensuring accuracy is the recording of every one of the financial transactions with at least two complementary entries in the books of accounts.
• Accrual Basis Accounting: This practice of recognizing revenues and expenses in the period they are earned and incurred respectively is meant to ensure that the revenues are matched to expenses.
• Going Concern Principle: This principle presumes that the entity will continue operating in the foreseeable future which impacts numerous facets of valuation and recognition.
• Fair Value Measurement: The assets and liabilities are adjusted and recorded based on their fair value in the current market instead of their cost price, which offers flexibility and accuracy.
• Prudence Principle: This principle of accounting suggests that while recognizing infrequent and unusual, possibly one-time, expenses and potential losses should be reported early, potential gains should not unless realized.

Importance Accounting in UAE

There are several reasons why accounting is important for business entities in the UAE including: 

• Compliance with Legal and Regulatory Requirements: Accounting also helps businesses meet legal requirements such as tax laws, company laws, and accounting rules.
• Transparency and Accountability: Accounting is vital for the provision of accurate and reliable financial details that could be useful to investors, creditors, and regulators.
• Decision-making: Legal accounting is of great use in decision-making such as investing decisions, operational decisions, and strategic decisions.
• Risk Management: It also enables them to assess associated risks such as financial risk, operational risk, and compliance risk.
• Tax Planning: Legal accounting helps in preparing the financial statements which are important in ascertaining taxation amounts and looking for tax planning.

Table 1: Comparison of Financial Accounting and Management Accounting

Financial Accounting	Management Accounting
Focuses on compliance with legal and regulatory requirements	Focuses on internal decision-making
Provides financial information to external stakeholders	Provides financial information to internal stakeholders
Based on IFRS or local GAAP	Based on management’s needs and requirements
Requires financial statements to be audited	Does not require financial statements to be audited
Provides historical financial information	Provides current and future financial information

FAQs

Question: What is accounting?

Answer: Accounting involves the keeping of accounts and preparation of accounts and financial reports to meet legal or statutory requirements. 

Question: What are the methods of legal accounting in UAE?

Answer: The legal accounting methods of UAE include the accrual basis of accounting, the going concern principle, the fair value, the matching, and the prudence principle. 

Question: Why is legal accounting important?

Answer: Accounting is critical in the UAE for reasons relating to legal compliance, accuracy and disclosure, management decision-making, risk management, and tax management. 

Question: What is the difference between financial accounting and management accounting?

Answer: Legal accounting is mainly concerned with legal compliance and prepares accounts that are issued to outside parties while management accounting is mainly concerned with turning data into useful reports for use within the organization.

Conclusion

Conclusively, financial accounting is an accounting method used to meet both the financial reporting requirements as well as compliance requirements of an organization. Adhering to the best practices assists in the creation of credibility and accuracy in the accounting records. It raises stakes for the stakeholders, as well as sustains business operations and new opportunities for companies that function under the newly developing legal framework of the UAE. Businesses are advised to seek the expert services of professional auditors in UAE to ensure compliance with statutory laws and legal accounting requirements. Thus, contact us today and we shall be glad to assist you.