Accounting in Everyday Life

As long as there will people in this world, there will be business, and as long as there is business, there will be accounting. Accounting is involved in virtually everything in our lives whether we know it or not, and its importance can sometimes be overlooked. Everything needs accounting. From a baseball cap you wear, to the food you eat, to the company you work for, or even the music you hear on the radio, accounting is needed and was involved in all of those things steps of production or operation.

An accountant measures, aggregates and reports financial information necessary for the sake of decision making by organizational managers, owners, investors, government agencies and other users. From the previous statement, we can see the indication that shows how accounting is important in careers. Everything needs accounting. Whether you are a doctor, or an ordinary office worker, you would still need to play with numbers and take into account the cost of things that you used or used by someone else. Timely and accurate information on operations is crucial to success in the recent days of rapidly changing business environment, and the accountant is the one responsible for the critical business function that mostly though indirectly affects our career and everyday life.

In the career perspective every occupation must carefully manage their money, their cash inflows and outflows. Jobs such as independent contractors have to analyze how much the job is going to cost them and how much they are going to charge for the job. They must track all their expenses and estimates in order to not under cost and to charge appropriate prices. In simplest form, this is accounting. If not accurately tracked and estimated, that contractor's business will not profit and eventually go out of business. Same thing goes for big business, if that company or firms does not accurately handle the operations of its cash flows, it will not sustain for long. More and more today employees such as secretaries and receptionists are being taught basic accounting practices to help aid the accountants and to keep proper bookkeeping. This way these employees can manage the lower importance items of a business and leave transactions of higher significance to the accountant to analyze and interpret for decision making purposes.

Accounting in Everyday Life

In one's life, can we say accounting will promote a better lifestyle? I say, definitely yes. The management and control of personal finance is a subject of immense importance today to people. In the world that we lived in today, there is barely a single person who lives without a single debt in their life. Debts ranging from credits cards, car payments, mortgages, and so on, one can find themselves stuck in economic hardships that in some cases destroy lives and has become wake-up calls to many people. Wouldn't it be nice to know exactly where the increases and decreases are coming from and going to, respectively, to whatever degree of detail you need? Of course it would be. Many of us spend without much thought on the impact of the action. It is essential on knowing the proportions being spent on the basic necessities and luxuries and how to have that proper balance across our expenditure. Life is not as easy as driving on the road with traffic lights and signs along the way, but we still need financial signals in our life whether we are in a comfortable phase or in the danger phase that requires help. Accounting can help people detect these dangers. If not much, the least it can do is ensure that your debt is under control and manageable.

Handling all the calculations of accounting can be tedious and bothersome but can make all the difference one's finances. You can strategically plan ahead to save for your retirement, your children's college fund, or luxury or two later down the road. We can see the importance of this concept by noticing companies today whose operations are strictly financial advising. It can be concluded that in the era that we are living in today, Families, and retirees depend on the credibility of financial reporting for their futures and livelihoods. With financial pressure amounting in many peoples' lives, accounting is seen as important in so many ways that it is almost impossible to live without it.

Accounting in Everyday Life
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Matthew Clark
25 October 2009

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The Origin Of Accounting Theory

If it is to be comprehensible and reliable, accounting must be used in accordance with specific rules and regulations. It would be chaos of Babylonian proportions if each person used his own grammar and vocabulary - nobody would understand anybody else. Likewise, it is essential that accounting is used according to generally accepted rules.

The first prerequisite is that accounting should agree or conform with the basic truths according to which our economic system functions; the current economic and business practices and the applicable law as embodied in legislative regulations or common law. Consequently, it is important that uniformity is maintained in accounting practice; in other words, a specific set of circumstances, wherever it may be encountered must be dealt with by everyone in exactly the same way within the accounting process.

Accounting theory creates a framework that ensures that accounting practice complies with the requirements of conformity and uniformity. This theory is embodied in a set of principles, policies, methods, procedures and conventions. The continuously increasing scope and complexity of our economic system requires a corresponding process of adaptation in accounting in order that the relevant information regarding economic activities may be recorded. It is essential that everyone involved in accounting should understand this process of adaptation; moreover, a prerequisite for such understanding is a grasp of not only the theory of accounting, but also the structure of that theory.

The Origin Of Accounting Theory

Accounting theory is based on a set of basic economic truths that are of a dual nature. First, accounting theory is based on propositions generally accepted in the economic order of a particular society. For example, consider the concept of personal ownership: a general accepted tenet of our society is the exclusive right of every person to own things - they are his personal property and no one else's. This concept is a basic economic truth.

Second, the basic economic truths have characteristics similar to those of natural laws in the sense that specific causes generate specific consequences. If, for example, someone derives greater value from a transaction than what was put into the transaction, his net worth - his wealth - will have increased by the surplus amount. This, too, is a basic economic truth. These economic truths are formulated as concepts and postulates. A concept is a generally accepted view of a specific phenomenon, which is described in specific terms. A postulate is a generally accepted hypothesis or supposition of a specific condition or phenomenon, which serves as a basis for the formulation of principles.

In the development of accounting theory, concepts and postulates serve as formulations of the basic truths or propositions upon which the theory is based. They do not attempt to prescribe the working of the accounting process, but simply the foundation upon which the structure of accountancy is based.

The Origin Of Accounting Theory
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Michael Russell

Your Independent guide to Accounting

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Close Your Accounting Books Fast With a Month-End Checklist

The month end close checklist is a system that allows a company to facilitate the end of month accounting department closing process. A comprehensive month end close checklist will contain much useful information that is exhaustive in its detail and may cover the following areas: bank reconciliation, budget versus actual, cash flow analysis, accounts payable, accounts receivable, fixed assets, debt reconciliation and a host of other items.

When using a month end close checklist, it is highly recommended that most small to medium size companies prepare six binders, one each for Accounts Receivable, Sales Orders, Accounts Payable, Purchase Orders, Payroll and General Ledger. The binders should be 3 or 4 inches thick and can be obtained from the office supply stores with each binder having twelve dividers, one for each month. In each of these binders place the completed month-end checklists and month end reports as printed out by the accounting.

Once these procedures are followed diligently, the month end close checklist system will assist the company auditing department, which must provide relevant information to the IRS and to other state tax auditors. In addition, this system acts as a fallback in case of a disastrous system or backup failure.

Close Your Accounting Books Fast With a Month-End Checklist

There are two types of closing checklists. Those that pertain to year end (hard closes) and those pertaining to month end (soft closes) and each is useful in providing managers in the organization with important financial information, especially for internal use. With the growing use of computers, the month end close checklist has now found its way into software packages that automate the whole process for the current month and for the next month.

An important aspect of month end close checklists is the presence of closing process controls which can be either preventive or detective and which are used to produce company financial reports for each month. Usually companies formulate their own regulations to ensure that the procedures that they use are effective and that the reports accurately provide month end information about the financial position of the company. The checklist is there to provide a method of keeping accurate financial records that are both consistent and well maintained.

There are a number of vendors selling month end close checklists that, after a lot of research and expert advice, have been diligently prepared and which take into account all aspects of the company's accounting procedures. The checklist can also be tailored to suit individual needs as required. The cost is not more than ten dollars and the benefit to the user is tremendous as there is no need to do much more than fill in the relevant information and once that is done, the month end close checklist is ready to be used for the individual company's accounting system.

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Why Accounting Standards Are Important?

In all types of businesses, accounting is not merely the recording and the keeping track of a business' finances, but accounting must also adhere to a certain set of accounting standards.

Basically, accounting standards, which are generally the accepted principles, guidelines and procedures that standardize accounting practices with regards to the recording and reporting of business transactions across the country and around the globe, ensure that there is a reasonable degree of uniformity in the accounting policies throughout the world with respect to collection and presentation of accounting information; thus, ensuring that accounting decisions are made in a unified and reasonable way, as well as ensuring that the process of accounting, the keeping track of a businesses' finances, the interpretation of these numbers and the wherewithal to place them in the proper context, which are at the heart of accounting, are done and reported fairly and accurately.

Accounting standards do not only safeguard investors and creditors, but also helps the businesses themselves, providing them with accurate, relevant, useful information that would help them in making well-informed investment decisions as well as help them in facilitating reasonable assessments of performance and assess their businesses' growth and evaluate the success of their strategies.

Why Accounting Standards Are Important?

Specifically, accounting standards ultimately ensure that business entities record and report financial information in a way that most fairly and clearly represents the current financial standing of the operation. This, thus, provides both investors and the entity itself with access to the most relevant information in the most reasonable way possible, helping them make well-informed decisions.

Designed to enforce transparency, accounting standards therefore ensure that businesses lean in the direction of openness when deciding on how to provide information to organization observers by limiting the freedom and flexibility of businesses in using clever accounting to move items around or even to hide them. Therefore, both consumers and investors are protected from the risk of fraud by the business. This is because businesses work to ensure compliance with regulatory accounting standards to avoid the significant legal costs or criminal penalties associated with accounting inconsistencies. Also, accounting standards improve the efficiency of markets as national regulators use these standards to help provide their nations' enterprises with access to foreign markets and capital.

With these, the interests of investors are therefore protected as well as it ensures them that their investment is still substantiated. Basically, educated investors usually need relevant, useful information to make their investment decisions as well as ensure them that the money they put into a company will result in a return on investment and build shareholder value, and that is what "high quality accounting standards deliver".

By practicing proper accounting standards, one can therefore provide confidence to a greater number of investors, both locally and globally, that their investments will be responsibly managed and protected by them. This would create the business' credibility, which in turn could mean a greater investor interest and further investment in the company.

Finally and most significantly for businesses, by using consistent accounting standards, this is one way that business managers will be able to reasonably and accurately compare their performance. This is because different companies use the same accounting standards, and the businesses that opt to do so will be able to contrast their growth with that of competitors. This, thereby, helps business managers and investors identify strengths and weaknesses.

In addition, practicing proper accounting standards will ensure that financial statements can be reasonably compared over time. By comparing current and past performances, managers will be able to assess and evaluate their businesses' growth and the success of their strategies.

Why Accounting Standards Are Important?
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Accounting Rate of Return

The accounting rate of return, also known as the return on investment, uses accounting information, as revealed by financial statements, to measure the profitability of an investment. That is the ration of the average after tax profit divided by the average investment. The average investment would be equal to half of the original investment if it were depreciated constantly. Alternatively, it can be found out by dividing the total of the investments book values after depreciation by the life of the project. Thus, is an average rate and can be determined by the following equation,

Accounting rate of return = Average income / Average investment

Acceptance rule

Accounting Rate of Return

As an accept or reject criterion, this method will accept all those projects whose It is higher than the minimum rate established by the management and reject those projects which have rate less than the minimum rate. This method would rank a project as number one if it has highest accounting rate of return and lowest rank would be assigned to the project with lowest accounting rate of return.

Evaluation of Accounting Rate of Return

That method may have some merits:

• Simplicity. That method is simple to understand and use.

• Accounting date. The accounting rate of return can be readily calculated from the accounting data; unlike in the net present value and internal rate of return methods, no adjustments are required to arrive at cash flows of the project.

• Accounting profitability. For this method rule incorporates the entire stream of income in calculating the projects profitability.

It is a method commonly understood by accountants, and frequently used as a performance measure. As a decision criterion, however, it has serious shortcomings.

• Cash flows ignored. It uses accounting profits, not cash flows, in appraising the projects. Accounting profits based on arbitrary assumptions and choices and also include not-cash items.

• Time value ignored. The averaging of income ignores the time value of money. In fact, this procedure gives more weight age to the distant receipts.

• Arbitrary cut off. The firm employing that rule uses an arbitrary cut-off yardstick. Generally, the yardstick is the firms current return on its assets (book-value). Because of this, the growth companies earnings very high rates on their existing assets may reject profitable projects with positive net present values and the less profitable companies may accept bad projects with negative net present values.

Accounting Rate of Return
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Non-Profit Organizations and In-Kind Contributions - Accounting

Organizations do not get cash donations only. Many times they get furniture, equipment and other items that are valuable, but are not in form of cash, check or credit cards funds. These types of donations are considered to be in-kind contributions. If an item is expensive, for example ,000 and over, a formal appraisal may be needed, not just for accounting purposes, but for taxes as well. Often enough donors help to pay for the appraisals because they want the deduction in their income tax returns.

Donated in-kind contributions are booked as expenses and revenues. The journal entry is:

Debit Equipment expense-In-kind 3,000

Non-Profit Organizations and In-Kind Contributions - Accounting

Credit Donations- In-kind 3,000

Donated in-kind contributions can also be booked as a debit to assets, in the case of items that can be capitalized, usually expensive things. Depending on the assets, they can be depreciated. The journal entry then would be:

Debit Asset- In-kind 10,000

Credit Donations- In-kind 10,000

The other type of in-kind contribution is related to donated services. Per accounting rules, only professional services can be recognized. For example, if volunteers work at special events as ushers and receptionists, their time is not recognized by accounting. However, if a doctor provides services or a lawyer volunteer his time with professional services, then the time is accounted for using a reasonable hourly rate. For example, a CPA may provide high level accounting services for free and an hourly rate of 0 would be reasonable. If an lawyer provides legal services usually billed at 0/hour, but charging the organization only / hour, the difference- 0- is considered in-kind. The journal entry to book this contribution for 10 hours will be:

Debit Legal expenses - In-kind 1,700

Credit Donations- In-kind 1,700

In order to substantiate in-kind services, the professional could send the non-profit a note with his time spent. The organizations could send the professional a thank you note acknowledging his donated time. Note that services donated are not deductible in income tax returns.

Non-Profit Organizations and In-Kind Contributions - Accounting
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Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting

Accounting vs. Book-keepingBook-keeping concerns itself with the recording (correctly and in a set of books) of those transactions that result in the transfer of money or money's worth. Whereas accounting is comprehensive in perspective. It extends to classifying, summarizing, presenting and even analyzing accounting information .

Accounting vs. Accountancy

Body of knowledge (consisting of principles, postulates, assumptions, conventions, concepts and rules) governing the science of recording classifying and analyzing financial transactions is accounting. Whereas the practice and art of the science of accounting is termed as accountancy.To meet the ever increasing demands made on accounting by different interested parties (such as owners, management, creditors, taxation authorities etc.) the various branches have come into existence. Financial AccountingThe object of financial accounting is to ascertain the result (profit or loss) of business operations during the particular period and to state the financial position (Balance Sheet) as on a date at the end of the period.

Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting

Cost Accounting

The object of cost accounting is to find out the cost of goods produced or services rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes.Management AccountingThe object of management accounting is to supply relevant information at appropriate time to the management to enable it to take decision and effect control.In this web primer, we are concerned only with financial accounting. The objects of financial accounting as stated above can be achieved only by recording the financial transactions in a systematic manner according to a set of principles. The recorded information has to be classified, analyzed and presented in a manner in which business results and financial position can be ascertained.

Uses of Accounting

Accounting plays important and useful role by developing the information for providing answers to many questions faced by the users of accounting information.

(1) How good or bad is the financial condition of the business?

(2) Has the business activity resulted in a profit or loss?

(3) How well the different departments of the business have performed in the past?

(4) Which activities or products have been profitable?

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased.

(6) Whether to buy a component from the market or to manufacture the same?

(7) Whether the cost of production is reasonable or excessive?

(8) What has been the impact of existing policies on the profitability of the business?

(9) What are the likely results of new policy decisions on future earning capacity of the business?

(10) In the light of past performance of the business how it should plan for future to ensure desired results ?

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.

Besides, accounting is also useful in the following respects :-

(1) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions.

(2) Accounting record, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period.

(3) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles.

(4) Cocooning records, backed up by proper and authenticated vouchers are good evidence in a court of law.

(5) If a business is to be sold as a going concern then the values of different assets as shown by the balance sheet helps in bargaining proper price for the business.

Limitations of Financial Accounting

Advantages of accounting discussed in this section do not suggest that accounting is free from limitations.

Following are the limitations:

Financial accounting permits alternative treatmentsAccounting is based on concepts and it follows " generally accepted principles" but there exist more than one principle for the treatment of any one item. This permits alternative treatments with in the framework of generally accepted principles. For example, the closing stock of a business may be valued by anyone of the following methods: FIFO (First-in- First-out), LIFO (Last-in-First-out), Average Price, Standard Price etc., but the results are not comparable.

Financial accounting does not provide timely information

It is not a limitation when high powered software application like HiTech Financial Accenting are used to keep online and concurrent accounts where the balance sheet is made available almost instantaneously. However, manual accounting does have this shortcoming.

Financial accounting is designed to supply information in the form of statements (Balance Sheet and Profit and Loss Account) for a period normally one year. So the information is, at best, of historical interest and only 'post-mortem' analysis of the past can be conducted. The business requires timely information at frequent intervals to enable the management to plan and take corrective action. For example, if a business has budgeted that during the current year sales should be $ 12,00,000 then it requires information whether the sales in the first month of the year amounted to $ 10,00,000 or less or more?

Traditionally, financial accounting is not supposed to supply information at shorter interval less than one year. With the advent of computerized accounting now a software like HiTech Financial Accounting displays monthly profit and loss account and balance sheet to overcome this limitation. Financial accounting is influenced by personal judgments'Convention of objectivity' is respected in accounting but to record certain events estimates have to be made which requires personal judgment. It is very difficult to expect accuracy in future estimates and objectivity suffers. For example, in order to determine the amount of depreciation to be charged every year for the use of fixed asset it is required estimation and the income disclosed by accounting is not authoritative but 'approximation'.

Financial accounting ignores important non-monetary information

Financial accounting does not consider those transactions of non- monetary in nature. For example, extent of competition faced by the business, technical innovations possessed by the business, loyalty and efficiency of the employees; changes in the value of money etc. are the important matters in which management of the business is highly interested but accounting is not tailored to take note of such matters. Thus any user of financial information is, naturally, deprived of vital information which is of non-monetary character. In modern times a good accounting software with MIS and CRM can be most useful to overcome this limitation partially.

Financial Accounting does not provide detailed analysis

The information supplied by the financial accounting is in reality aggregates of the financial transactions during the course of the year. Of course, it enables to study the overall results of the business the information is required regarding the cost, revenue and profit of each product but financial accounting does not provide such detailed information product- wise. For example, if business has earned a total profit of say, $ 5,00,000 during the accounting year and it sells three products namely petrol. diesel and mobile oil and wants to know profit earned by each product Financial accounting is not likely to help him unless he uses a computerized accounting system capable of handling such complex queries. Many reports in a computer accounting software like HiTech Financial Accounting which are explained with graphs and customized reports as per need of the business overcome this limitation.

Financial Accounting does not disclose the present value of the business

In financial accounting the position of the business as on a particular date is shown by a statement known as 'Balance Sheet'. In Balance Sheet the assets are shown on the basis of "Continuing Entity Concept. Thus it is presumed that business has relatively longer life and will continue to exist indefinitely, hence the asset values are 'going concern values.' The 'realized value' of each asset if sold to-day can't be known by studying the balance sheet.

Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting
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The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application development for business. The software are available both for intranet and internet. These software are available for download from the website:

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Financial Accounting and Management Accounting - An Overview

This article deals with a brief overview of some of the differences between financial accounting and management accounting systems. But at first let us understand what accounting is.

What is accounting? Accounting may be defined as a system of collecting, summerising, analysing, and reporting in financial terms, information about a business organisation. The business accounting as understood today, comprises of, financial accounting, and management accounting. These two parts of the business system have something in common and there are differences as well.

As a part of the accounting system of business enterprises, these two differ from each other in many respects.

Financial Accounting and Management Accounting - An Overview

The first difference is in its structure or formats of its presentation of information. Financial accounting has a single unified structure of presentation, which means, that the information relating to enterprise business system is presented more or less on a uniform basis. The end products of financial accounting are its three basic financial statements, and these are:

- The balance sheet.

- The profit and loss account/income statement.

- The statement of changes in financial position.

The balance sheet presents the financial position of an organisation at any point of time. The profit and loss statement would contain the organisation's financial performance over a specified period of time, which is usually one year. The inflow and outflow of financial resources of an organisation during a period of time is reported in the statement of changes.

The financial statements prepared are based upon an equation or model, which implies, that all organisations present their financial statements on basis of a uniform structure. This would mean that financial accounting has a unified structure.

Primarily, financial statements are usually meant for people outside the organisation, such as, shareholders, creditors, government, the general public, and like others. These people also get such reports from other organisations, and to maintain uniformity in these statements, financial accounting system uses a unified structure system.

On the other hand, management accounting is mainly concerned with the in-house management. Since the accounting statements are used internally, it varies in structure from organisation to organisation, depending upon the circumstances and requirements of individual use. Therefore, management accounting is tailored to meet the needs of the management of the particular organisation.

The next difference is in the generally accepted accounting principles. Financial accounting is prepared in accordance with the Generally Accepted Accounting Principles, which in short is known as GAAP. Preparation of financial statements following GAAP ensures that the account presentations have been prepared on basis of a norm, as per the general guidelines issued by law.

On the other hand, management accounting is an in-house requirement, and is for the exclusive use of the management of the organisation. These management accounting statements are never made available to the outsiders, and hence could be formulated in the manner as wanted by the in-house management.

The third difference between financial accounting and management accounting is the statutory requirement of preparation of accounts. As discussed above, financial statements are prepared solely for the people outside the organisation, who have interests in the business operation of the organisation. There are shareholders, who would use the information contained in the financial statements, to decide whether or not to invest in the organisation. By law it is mandatory to prepare such statements, and it is a statutory obligation. In fact, the company law not only makes it mandatory to prepare such accounts, it also has laid down the structures, based on which such financial statements need to be prepared.

The fourth difference is the reflection of historical accounts. As mentioned above, there are three types of financial accounting statements that are prepared. Within these three, while the balance sheet and the profit and loss account, report the financial position on a particular date, and the results of operation of the organisation during a specific period of time respectively, the statement of changes of the financial position reports the inflow and outflow of resources during a particular period of time. Therefore, financial statements record historical data. On the other hand, management accounting does not record any financial history of the organisation.

The fourth difference relates to segment reporting. Financial accounting pertains to the business as a whole, though some organisations segment such accounting for its different operating centres. But, as and when the financial statements are presented, it shows the business as a whole. Contrary to this, the management accounting system may present statements in segmented fashion.

Finally, the financial accounting and management accounting differs in respect of their ultimate objectives. Financial accounting is prepared specifically for external reporting, where-as, management accounts are solely for in-house use.

In this brief presentation, it has become quite clear how financial accounting differs with management account preparation. Both of the accounting systems are vital to any business scenario, and are mandatory requirements in a corporate environment.

Financial Accounting and Management Accounting - An Overview
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Over twenty two years experience in Oracle. Significant development & Management skills viz.,technical writing, project planning and execution, project management, Oracle sql, pl/sql, data flow design, database design, datawarehousing, Oracle applications viz., manufacturing, scm, crm, financials, hrms, workflow, Oracle discoverer, forms, reports, etc., having expertise in Business Analysis. Presently a Sr. Program Manager with a Large IT organisation in London, looking after 10 Oracle applications project in Europe, and managing offshore development partners.

Education:

1. Fellow - Institute of Electronics & Communication Engineers.
2. MSc. Eng (Computer Science), University of London.
3. BSc. Eng (Electronics), University of London.

Hobby: Writing

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Generally Accepted Accounting Principals - A Primer

Accountants are the keepers of the standards. They are the ones who make sure that when we look at a financial statement, we can be reasonably that it was built using sound accounting practices and that it is comparable to other audited financial statements for other companies.

That sounds like a daunting task, but never fear. The accounting professional is in business to help you through all this.

The accounting profession is self-regulated. They decide the most appropriate way to record company activity on the financial books of record. They do this through an august board of seasoned professionals, the Accounting Practices Board of the American Institute of Certified Public Accountants (AICPA). This group defines what is known as "Generally Accepted Accounting Principals" or GAAP, which all public accountants must adhere to on behalf of all their clients.

Generally Accepted Accounting Principals - A Primer

The process used to introduce new GAAP or change old GAAP is beyond the scope of this paper, but it is a lengthy process with plenty of review opportunities for all CPAs and business people.

THE PURPOSE OF GAAP

The main purpose of having GAAP is to assure consistency in accounting practices, not only within a company, but across all regulated companies. The SEC requires all publicly held companies to be audited at least annually by a Certified Public Accountant (CPA). The CPA assures the stockholders that they can count on the financial information from the company, because it is in compliance with GAAP.

By preparing all financial information according to GAAP,

o Management can depend on the records and make course corrections for their individual departments or the company as a whole for the betterment of the company.

o Investors and lenders can make sound decisions based on the financial records of the company.

o Stockholders and prospective stockholders get an accurate picture of the company's financial health.

o Stock can be valued fairly on the market

o Deceptive, unfair and even criminal practices are minimized.

PRIMARY PRINCIPLES

The following are some of the primary principles upon which GAAP is built. This is, by no means, a complete description of GAAP, which is very detailed and takes much study to become expert at, but it shows the abiding purpose behind all that detail.

1. Historical Cost Principle: In general, the value of a company's assets is the original cost of those assets less suitable depreciation or amortization. This keeps companies from stating their assets at market value, which is not only difficult to ascertain, but very subjective in nature. Historical cost provides the actual cost which is very objective.

2. Revenue Recognition Principal: This simply states that revenue is recognized when it is earned, which may be a different time than it is received. For example, if your company provides a service at the end of December, but you customer doesn't pay you until January of the following year, your December revenue total will include that amount. January will not, even though that is the month in which you deposited the payment.

3. Full Disclosure Principle: Any information, whether or not strictly financial, that is relevant to the business and may have a future impact, must be disclosed. All transactions must be posted, of course. But even further, this principle provides for disclosure of contingencies. For example, if your company is being sued, the lawsuit must be analyzed for expected chance of loss. This contingency must be disclosed in a footnote of the financial statements. This is to prevent a loan officer or investor from not knowing this possibly impacting information when making decisions regarding investments in or loans to the company.

4. Matching Principle: Put simply, revenue must be matched to the expenses that helped to create it. This is why you have accruals and deferrals. The expenses associated with earning revenue for this period must also appear in this period.

GAAP ASSUMPTIONS

GAAP assumes the following:

1. Going Concern Assumption: The company or entity is a "going concern" and is not likely to end operations in the current year. It is expected to remain in business for the foreseeable future. Any exceptions to this assumption must be disclosed.

2. Economic Entity Assumption: The company is an independent entity and is separate from it's owners.

3. Monetary Unit Assumption: The currency used to measure the entity's financial performance is stable.

4. Periodic Reporting Assumption: Business operations are reported on a regular basis, usually annually. The fiscal year doesn't have to be the same as the calendar year. This is usually set according to the business cycle for the particular company.

Using Generally Accepted Accounting Principles is necessary for all business entities. But you needn't become a GAAP expert yourself. Hire a good accountant. A CPA may be necessary if your company is publicly held, or for loan or business venture requirements.

Generally Accepted Accounting Principals - A Primer
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Michael Russell

Your Independent guide to Accounting

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Revenue Accounting

Revenue accounting is the process of receiving, organizing and recording payments and invoicing, recording, tracking, and collecting loans and other types of debt receivable on customer accounts. Revenue accounting provides essential tools for determining and keeping track of the revenue generated.

In business, revenue means the income that a firm actually receives from its activities, especially from sales of products and / or services to customers. Consistent revenue growth is essential for a firm to attract investors to its publicly traded stock. However, revenue is less important than profit to investors. The word 'top line' is also used to represent the term 'revenue,' because in a company's profit and loss account, revenue is usually placed at the top, and all other costs and expenses below that.

'Revenue recognition' is one the four major principles listed in the US generally accepted accounting principles (GAAP). The other three include the 'historical cost principle,' 'matching principle' and the 'full disclosure principle.'

Revenue Accounting

Data capture, preparation, accounting, auditing, reconciliation, management reporting, and interline billing are the main processes involved in revenue accounting. Airline revenue accounting system is a good example. Its objective is to provide scheduled passenger airlines with a computerized solution to cater to the needs of passenger revenue accounting departments.

Revenue accounting has now grown more complex and auditors are now examining financial records in finer details. Unfortunately, many accounting systems do not handle complex revenue processes well because they are designed for simple revenue processes. You can automate revenue accounting by using software packages. They help you mange multiple business models, corporate entities, and currencies.

Revenue Accounting
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