Accounting 101

There are several definitions of accounting. Accounting may be defined as (1) a service activity wherein its primary function is to supply quantitative information essentially financial in nature that is all about economic entities which may be significantly useful in decision making for top management. Another definition Accounting may also be defined as (2) the art of recording, classifying and summarizing in a considerable manner and in terms of money, business transactions, activities and events, which are part of a financial character and later on interpreting the results of the reports. Another definition of accounting is (3) the process of identifying, measuring and communication economic information to allow knowledgeable judgments and decisions by all users of the information.

The world of accounting follows certain guidelines and procedures that compose of acceptable accounting practice at a given time. These set of guidelines and procedures are known as GAAP which means generally accepted accounting principles. The basics of accounting principles are as follows.

Accounting

Adequate Disclosure. This accounting principle states that all relevant information which would affect the understanding and evaluation or assessment of the user of the accounting entity should be disclosed in the financial statements.

Accounting 101

Consistency Principle. As the name, consistency, implies, there should be consistence. Firms should use the same accounting method from period to period in order to attain comparability over time within a single enterprise. Nevertheless, companies are allowed to change as long as it is justifiable and be disclosed in the financial statements.

Expense Recognition Principle. In this principle, it is stated that expenses should be recognized in the accounting period wherein goods and services are used up to generate revenue and not when the entity pays for those services and goods.

Historical Cost. This principle states that purchased assets should be recorded at their actual cost and not what management thinks they are worth as at reporting date.

Materiality. It should be noted that financial reporting is only concerned with information that is significant enough that will likely affect assessments and decisions. Materiality is dependent on the size and nature of the item judged in the particular situations of its omission. Upon deciding as to whether an item or collection of items is material, the nature as well as the size of the item is assessed together. Either of the nature of the item or the size may be the determining factor, depending on the circumstances.

Objectivity Principle. Records and statements in accounting are based on the most reliable information available in order for them to be as accurate and as useful as possible. Information that is considered reliable may be verified and confirmed by independent observers. It is mainly ideal in accounting that all records are based on information, which flows from activities that are documented by objective evidence. Without the objectivity principle, accounting records may be based on opinions and impulses that may be subject to dispute.

Revenue Recognition Principle. In revenue recognition principle, revenue is to be recognized in the accounting period when services are rendered or performed or when goods have been delivered.

Accounting 101

Michael Russell
Your Independent guide to Accounting

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What is Cost Accounting?

This can be described as the process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to the internal and external stakeholders of a business entity. External stakeholders are those who have a vested financial interest in a business or company. For example banks (loans), financial houses (mortgages), investors (investments), etc. Internal stakeholders are the business or company directors, managers, division heads, etc.

One of the many benefits of cost accounting is that it turns data into information, knowledge and wisdom about a business entity's operations that is useful for:

Accounting

measuring performance reducing or managing costs determining the fees or prices for goods and services deciding to authorize, modify or discontinue a program or activity Another benefit is that information on the costs programs and activities may be used as a basis to estimate future costs in preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance. Moreover, costs may be compared to known or assumed benefits to identify value-added and non-value added activities. Reliable information on the cost of programs and activities is crucial for the effective management of a business entity's operations. Cost accounting is especially important for fulfilling the objective of assessing operational performance. The objective is to improve the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information to allow for continuous improvement in delivering outputs and outcomes to stakeholders. Cost accounting has been with us since early times to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

What is Cost Accounting?

In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labour, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making.

Some costs tend to remain the same even during busy periods, unlike variable costs which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making.

In modern accounting, costs are measured in accordance with Generally Accepted Accounting Principles (GAAP). In accordance to GAAP the principle is to record historical events and assign a monetary value to each event that has taken place. Costs are measured in units of currency by convention. Cost accounting could also be defined as a kind of management accounting that translates the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values.

In conclusion, for any business entity - from the smallest business enterprise to the largest multinational corporation - to be successful requires the use of cost accounting concepts and practices. It provides key data to managers for planning and controlling, as well as costing products, services, and customers. The central focus is how it could help managers make better decisions. For this reason businesses and companies hire cost accountants and they are increasingly becoming integral members of decision-making teams instead of just data providers.

What is Cost Accounting?

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What Financial Planning Tools Should I Be Using?

No matter who you are, financial planning is something that's necessary for everyone. If you're like most people, financial planning might seem very complicated and confusing, and you might not know where to start. However, financial planning tools can help. Here are some ideas to get you started.

First and most importantly, you need to have a good budget in place, and you need to follow it. There is no way to reach your financial goals without a budget to help you reach them. Having a budget will help you allocate money such that you can pay your debts and plan for the future at the same time.

Accounting

The second thing that you need to plan for retirement is a savings account. Other investments are certainly important, but a savings account is something that you need in order to have easily accessible liquid cash available for emergencies, but able to earn you some interest at the same time. You can check with your bank to see what savings plans they have available. There are also many good online banks that offer very competitive interest rates, some nearly as high as a money market savings account, with the added protection of having your deposits federally insured up to 0,000. In some cases, these accounts have savings rates that go up as your balance goes up, so you might start with a lower interest rate at one level and earn a higher interest rate as your savings account level rises. Many of these places also offer "no minimum deposit" plans, so you can start saving with just to . Keep in mind that this is important, since getting in the habit of saving is just as important as how much you save. If you wait until you "have enough" money to begin saving, you never will.

What Financial Planning Tools Should I Be Using?

The next thing to check on is your credit report. Several web sites offer you a credit report for a fee, but the government also has a web site at annualcreditreport.com. There, you can check your credit report at each of the three major credit bureaus for free once a year. If you need to check it more often because of frequent changes or because you are at risk for identity theft for some reason, then a credit reporting service may be the way to go.

Managing your debt can be daunting, but there are a few financial planning tools that you can use to make it easier. Credit cards are a way of life in today's world. You can use the extreme competitiveness of credit card companies to your advantage. Only carry a few cards, and make sure that those cards have the lowest possible interest rate. Many cards will send you balance transfer offers that allow you to transfer a balance from another card at a very low rate. Be sure to take advantage of any reward programs that are offered so that you can get the most from your purchases.

Fifth, one of your most major bills is probably your rent or your mortgage. Of the two, a mortgage payment usually better for you, since you can usually deduct interest you pay on your mortgage from your taxes. When interest rates drop or some other financial situation arises where refinancing would be a good option for you, make sure you check into this and refinance if possible, in order to lower your mortgage payments. Usually, the most prudent way to handle a refinancing is to roll your refinance savings into your mortgage, so that you save on the mortgage itself rather than taking the cash out to spend on something else. This will save you up to several years on mortgage payments, depending on the length of your loan.

Finally, perhaps the greatest financial planning tool anyone has is a retirement plan. Unfortunately, for many people, this financial tool is greatly underused. If you have a job and your employer offers a 401(k) plan, you should be participating in it and making the maximum contribution, or at least as much as you can possibly spare. Choose a diversified plan that will let you save as much as possible for your retirement and protects against losses in one particular sector. Once you begin working, start funding your 401(k) right away. The earlier you start, the more money you will have at retirement.

In short, a few good financial planning tools can help you manage your money so that you live well at retirement. Do plenty of research and take advantage of all resources available to you. Many financial planning tools exist that are free or very inexpensive, either at your bank or on the Internet. If you use financial planning tools wisely, you'll get the most out of your money and eventually, out of your retirement.

What Financial Planning Tools Should I Be Using?

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Accounting for Government Contracts - Fringe, Overhead and G&A

If you are planning to have the U.S. Government as a client, you will need to have your accounting systems set up so you can handle their accounting requirements. Regardless of whether you are engaging in a plain vanilla contract or an SBIR grant, you will be required to negotiate fringe benefit rates, overhead rates, and general and administrative rates.

Fringe benefits rates include

Accounting

Compensated Absences, such as Vacation, Holidays, and Sick Leave; Medical Programs, such as Health and Dental Insurance; Retirement, such as the Defined Contribution Portion of your Retirement Plan and Plan Service Fees; Long-term Disability Coverage; Worker's Compensation Coverage; and Employee Wellness, such as Fitness Club Membership and Other Wellness Programs

Accounting for Government Contracts - Fringe, Overhead and G&A

Overhead covers direct and indirect support of the employees whose time is being billed to the Government. This includes items like

Rent (only for the space that those employees use); Depreciation of their furniture and equipment; Utilities (based on the space allotment for those employees); and Supplies that these employees share, such as office supplies.

General and administration covers other costs that are necessary for the company to perform in this contract, including:

Management (and their associated fringe, direct, and indirect costs) Legal costs State and Federal taxes Marketing to the Government costs Accounting

Note, however, that they have extensive regulations covering was is not considered an allowable cost (see the FAR section 31.205 - Selected Costs [http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/31.htm#P268_51249] to get a specific description as to what is allowable and what is not.

Once you have negotiated these rates, you will be required to back them up yearly using an indirect cost model to show that you are matching your negotiated rates. This model is subject to audit.

Although you can figure out what needs to go into these calculations, it will take a long time to read all the regulations. If you believe that you want to win Government contracts, you must think ahead or hire a consultant to assist you with the process.

Accounting for Government Contracts - Fringe, Overhead and G&A

Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting is a finance and business strategy consultancy providing professional services to high growth, early stage companies. The company provides capital formation assistance, market research and business intelligence, and business planning strategy. More information about the company can be found at http://www.worrallconsulting.com - Additional financial and strategy advice can be found at http://www.cfoyourself.com

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Principles of Accounting and Accounting Assumptions

In the modem world no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, public and government etc., are interested to know about the affairs of the business. Affairs of the business can be studied mainly by consulting final accounts and the balance sheet of the particular business. Final accounts and the balance sheet are end products of book-keeping. Because of the importance of these statements it became necessary for the accountants to develop some principles, concepts and conventions which may be regarded as fundamentals of accounting. Such fundamentals having wide acceptance give reliability and creditability to the financial statements prepared by the accountants. The need for 'generally accepted accounting principles' arises for two reasons: First, to be logical and consistent in recording the transactions and second, to conform to, the established practices and procedures.

There is no agreement among the accountants as regards the basic concepts of accounting. There is no uniformity in generally accepted accounting principles (GAPP). The terms-axioms, assumptions, conventions, concepts, generalizations, methods, rules, doctrines, techniques, postulates, standards and canons are used freely and inconsistently in the same sense.

Accounting

Principles

Principles of Accounting and Accounting Assumptions

"A general law or rule, adopted or professed as a guide to action, a settled ground or basis of conduct or practice." This definition given by dictionaries comes nearest to describing what most accountants mean by the word 'Principle'. Care should be taken to make it clear that as applied to accounting practice, the world principle, does not connote a rule for which there can be no deviation. An accounting principle is not a principle in the sense that it admits of no conflict with other principles.

Postulates

Mean to assume without proof, to take for granted or positive consent, a position assumed as self- evident. Postulates are assumptions but they are not arbitrary deliberate assumptions but generally recognized assumptions which reflect the judgment of 'facts' or trend or events, assumptions which have been borne out in past by facts supposed by legal institutions making them enforceable to some extent.

Doctrines

Mean principles of belief: what the scriptures teach on any subject. It refer to an established principle propagated by a teacher which is followed in strict faith. But in accounting practice, no such doctrine need be adhered to but the word denotes the general principles or policies to be followed.

Axiom

Denotes a statement of truth which cannot be questioned by anyone.

Standards

Refer to the basis expected in accounting practice, under different circumstances. In Indian context, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standards Board on 21st April, 1977. The main function of ASB is to formulate accounting standards taking into consideration the applicable laws, customs, usages and business environment.

Accounting Assumptions

The International Accounting Standards Committee (lASC) as well as the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the following as the fundamental accounting assumptions:

(1) Going concern

In the ordinary course, accounting assumes that the business will continue to exist and carry on its operations for an indefinite period in the future. The entity is assumed to remain in operation sufficiently long to carry out its objects and plans. The values attached to the assets will be on the basis of its current worth. The assumption is that the fixed assets are not intended for re-sale. Therefore, it may be contended that a balance sheet which is prepared on the basis of record of facts on historical costs cannot show the true or real worth of the concern at a particular date. The underlying principle there is that the earning power and not the cost is the basis for valuing a continuing business. The business is to continue indefinitely and the financial and accounting policies are followed to maintain the continuity of the business unit.

(2) Consistency

There should be uniformity in accounting processes and policies from one period to another. Material changes, if any, should be disclosed even though there is improvement in technique. A change of method from one period to another will affect the result of the trading materially. Only when the accounting procedures are adhered to consistently from year to year the results disclosed in the financial statements will be uniform and comparable.

(3) Accrual

Accounting attempts to recognize non-cash events and circumstances as they occur. Accrual is concerned with expected future cash receipts and payments: it is the accounting process of recognizing assets, liabilities or income for amounts expected to be received or paid in future. Common examples of accruals include purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we make record of all expenses and incomes relating to the accounting period whether actual cash has been disbursed or received or not. If a fundamental accounting assumption (i.e. Going concern, consistency and accrual) is not followed (in the preparation of financial statements) the fact should be disclosed. [AS-I para 27].

Principles of Accounting and Accounting Assumptions

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Accounting Theory - Basic Accounting Concepts

There are four basic accounting concepts. The concepts specify and explain the guidelines that should be followed when managing the accounting of a business. Below there is a list of the these four basic accounting concepts and a brief summary of each concept.

1. Accruals Concept

Accounting

The accruals concept states that revenue from transactions and transactions which cause liabilities are accounted for when they occur, even if cash or property has not actually been exchanged between the entities involved in the transaction. For example, a dentist, Dr. Payne orders and receives 6 months worth of toothpaste for 0 in January. Even if he does not pay for the toothpaste until February, Dr. Payne should still record the 0 liability in January and not wait until February, since he owns the goods and is liable to pay for them to the supplier. On its turn the supplier will be accounting for the sale of toothpaste to Dr. Payne.

Accounting Theory - Basic Accounting Concepts

2. Consistency Concept

Once certain accounting method has been applied by the accountant, this methods must be applied throug all the further periods for the accounting purposes. The accounting method should only be changed if there is a valid reason that requires the change. For example, if the accountant starts recording transactions using the double-entry accounting method in January, he or she should continue applying the double-entry method for the remainder of the accounting period. He or she should not begin applying the double-entry method and suddenly switch to the single-entry accounting method mid-accounting cycle for no identifiable, valid reason. This means that all the accounting methods and procedures must be applied consistently to ensure comparability of information among periods.

3. Going Concern Concept

When the accounting of a business is being managed, it should be assumed by the accountant that the business is viable and will still operational in the foreseeable future. If the accountant has any reason to believe that the business will not remain viable in the foreseeable future, he or she must state the reasons for coming to that conclusion in the financial reports of the business. If the accountant has an opinion that the company will not remain in business and there are no sufficient evidence to proof the opposite, the accountant may simply include a disclaimer in the financial reports stating that he or she believes, but cannot show evidence to prove that the business will not remain viable.

4. Prudency Concept

Liabilities are accounted for in the balance sheet even if they is only a possibility for such liabilities to occur, despite they are potential. However, revenues are accounted for in the financial statements only if the business has title for such revenue and has already collected or will collect cash or other assets in the future. If there is a doubt about this or there is no strong legal basis to recognize revenue, it is not accounted for in the accounting books. This concept helps to ensure that businesses make provisions for potential losses, not just realized losses, and do not erroneously include revenues that are simply anticipated, but not yet earned.

Accounting Theory - Basic Accounting Concepts

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Accounting Basic - Understanding the General Ledger

The general ledger contains an entry for every transaction ever made with a business. The general ledger's first entry should be the one of the business's transaction, and it should be updated as often as necessary to ensure that every single future transaction is recorded. Since the general ledger holds all of the information regarding every single transaction in the business's history, it is the core of all of the business's accounting activity. Balance sheets and income statements are both derived from information contained in the general ledger. Each entry it records the following information:
the date of the transaction, the balance of the transaction, and a description of the transaction

Entering this information is referred to as "posting" a general transaction and the entry itself is referred to as a "post".

Accounting

The general ledger may consist of smaller sub-ledgers, or accounts. Examples of commonly used sub-ledgers are accounts receivable sub-ledgers and accounts payable sub-ledgers. Each transaction either posts only in the general ledger or in both sub-ledger and the general ledger.

Accounting Basic - Understanding the General Ledger

When a general ledger is set up for the first time, the value of the starting balance and the balances of all of the sub-ledgers should be carefully determined. The worth of a business's assets such as cash and equipment, for example, should be included in the starting balance of the asset sub-ledger.

A business's general ledger should be updated to include new transactions as often as it is necessary to prevent the process from becoming cumbersome. Sometimes, a particular sub-ledger should be updated more often than another sub-ledger.

When using a double-entry accounting method, a method which relies on the accounting equation, the general ledger is kept with two opposite posts for each transaction in two separate ledgers or sub-ledgers. This is a beneficial method because it helps ensure that the accounting is kept in balance, and any errors in the accounting are quickly identified.

If it is kept up properly, the general ledger can be a great resource for finding, verifying, and identifying transactions, even if the transactions were completed a relatively long time ago. For example, in case the accounting activities and reports of a business are audited, either externally or internally, a well-kept general ledger can be a source of detailed transaction history.

Accounting Basic - Understanding the General Ledger

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