Accounting is the process of identifying, measuring, and communicating economic information to allow informed decisions to be made concerning business matters. It has been described as “the language of business” ( Godwin, n.d. p. 1 ). As the basis of accounting some of the fundamental assumptions an accountant attempts to solve are economic entity, time period, monetary unit, and going concern. The economic entity assumption states that financial dealings of the business and that of the owner should be separate. The time period assumption is used to record economic information over a fixed period of time. The monetary unit assumption assumes that the dollar is the best way to relay economic information. The going concern assumption assumes that a business will operate into the foreseeable future. There are four main financial statements. An income statement covers a fixed amount of time and is a summary of revenues and expenses. An income statement also shows gains and losses from other commerce, such as repayment of debt and sales of assets ( income statement, 2009 ). A balance sheet states a company’s assets and liabilities. It also shows a company’s obligations to debtors as well as its fixed and current assets. A balance sheet is a “condensed financial snapshot of a company’s state of affairs” ( balance sheet, 2006 p.1 ). The formula a balance sheet attempts to solve is: fixed assets + (current assets - current liabilities) = net worth. A Statement of Retained Earnings is a statement showing changes in equity over a period of time over a financial entity. It shows inflows and outflows of money as well as dividends compensated and the end balance is equal to that of the end balance of a balance sheet. A Statement of Cash Flows shows sources of cash and how cash is used in a business. Cash flows are ACCOUNTING 4 organized into three different categories: the source of the finance, the source of the investment and the operational costs associated with day- to- day business. ( Smith, 2011). Revenues refer to an increase in resources from providing a product or service. The are recorded when they are earned. Expenses are decreases in resources to provide a service or product. Expenses are recorded when a benefit is obtained or used and is also known as the matching principle. These terms are used in conjunction with a income statement. Other goals a financial statement attempts to accomplish are accuracy, time constraint restrictions, understandability, consistency, relevancy, reliability, comparability, materiality and conservatism. These goals affect how a financial statement is interpreted, how it relates to past statements, the dependability of the information provided, how it impacts the business and understating potential so as not to affect future financial outcomes. Accounting transactions fall under GAAP or Generally Accepted Accounting Principles and some of the governing bodies of accounting include the SEC or Securities Exchange Commission that protects investors, the AICPA or American Institute of CPA’s, the FASB or Financial Accounting Standards Board and the IASB or International Accounting Standards Board. The accounting systems strives to identify, quantify, record and communicate transactions of a business. By using individual accounts an accountant is able to identify which item(s) are affected. By organizing the accounts separately it is simpler to record transactions and ensure adequate space is available to record and provide economic information. The listing of these different accounts is called the Chart of Accounts. On a Chart of Accounts all transactions effect one of the three balance sheet ACCOUNTING 5 categories. Any change in an account effects the Balance Sheet. To maintain this balance accountants use a double entry recording system. Double entry recording systems record every transaction as a debit or credit. The credit entries record the sources of finance, such as loans or revenues produced by current operations. Debits record the use to which these funds are used. On the balance sheet, when these funds are added together they should, ideally, result in the same number. When they do not add up it shows a businesses profit- and- loss which is organized into a separate account ( double- entry bookkeeping, 2003). Accounts can be summarized into a “T” account where the left side of the “T” is used for debits or DR in accounting terms and the right side is reserved for credits or CR. Equity or worth increases with credit and decreases with debit. A trial balance reports general ledger accounts and their balances. Accounting has affected my personal life, professionally, by showing me where my money is spent, comparing it with past expenses, forecasting future needs, and eliminating wasteful financial practices. This leads to more efficiency and being able to do more with less, which results in a credit in the long run from potential investors because of accountability. Accounting has affected small business because there is now accounting software available for any business owner to simply record every transaction and compare it to different fiscal periods where, in the past, the owner might have to hire an accountant. Other software is also available, such as Turbo Tax, that even allows a person to calculate how much tax they owe. Technology is definitely playing a role in the evolution of the accounting world. ACCOUNTING 6 References Andrew Russo (2011). American Intercontinental University [Online].
Posted on: Thu, 13 Mar 2014 05:21:22 +0000
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