Financial Accounting

Financial Accounting

Introduction The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities. Managerial accounting contrasts with financial accounting in that managerial accounting is for internal decision making and does not have to follow any rules issued by standard-setting bodies. Financial accounting, on the other hand, is performed according to Generally Accepted Accounting Principles (GAAP) guidelines.


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CPA's
The primary accounting professional association in the U.S. is the American Institute of Certified Public Accountants (AICPA). The AICPA prepares the Uniform CPA Examination, which must be completed in order to become a certified public accountant. To be eligible to become a CPA, one needs an undergraduate degree in any major with 150 credit hours of course work. Of these 150 credit hours, a minimum of 36 credit hours must be in accounting. Only about 10% of those taking the CPA exam pass it the first time.


Accounting Standards
In order that financial statements report financial performance fairly and consistently, they are prepared according to widely accepted accounting standards. These standards are referred to as Generally Accepted Accounting Principles, or simply GAAP. Generally Accepted Accounting Principles are those that have "substantial authoritative support".


Accrual vs. Cash Method
Many small businesses utilize an accounting system that recognizes revenue and expenses on a cash basis, meaning that neither revenue nor expenses are recognized until the cash associated with them actually is received. Most larger businesses, however, use the accrual method.
Under the accrual method, revenues and expenses are recorded according to when they are earned and incurred, not necessarily when the cash is received or paid. For example, under the accrual method revenue is recognized when customers are invoiced, regardless of when payment is received. Similarly, an expense is recognized when the bill is received, not when payment is made.
Under accrual accounting, even though employees may be paid in the next accounting period for work performed near the end of the present accounting period, the expense still is recorded in the current period since the current period is when the expense was incurred.

Underlying Assumptions, Principles, and Conventions
Financial accounting relies on the following underlying concepts:

• Assumptions: Separate entity assumption, going-concern assumption, stable monetary unit assumption, fixed time period assumption.
• Principles: Historical cost principle, matching principle, revenue recognition principle, full disclosure principle.
• Modifying conventions: Materiality, cost-benefit, conservatism convention, industry practices convention.

Financial Statements Businesses have two primary objectives:

• Earn a profit
• Remain solvent

Solvency represents the ability of the business to pay its bills and service its debt. The four financial statements are reports that allow interested parties to evaluate the profitability and solvency of a business. These reports include the following financial statements:

• Balance Sheet
• Income Statement
• Statement of Owner's Equity
• Statement of Cash Flows

These four financial statements are the final product of the accountant's analysis of the transactions of a business. A large amount of effort goes into the preparation of the financial statements. The process begins with bookkeeping, which is just one step in the accounting process. Bookkeeping is the actual recording of the company's transactions, without any analysis of the information. Accountants evaluate and analyze the information, making sense out of the numbers.
For the reports to be useful, they must be:

• Understandable
• Timely
• Relevant
• Fair and Objective (free from bias)

Double Entry Accounting Financial accounting is based on double-entry bookkeeping procedures in which each transaction is recorded in opposite columns of the accounts affected by the exchange. Double entry accounting is a significant improvement over simple and more error-prone single-entry bookkeeping systems.

Fundamental Accounting Model The balance sheet is based on the following fundamental accounting equation :

Assets  =  Liabilities  +  Equity This model has been used since the 18th century. It essentially states that a business owes all of its assets to either creditors or owners, where the assets of a business are its resources, and the creditors and owners are the sources of those resources.


Transactions
To record transactions, one must:

1. Identify an event that affects the entity financially.
2. Measure the event in monetary terms.
3. Determine which accounts the transaction affects.
4. Determine whether the transaction increases or decreases the balances in those accounts.
5. Record the transaction in the ledgers.

Most larger business accounting systems utilize the double entry method. Under double entry, instead of recording a transaction in only a single account, the transaction is recorded in two accounts.
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The Accounting Process
Once a business transaction occurs, a sequence of activities begins to identify and analyze the transaction, make the journal entries, etc. Because this process repeats over transactions and accounting periods, it is referred to as the accounting cycle.

Recommended Reading
Eisen, Peter J., Accounting the Easy Way

 

What is Commerce?

Commerce.

From Wikipedia, the free encyclopedia
This article is about the business concept. For other uses, see Commerce (disambiguation).
This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (March 2007)

While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any country. Thus, commerce is a system or an environment that affects the business prospects of an economy or a nation-state. We can also define it as a second component of business which includes all activities, functions and institutions involved in transferring goods from producers to consumers.
[edit] History
File:Preziosi - Cherry peddler , 1869.jpg
Cherry peddler in Bucharest, around 1869.

Some commentators trace the origins of commerce to the very start of communication in prehistoric times. Apart from traditional self-sufficiency, trading became a principal facility of prehistoric people, who bartered what they had for goods and services from each other. Historian Peter Watson dates the history of long-distance commerce from circa 150,000 years ago.

In historic times, the introduction of currency as a standardized money facilitated a wider exchange of goods and services. Numismatists have collections of these monetary tokens, which include coins from some Ancient World large-scale societies, although initial usage involved unmarked lumps of precious metal. [2] [3] The circulation of a standardized currency provides the major disadvantage to commerce of overcoming the "double coincidence of wants" necessary for barter trades to occur. For example, if a man who makes pots for a living needs a new house, he may wish to hire someone to build it for him. But he cannot make an equivalent number of pots to equal this service done for him, because even if the builder could build the house, the builder might not want the pots. Currency solved this problem by allowing a society as a whole to assign values and thus to collect goods and services effectively and to store them for later use, or to split them among several providers.

Today commerce includes a complex system of companies that try to maximize their profits by offering products and services to the market (which consists both of individuals and other companies) at the lowest production cost. A system of international trade has helped to develop the world economy but, in combination with bilateral or multilateral agreements to lower tariffs or to achieve free trade, has sometimes harmed third-world markets for local products (See Globalization).