Accounting.docx

Accounting.docx

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Accounting

1、Accounting:

abusinesslanguage

Somepeoplethinkofaccountingasahighlytechnicalfieldwhichcanbeunderstoodonlybyprofessionalaccountants.Actually,nearlyeveryonepracticesaccountinginoneformoranotheronanalmostdailybasis.Accountingistheartofmeasuring,describing,andinterpretingeconomicactivity.Whetheryouarepreparingahouseholdbudget,balancingyourcheckbook,preparingyourincometaxreturn,orrunningGeneralMotors,youareworkingwithaccountingconceptsandaccountinginformation.

Accountinghasoftenbeencalled“thelanguageofbusiness”.Everyinvestor,manager,andbusinessdecisionmakerneedsaclearunderstandingofaccountingtermsandconcepts.

Theunderlyingpurposeofaccountingistoprovidefinancialinformationfordecisionmakingaboutaneconomicentity.Inthisbooktheeconomicentityweconcentrateuponisabusinessenterprise.Businessexecutivesandmanagersneedthefinancialinformationprovidedbyanaccountingsystemtohelpthemplanandcontroltheactivitiesofthebusiness.Forexample,managementneedsanswerstosuchquestionsastheprofitabilityofeachdepartmentofthebusiness,theadequacyofthecompany’scashposition,andthetrendofearnings.

Manybusinessesalsocompilenon-financialinformationneededfordecisionmaking.Anairline,forexample,musthaveinformationabouton-timearrivals,repairschedules,andphysicalexaminationsofflightcrews.TheuseofcomputersmakespossibletheoperationofaManagementInformationSystem（MIS）whichprovidesdecisionmakerswithbothfinancialandnon-financialinformation.

Theaccountingsystemisthemostextensiveandimportantcomponentofamanagementinformationsystembecauseitisusedbytheentirebusinessentityandbyoutsidersaswell.Financialinformationaboutbusinessisneededbymanyoutsiders.Theseoutsidersincludeowners,bankers,othercreditors,potentialinvestors,laborunions,governmentagencies,andthepublic,becauseallthesegroupshavesuppliedmoneytothebusinessorhavesomeotherinterestinthebusinessthatwillbeservedbyinformationaboutitsfinancialpositionandoperatingresults.Alaborunion,forexample,needstobeinformedonacompany’sfinancialstrengthandprofitsbeforebeginningnegotiationsforanewlaborcontract.Rememberthateveryindividualaswellaseverybusinessmustmakeeconomicdecisionsaboutthefuture.Therefore,everyoneneedssomeunderstandingofaccountingasabasisformakingsounddecisions.

Toemphasizeourbasicconcept:

thegoaloftheaccountingsystemistoprovideusefulinformationtodecisionmakers.Thus,accountingistheconnectinglinkbetweendecisionmakersandbusinessoperations.

2、AccrualBasis

Asnoted,thebestmatchingofrevenuesandexpensestakesplacewhentheaccrualbasisofaccountingisused.Thismeansthatthefinancialeffectsoftransactionsandeconomiceventsarerecognizedbytheenterprisewhentheyoccur,ratherthanwhentheactualcashisreceivedorpaidbytheenterprise.Forexample,asshowninExhibit1,salesarerecognizedasrevenueswhentheyaremade,andservicesarerecognizedwhentheyareperformed.Whensalesaremadeorservicesperformedthereisacorrespondingrighttoreceivepayment,regardlessofwhenthecashisactuallycollected.Thatis,asaleonaccount（asalemadeforlaterpayment）isrecognizedinthesamemannerasacashsale.TheonlydifferenceisthatAccountsReceivableratherthanCashisincreasedatthetimeofsale.Whenthecashfromthesaleonaccountiscollected,norevenueisrecognized.Thecashcollectionisjustanexchangeofoneasset,AccountsReceivable,foranotherasset,Cash.Thetotalamountofassetsremainsthesame.Therevenueandassetincreaseswererecognizedatthetimethesaletookplace.

Withtheaccrualbasisofaccounting,ifcashisreceivedasadepositoradownpaymentisreceivedbeforethesaleismadeortheservicerendered,norevenueisrecognizeduntilthetimeoftheactualsaleorservice.Instead,aliabilitytodeliveraproductorperformafutureserviceisrecognizedatthetimeofthecashreceipt.Thisliabilityusuallyisreferredtoadasunearnedrevenue,whentheservicefinallyisrendered,andtheliabilityisdischarged.

Expensesarerecognizedinasimilarmanner.Thatis,expensesareconsideredtobeincurredwhenthegoodsorservicesareconsumedbytheenterprise,notnecessarilywhenthecashoutflowtakesplace.Forexample,asshowninExhibit2,theCashCorporationrecordsasaJuneexpensethesalariesearnedbyitsemployeesinthatmonth,eventhoughthosesalariesmaynotbepaiduntilJuly.ThisisaccomplishedbyrecordingSalariesPayableinJune.WhenJune’ssalariesarepaidinJuly,noexpenseisrecognizedthattime.BothsalariesPayableandCasharereducedatthattime,butnoexpenseisinvolved.Thedecreaseinthefirm’snetassetsandthecorrespondingexpensewererecordedinJune.

Inmanycases,thecashispaidatthesametimetheexpenseisincurred.Forexample,plumbingrepairsmaybepaidwhentheservicesarerendered.Inthiscase,RepairsandMaintenanceExpenseisrecordedwhenthecashispaid.However,itisnotthepaymentofcashthattriggerstherecognitionoftheexpense.Theexpenseisrecognizedbecausetheplumbingserviceswerereceivedandanobligationtopaycameintobeing.Finally,ifcashispaidbeforetheexpenseisincurred,noexpenseisrecognizedatthattime.Forexample,ifafirmprepaysitsJunerentinMay,theprepaymentisconsideredanassetinMayandisnotconsideredanexpenseuntilJune,whentheservicehasbeenreceived.

CashBasis

Withthecashbasisofaccounting,arevenueisrecognizedwhenthecashisreceived,andanexpenseisrecognizedwhenthecashispaid.Thecashbasisofaccountingthusdoesnotproperlymatchrevenuesandexpenses.Thisisbecausetherecognitionofrevenueandexpenseiscontingentonthetimingofcashreceiptsanddisbursements;dependingonthistiming,theexpensesofoneperiodcouldbematchedagainstthesalesorservicesofanotherperiod.Thecashbasisofaccounting,therefore,isnotagenerallyacceptedaccountingprincipleforfinancialreportingpurposes.However,manyprofessionals,suchasdoctorsandlawyers,whopreparefinancialstatementssolelyfortheirownuse,usethecashbasisinordertosimplifytheirrecordkeeping.Inaddition,mostindividualsusethecashbasisofaccountingfortheirpersonalaffairsandindeterminingtheirtaxableincome.

3、GenerallyAcceptedAccountingPrinciples

Basicconceptsofaccountingtheoryaretoovasttoconsumeinonegulp,sotheyarebeingintroducedgraduallyasweproceed.Wewilldiscusssomebasicconceptsofaccounting,suchasentity,andstablemonetaryunitfirstandthenweconsiderthreeothermajorideasthatarepartofthebodyofgenerallyacceptedaccountingprinciples:

goingconcern,materiality,andcost-benefit.Atlast,webrieflyreviewtheconceptofroomforjudgmentswhichunderliestheGAAP.

1.TheEntityConcept

Thefirstbasicconceptorprincipleinaccountingistheentityconcept.Anaccountingentityisanorganizationorasectionofanorganizationthatstandsapartfromotherorganizationsandindividualsasaseparateeconomicunit.Accountingdrawssharpboundariesaroundeachentitytoavoidconfusingitsaffairswiththoseofotherentities.AnexampleofanentityisGeneralMotorsCorporation,anenormousentitythatencompassesmanysmallerentitiessuchastheChevroletDivisionandtheBuickDivision.Inturn,ChevroletencompassesmanysmallerentitiessuchasaMichiganAssemblyPlantandanOhioAssemblyPlant.Managerswantaccountingreportsthatareconfinedtotheirparticularentities.Thekeypointhereisthattheentityconcepthelpstheaccountantrelateeventstoaclearlydefinedareaofaccountability.Forexample,thebusinessentityshouldnotbeconfusedwithpersonalentity.Apurchaseofgroceriesformerchandiseinventory,isanaccountingtransactionofagrocer’store（thebusinessentity）,butthestoreowner’spurchaseofastereosetwithapersonalcheckisatransactionoftheowner（thepersonalentity）.

2.StableMonetaryUnit

Themonetaryunit（calledtheRMBinChina,thedollarintheUnitedStates,Canada,Australia,NewZealand,andelsewhere）istheprincipalmeansformeasuringassetsandequities.Itisthecommondenominatorforquantifyingtheeffectsofawidevarietyoftransactions.Accountantsrecord,classify,summarize,andreportintermsofthemonetaryunit.

Suchmeasurementassumesthatthemonetaryunit,thedollar,isanunchangingyardstick.Yetweallknowthata2003dollardidnothavethesamepurchasingpowerthata1993ora1983dollarhad.Furthermore,thechangeinthepurchasingpowerofthemonetaryunitvariesamongcountries.Duringthe1980s,theU.S.dollarlost5.0%ofitspurchasingpowerperyear,whiletheJapaneseyenlostonly2.2%,andtheItalianliralost10.1%.Therefore,accountingstatementsthatincludeassetsmeasuredindifferentyearsmustbeinterpretedandcomparedwithfullconsciousnessofthelimitationsofthebasicmeasurementunit.

3.GoingConcernConvention

Thegoingconcernconvention,orcontinuityconvention,istheassumptionthatinallordinarysituationsanentitypersistsindefinitely.Thisnotionimpliesthatexistingresources,suchasplantassets,willbeusedtofulfillthegeneralpurposesofacontinuingentityratherthansoldintomorrow’srealestateorequipmentmarkets.Italsoimpliesthatexistingliabilitieswillbepaidatmaturityinanorderlymanner.

Forexample,supposesomeoldspecializedequipmenthasabookvalue（thatis,originalcostlessaccumulateddepreciation）of$1