Accounting.docx

1、Accounting1、 Accounting: a business languageSome people think of accounting as a highly technical field which can be understood only by professional accountants. Actually, nearly everyone practices accounting in one form or another on an almost daily basis. Accounting is the art of measuring, descri

2、bing, and interpreting economic activity. Whether you are preparing a household budget, balancing your checkbook, preparing your income tax return, or running General Motors, you are working with accounting concepts and accounting information.Accounting has often been called “the language of busines

3、s”. Every investor, manager, and business decision maker needs a clear understanding of accounting terms and concepts.The underlying purpose of accounting is to provide financial information for decision making about an economic entity. In this book the economic entity we concentrate upon is a busin

4、ess enterprise. Business executives and managers need the financial information provided by an accounting system to help them plan and control the activities of the business. For example, management needs answers to such questions as the profitability of each department of the business, the adequacy

5、 of the companys cash position, and the trend of earnings.Many businesses also compile non-financial information needed for decision making. An airline, for example, must have information about on-time arrivals, repair schedules, and physical examinations of flight crews. The use of computers makes

6、possible the operation of a Management Information System (MIS) which provides decision makers with both financial and non-financial information.The accounting system is the most extensive and important component of a management information system because it is used by the entire business entity and

7、 by outsiders as well. Financial information about business is needed by many outsiders. These outsiders include owners, bankers, other creditors, potential investors, labor unions, government agencies, and the public, because all these groups have supplied money to the business or have some other i

8、nterest in the business that will be served by information about its financial position and operating results. A labor union, for example, needs to be in formed on a companys financial strength and profits before beginning negotiations for a new labor contract. Remember that every individual as well

9、 as every business must make economic decisions about the future. Therefore, everyone needs some understanding of accounting as a basis for making sound decisions. To emphasize our basic concept: the goal of the accounting system is to provide useful information to decision makers. Thus, accounting

10、is the connecting link between decision makers and business operations.2、Accrual BasisAs noted, the best matching of revenues and expenses takes place when the accrual basis of accounting is used. This means that the financial effects of transactions and economic events are recognized by the enterpr

11、ise when they occur, rather than when the actual cash is received or paid by the enterprise. For example, as shown in Exhibit 1, sales are recognized as revenues when they are made, and services are recognized when they are performed. When sales are made or services performed there is a correspondin

12、g right to receive payment, regardless of when the cash is actually collected. That is, a sale on account (a sale made for later payment) is recognized in the same manner as a cash sale. The only difference is that Accounts Receivable rather than Cash is increased at the time of sale. When the cash

13、from the sale on account is collected, no revenue is recognized. The cash collection is just an exchange of one asset, Accounts Receivable, for another asset, Cash. The total amount of assets remains the same. The revenue and asset increases were recognized at the time the sale took place.With the a

14、ccrual basis of accounting, if cash is received as a deposit or a down payment is received before the sale is made or the service rendered, no revenue is recognized until the time of the actual sale or service. Instead, a liability to deliver a product or perform a future service is recognized at th

15、e time of the cash receipt. This liability usually is referred to ad as unearned revenue, when the service finally is rendered, and the liability is discharged.Expenses are recognized in a similar manner. That is, expenses are considered to be incurred when the goods or services are consumed by the

16、enterprise, not necessarily when the cash outflow takes place. For example, as shown in Exhibit 2, the Cash Corporation records as a June expense the salaries earned by its employees in that month, even though those salaries may not be paid until July. This is accomplished by recording Salaries Paya

17、ble in June. When Junes salaries are paid in July, no expense is recognized that time. Both salaries Payable and Cash are reduced at that time, but no expense is involved. The decrease in the firms net assets and the corresponding expense were recorded in June. In many cases, the cash is paid at the

18、 same time the expense is incurred. For example, plumbing repairs may be paid when the services are rendered. In this case, Repairs and Maintenance Expense is recorded when the cash is paid. However, it is not the payment of cash that triggers the recognition of the expense. The expense is recognize

19、d because the plumbing services were received and an obligation to pay came into being. Finally, if cash is paid before the expense is incurred, no expense is recognized at that time. For example, if a firm prepays its June rent in May, the prepayment is considered an asset in May and is not conside

20、red an expense until June, when the service has been received.Cash Basis With the cash basis of accounting, a revenue is recognized when the cash is received, and an expense is recognized when the cash is paid. The cash basis of accounting thus does not properly match revenues and expenses. This is

21、because the recognition of revenue and expense is contingent on the timing of cash receipts and disbursements; depending on this timing, the expenses of one period could be matched against the sales or services of another period. The cash basis of accounting, therefore, is not a generally accepted a

22、ccounting principle for financial reporting purposes. However, many professionals, such as doctors and lawyers, who prepare financial statements solely for their own use, use the cash basis in order to simplify their record keeping. In addition, most individuals use the cash basis of accounting for

23、their personal affairs and in determining their taxable income. 3、Generally Accepted Accounting PrinciplesBasic concepts of accounting theory are too vast to consume in one gulp, so they are being introduced gradually as we proceed. We will discuss some basic concepts of accounting, such as entity,

24、and stable monetary unit first and then we consider three other major ideas that are part of the body of generally accepted accounting principles: going concern, materiality, and cost-benefit. At last, we briefly review the concept of room for judgments which underlies the GAAP.1. The Entity Concept

25、The first basic concept or principle in accounting is the entity concept. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. Accounting draws sharp boundaries around each entity to avoid conf

26、using its affairs with those of other entities. An example of an entity is General Motors Corporation, an enormous entity that encompasses many smaller entities such as the Chevrolet Division and the Buick Division. In turn, Chevrolet encompasses many smaller entities such as a Michigan Assembly Pla

27、nt and an Ohio Assembly Plant. Managers want accounting reports that are confined to their particular entities. The key point here is that the entity concept helps the accountant relate events to a clearly defined area of accountability. For example, the business entity should not be confused with p

28、ersonal entity. A purchase of groceries for merchandise inventory, is an accounting transaction of a grocer store (the business entity), but the store owners purchase of a stereo set with a personal check is a transaction of the owner (the personal entity).2. Stable Monetary UnitThe monetary unit (c

29、alled the RMB in China, the dollar in the United States, Canada, Australia, New Zealand, and elsewhere) is the principal means for measuring assets and equities. It is the common denominator for quantifying the effects of a wide variety of transactions. Accountants record, classify, summarize, and r

30、eport in terms of the monetary unit.Such measurement assumes that the monetary unit, the dollar, is an unchanging yardstick. Yet we all know that a 2003 dollar did not have the same purchasing power that a 1993 or a 1983 dollar had. Furthermore, the change in the purchasing power of the monetary uni

31、t varies among countries. During the 1980s, the U.S. dollar lost 5.0% of its purchasing power per year, while the Japanese yen lost only 2.2%, and the Italian lira lost 10.1%. Therefore, accounting statements that include assets measured in different years must be interpreted and compared with full

32、consciousness of the limitations of the basic measurement unit.3. Going Concern ConventionThe going concern convention, or continuity convention, is the assumption that in all ordinary situations an entity persists indefinitely. This notion implies that existing resources, such as plant assets, will

33、 be used to fulfill the general purposes of a continuing entity rather than sold in tomorrows real estate or equipment markets. It also implies that existing liabilities will be paid at maturity in an orderly manner.For example, suppose some old specialized equipment has a book value( that is, original cost less accumulated depreciation) of $1