Accounting_Principles

Accounting Objectives AIU Online ACCT205-1104A-10   Abstract In this essay we are asked to explain the basics of accounting to students at a local career fair in our hometowns. I will explain the primary objectives of accounting, and I will also give some basic terminology to help explain accounting.   Accounting Objectives Accounting is a process that measures, identifies, and communicates how a company or person is doing financially (Godwin, 2010). Accountants use journals to record the client’s credits and debits for a specific period of time. There are many assumptions that take place in accounting to help determine how successful a person or company is doing. Economic entity assumption is the assumption that an owner’s personal assets can be separated from the business’s financial activities (Godwin, 2010). An example of this would be an owner of a photography business that is buying film for personal use needs to keep that listed separately than when they are buying film for their business. Next they use time period assumption, which allows accountants to assume that their financial information can be communicated in short periods of time; such as quarterly or annually (Godwin, 2010). Monetary unit assumption simply means that the dollar is the most effective means to communicate economic activity (Godwin, 2010). This means that if any economic activity cannot be expressed in dollars, it doesn’t belong in the accounting system. Finally, the going concern assumption, allows accountants to believe that a company will continue to operate into the foreseeable future (Godwin, 2010). Accountants use income statements to keep track of all of the company’s expenses and revenues. Revenues are the income or increase in resources that a company receives for selling goods or services to their customers. An expense would be a decrease in income or resources from the sale of goods or services. Some easy examples of expenses would be paying employee wages, taxes, or utilities on the building. The purpose of the income statement is to account for a company’s financial success or failure during a specific period of time; such as quarterly or annually. When a company’s revenue exceeds their expenses, they are generating net income and considered profitable. When a company’s expenses exceed their revenues, they are generating a net loss and no longer considered profitable (Godwin, 2010). An easy equation to calculate net income or net loss is to take revenues minus expenses and the remainder will be either a profit or a loss. An asset is an economic resource that is objectively measurable. This is the results from a previous transaction and provides future economic benefits such as cash and inventory. A liability is an obligation of a business that results from a past transaction and lowers the economic resources for a future date. An example of this would be loans that a company owes to the bank. Equity is the difference between a company’s assets and liabilities and represents the share of assets that are claimed by the company’s owners (Godwin, 2010). This is the same concept as a homeowner’s home equity. Accountants also use balance sheets to show a company’s assets, liabilities, and equity for a specific period of time. An equation to calculate assets is to take liabilities plus equity and this equals assets. A statement of cash flow is the financial statement that reports a company’s sources and uses of cash during a specific period of time. This is a great way to keep track of a company’s cash for needed expenses during the specific period of time. This financial document shows cash paid for inventory or supplies, along with any cash paid on interest of loans. It also shows the cash received from borrowing, and cash received from customers. Basically, all accounts are characterized as a T-account which shows the company’s credits and debits. Debits are on the left side, and credits are on the right side of the account. One basic rule for credits and debits is that to increase an account balance you need to record transactions on the same side as the normal balance. To decrease an account balance you need to record transactions on the opposite side as the normal balance. Finally, a journal is the order of all the financial transactions that take place. For every debit that is recorded, there needs to be a credit recorded as well so that it balances out in the end. Because accountants need to follow a code of ethics, to help ensure public confidence with their finances, ethics becomes a part of a good accountant’s everyday life. Accountants have a specific skill set of knowledge when it comes to tax laws, accounting principles, and auditing standards. These are things that most people won’t know enough about and why they rely on the help of an accountant to make sure that things are done correctly. However, accountants also know that they have access to their client’s personal files and the general public does not. They are expected to keep this information completely confidential since most businesses don’t want their finances becoming public knowledge. When an accountant performs unethical behavior, not only is the individual at risk for lawsuit, but the company the accountant works for is at risk as well. This type of behavior is enough to cause catastrophic events with the corporation that can trickle down to its shareholders. For this reason, it is especially important that an accountant follows the code of ethics and other regulations established by the professional accounting organizations such as the American Institute of Certified Public Accountants (AICPA) (Breaux et al., 2009). The role of accounting has changed for the small businesses with the addition of computerized accounting forms. This allows small business owners the chance to better keep track of their own financial documents instead of having to hire an accountant to do the work. In the past, small business owners would either hire an accountant to do the financial tracking for their business or they would use ledger paper and make the charts themselves. This allowed for room for errors if they miscalculated their math. Larger companies and corporations still hire out this job since there are so many transactions to keep track of, they don’t want to miss any and risk being audited. But for the small business owner, this is one less expense they need to pay for because it is easy enough for them to do on their own. All they need to do is buy a basic accounting software program that makes income statement sheets, balance sheets, and cash flow charts. Then it is a matter of entering the information into the correct form and the software does the math, eliminating the chance of errors and the risk of being audited.