Principles_of_Accounting

Lisa Hawxhurst ACCT205 Principles of Accounting Unit 1 Individual Project Professor A. Perez A.I.U. Online March 27, 2011 Abstract Accounts speak a language of their very own. Having a basic understanding of this language is needed to understand what exactly an accountant does. Ethics is very important when it comes to how companies handle their accounting practices. When a company fraudulently makes their accounting reports everyone pays from the government to employees to the investors. It is important to make sure that companies keep accurate records. With the advent of the computer and software programs small business have been given a lot of help in the expense and ability to easily handle their accounting. As an account I use a special language referred to as the “Language of Business”. This language allows an accountant to identify measure and communicate economic information to permit informed judgments and decisions. The final product of accounting information is the decision that is enhanced by the use of that information. (Norman Godwin, 2010)2 One major role that an accountant has in a company is to certify that financial information is accurate. The accuracy of this information is very important because the company uses this information to make decisions on the direction a company is to take, or whether or not make purchases or sales. Without accurate information a company can make the wrong financial decisions that could lead to loss of money for the company and investors. By using the information that an accountant provides to a business, helps that business make the maximum possible profit. Accountants also have to identify and record any activity that will impact a company financially. These recordings include purchases, sales, the acquiring of capitol and interest from different investments that the company makes. All of these transactions are recorded in journals and ledgers. Every transaction that has to do with the purchase or sale of an item must be recorded in the company’s general ledger. From this ledger the transactions get placed in the accounts that are relevant to each transaction. These transactions are recorded as debits and credits to each account. To be able to understand ledgers, journals and reports that accounts use and prepare a person needs to have a basic understanding of the “language” that accounts use. Debit: is an accounting entry that refers to an increase in asset or a decrease in liabilities or net worth. Credit: This is an entry in an accounting journal that shows an increase in the assets of a company. There are two different kinds of accounting that use the term credit. Cash basis accounting uses the term credit to refer to when income in actually received by a company. In accrual basis accounting credit refers to when income is earned. The company does not have to physically have the income just to have earned the income. Economic Entity: This is a term that allows for financial separation of the activities of a business and the owners of the business. Time Period: This is the accounting guideline that allows the accountant to divide up the complex, ongoing activities of a business into periods of a year, quarter, month, week, etc. The time period that is covered in the particular statement is placed at the top of the income statement. Monetary Unit: Is the dollar, unadjusted for inflation, is the best means for communicating accounting information in the United States. Going Concern: States that a company will continue to operate into the foreseeable future. Expense: is the decrease in the resources of a company through the sale of a good or the providing of a resource. These are some of the basic accounting terms. Like any language out there understanding of these terms is necessary to be able to be a successful accountant. One major expense for a small business is there accounting. Many small businesses initially hire bookkeepers to handle the day to day aspects of their company’s finances. Accounts tend to then be used on a quarterly basis to go over the bookkeepers work and to keep the general ledger of the company. Also an account would be responsible for the annual tax returns and quarterly tax payments to the government. For many small businesses this can be a major expense. Technology has changed the way accountants and small businesses handle their finances. The biggest advance has to be the use of a computer to handle company’s books. Gone are the days of non-digital ledgers and accounting journals. Employees do not need to be given paychecks anymore with the advent of direct deposit. Quarterly corporate taxes and sales taxes can be directly sent to the governmental agencies instead of paper checks and relying on the postal service to deliver the payments. Software like Quick Books has also streamlined accounting for the small business allowing a small business owner to have more of hands on control of the businesses day to day finances. With the advent of business tax software like turbo tax has allowed the small business owner a step by step guide to handling a company’s corporate tax forms. Most people do not believe or understand how accounting affects them in their daily life. It is only when large companies fraudulently keep accounting records do people begin to understand how accounting principles affect them. Companies like Enron used fraudulent accounting practices to show a profit in the trading of energy. Enron encouraged their employees to move all of their retirement money, 401k accounts into Enron stock. The heads of the company ensured their employees that their money was safe and that the company stock was only going to go higher and earn them all a lot of money. After Enron’s accounting irregularities could not be kept secret any longer the company went out of business, all the employees lost their jobs and the retirement accounts of the employees were wiped out. People who had spent their whole life saving for their future were left without any retirement. Washington, D.C., Aug. 4, 2009 — The Securities and Exchange Commission today filed civil fraud and other charges against General Electric Company (GE), alleging that it misled investors by reporting materially false and misleading results in its financial statements. The SEC alleges that GE used improper accounting methods to increase its reported earnings or revenues and avoid reporting negative financial results. GE has agreed to pay a $50 million penalty to settle the SEC's charges. (David Bergers, SEC, 2009)1. This is another example of how unethical accounting practices can damage a company’s reputation and harm investors. People may believe that if they do not directly own stock in GE that this would not affect them. This is not true by not properly reporting to shareholders and the government the correct corporate taxes would not get paid, not that this matters to GE. It was recently reported on over 5 billion dollars’ worth of profit that GE had domestically they did not pay one cent in corporate income taxes. Everyone pays when corporations do not properly keep their accounting records. References 1. Bergers, D. P. (2009, August 4). GE Agrees to Pay $50 Million to Settle SEC's Charges; 2009-178; Aug. 4, 2009. Retrieved March 24, 2011, from U.S. Securities and Exchange Commission website: http://www.sec.gov/news/press/2009/2009-178.htm 2. Godwin, N., et al. (2010). Financial Accounting. Mason: South-Western, Cengage Learning