© 1991 John Petroff
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© 1991 John Petroff |
INTRODUCTION
The purpose of accounting is to provide a means of recording,
reporting, summarizing, and interpreting economic data. In order
to
do this, an accounting system must be designed. A system design
serves the needs of users of accounting information. Once a system
has been designed, reports can be issued and decisions based upon
these reports are made for various departments. Since accounting
is
used by everyone in one form or another, a good understanding
of
accounting principles is beneficial to all.
ACCOUNTING FIELDS
The accounting profession is generally divided into two categories:
1) private accounting and 2) public accounting. Private accountants
are employed by a business, while public accountants practice
as
individuals or as members of an accounting firm. Public
accountants are subject to strict government regulations and
requirements which are determined by each individual state
where a license is granted. Private accountants on the other
hand require no licenses. They perform tasks which have been
determined by their employer. Accounting fields exist that
specialize in very specific areas of a business. Examples are
auditing, budgetary, tax, social, cost, managerial, financial
and international.
BASIC ACCOUNTING PRINCIPLES & CONCEPTS
Bookkeeping is concerned with the recording of business data,
while
accounting is concerned with the design, interpretation of data,
and the preparation of financial reports. Three forms of business
entities exist: 1) sole proprietorship, 2) partnership,
and 3) corporations. Corporations have the unique status of being
a
separate legal entity in which ownership is divided into shares
of
stock. A shareholder's liability is limited to his/her contribution
to
capital. Whenever a business transaction is recorded, it must
be recorded to accounting records at cost. All business transactions
must be recorded. All properties owned by businesses are assets.
All
debts are liabilities. The rights of owners is equity.
THE ACCOUNTING EQUATION & TRANSACTIONS
Assets, liabilities and owner's equity are the basic elements
of
the accounting equation. The excess of assets over liabilities
is
owner's equity. Thus, assets are equal to liabilities plus owner's
equity at all times. Any business transaction has to affect at
least one of these elements.
ACCOUNTING STATEMENTS
There are two basic accounting statements used by most businesses.
The balance sheet presents the assets, liabilities and owner's
equity. Each account balance in the balance sheet is reported
as of
the last day of the financial period. The income statement
determines whether a net profit or loss was realized by matching
total revenue and expenses for a specific time period. A third
statement is used by some businesses. It is the statement of
owner's equity which presents the changes which have taken place
in
owner's equity over the period.
CORPORATE ACCOUNTING STATEMENTS
The financial statements of corporations are different from those
of other forms of business in several aspects. Instead of having
an owner's equity section in the balance sheet statement, a
corporation has a stockholders' equity. Shareholders' equity is
composed of capital stock and retained earnings. Capital stock
represents the initial investment of the shareholders. Retained
earnings represents accumulated profits. The owner's equity
statement is usually called retained earnings statement. The
retained earnings statement will at times have deductions called
dividends which represent payments of earnings to shareholders.
Whenever shareholders buy shares of stock from the corporation,
assets and stockholders' equity increase. The reverse occurs when
dividends are distributed.
INCOME STATEMENTS
The income statement reports the amount of net income or loss
determined by subtracting expenses from revenues during a
specific time period. Only expenses which are attributable to
items of
income are recognized as period expenses. The net income or loss
from
the income statement is recorded in the statement of owner's
equity.
STATEMENT OF OWNER'S EQUITY
The statement of owner's equity records the changes in the value
of
owner's equity. Additional investments and net profits increase
owner's equity. Dividend payments, owner withdrawals, and net
losses
decrease owner's equity. Net profits or losses are derived from
the
income statement. The statement of owner's equity (or retained
earnings statement for corporations) is the connecting link between
the income statement and the balance sheet.
BALANCE SHEET
The balance sheet lists all assets, liabilities, and owner's equity
balances as of the last day of the financial period. The balance
sheet always begins with assets, then liabilities and owner's
equity. Assets which are listed first are the most liquid, such
as
cash, accounts receivable and prepaid expenses. Liabilities are
grouped by due date, with short-term liabilities listed first.
BUSINESS TRANSACTION & THE BALANCE
SHEET
The following is a summary of business transactions and how they
affect the items of the balance sheet.
1)- Initial and additional investments increase both assets and
owner's equity.
2)- Assets purchased on credit increase both assets and
liabilities.
3)- When assets are used to purchase other assets,
there is no net change in the amount of total assets.
BUSINESS TRANSACTION & THE BALANCE
SHEET
4)- Assets used to pay debts decrease assets and liabilities.
5)- Net income increases assets and owner's equity.
6)- Net losses decrease assets and owner's equity.
7)- Assets that are used up for the purpose of the generating
revenue decrease assets and owner's equity.
8)- Withdrawals owners and dividends decrease assets and owner's
equity.
9)- Expenses reduce assets and owner's equity.
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