unit1 Principal of Accounting IP

assignment Type:Individual Project Deliverable Length:3 pages
Points Possible:125 Due Date:2/16/2013 11:59:59 PM CT

You have been asked to speak at a career fair for high school students in your home town.
Specifically, you are making a presentation about your role as an accountant.

· Describe for the students the primary objectives of accounting.

· Explain the basic terminology of the accounting process or financial reporting.

· Explain how accounting has affected your personal life emphasizing professional ethics.

· Explain the role that technology has played in small business accounting.

Please include APA in-text citations and references.

Background on Course Research Requirements: In the business world, it is important to use research to strengthen points made in presentations and projects. Learning to use the search functions in databases for research is a crucial critical thinking skill that complements other research techniques.

There are two main types of databases. The most popular databases are ABI Inform Global, Academic Search Premier, and Business Source Premier. You must stay away from inferior Web sites with anonymous writers; articles found on consultant Web sites; and materials on sites like QuickMBA.com, MarketingProfs.com, etc. Dictionaries and encyclopedias most often repeat the information from textbooks. Acceptable internet resources include, among others, government sites (especially for statistics).Wikipedia or any open source Web sites are not permitted.

Please submit your assignment.

Accounting Fundamentals

If there is a universal truth in the world of business and finance, it is this: Never run out of cash!

At the outset, this intuitive statement sounds like simple advice. When it comes to actually

doing it, however, this task requires delicate and sound financial planning and control. After all,

cash – whether cash inflow or cash outflow – runs throughout the whole business system and

has to be traced and re-calculated at each step of the way. Our examination of cash flow in this

unit centers on issues of documentation. Specifically, we examine accounting fundamentals,

financial statements, and methods of financial forecasting and planning.

Accounting Fundamentals:

Central to understanding the financial condition of any firm is one basic accounting equation:

Assets = Liabilities + Equity

Assets are the items of value that a business owns. Liabilities are claims on the business by

nonowners, and equity is the owners’ claim on the business. The sum of the liabilities and

equity is the total capital contributed to the business. In essence, every business at any point in

time can be defined by this statement and its set of financial statements.

Financial Statements:

The primary financial statements are the balance sheet, the income statement, and the

statement of cash flow. Financial statements are either historical or pro forma – projecting the

future. Consequently, financial statements are the ideal vehicles for tracing and determining

the level of cash throughout the enterprise. If measured correctly, we should know precisely:

1. What a company’s cash situation is at any point in time – whether surplus or deficit, and thus

be able to

2. Plan accordingly to avoid any cash shortage.

Forecasting and Financial Planning:

After analyzing accurate financial statements, financial managers ask the following question: In

order for this business to run smoothly over a given period of time and as planned, how much

external financing will it need? In other words, they are after the Additional Funds Needed or

AFN for the given company, but how exactly does this work?

AFN is usually calculated through a method known as the percentage of sales method.

Simply put, the percentage of sales method starts with a realistic projection of the sales over

the next period – next year for example. Once we know what sales look like, we are able to

create relevant pro forma financial statements – especially pro forma balance sheets. At this

point, AFN is simply the difference between the projected investment needs (total assets) and

the projected financings (total liabilities and equity). Once the AFN is quantified, financial

managers can then start planning to raise the needed funds in case of deficit – or think of ways

to invest the excess funds in case of a cash surplus

Fundamental Accounting Principles

Accounting is an information system that measures business activities, processes that

information into reports, and communicates the results to decision makers. As the

“language of business,” accounting helps a wide range of decision makers. In this unit,

we will talk about some fundamental accounting principles, as well as how companies

record their financial business transactions.

Generally accepted accounting principles (GAAP) are rules that govern how

accountants measure, process, and communicate financial information. Several

concepts used by accountants include: the entity concept, the reliability principle, the

cost principle, the going-concern concept, and the stable-monetary unit concept.

Assets are the economic resources of a business that are expected to be of benefit in the

future. Liabilities are outsider claims, which are economic obligations payable to

outsiders. The accounting equation is presents the resources of business and the claims

to those resources. In its most common
form, the accounting equation is Assets =
Liabilities + Owner’s Equity.

Financial statements communicate information for decision making by an entity’s

managers, owners, and creditors and by government agencies. The primary financial

statements include:

The income statement, summarizing revenues and expenses incurred

The statement of owner’s equity, reporting the changes in owner’s equity

The balance sheet, listing assets, liabilities, and owner’s equity, and

The statement of cash flows, reporting cash receipts and cash payments

The account is the detailed record of the changes that have occurred in a particular

asset, liability, or owner’s equity during a period of time. Accounts can be viewed in

the form of the letter “T.”

The left side of each T-account is its debit side. The right side is its credit side. The

ledger, which contains a record for each
account, groups and numbers accounts by
category in the following order: assets, liabilities, and owner’s equity.

Assets and expenses are increased by debits and decreased by credits. Liabilities,

owner’s equity, and revenues are increased by credits and decreased by debits. An

account’s normal balance is the side of the account-debit or credit-in which increases

are recorded. Thus, the normal balance of assets and expenses is a debit, and the

normal balance of liabilities, owner’s equity, and revenues is a credit. The Withdrawals

account, which decreases owner’s equity,
normally has a debit balance. Revenues,
which are increases in owner’s equity, have a normal credit balance. Expenses, which are decreases in owner’s equity, have a normal debit balance.

The recording process begins by entering each transaction in the journal, a

chronological list of all the entity’s transactions. Posting means copying the amounts

from the journal to the ledger accounts. Posting references are used to trace amounts

back and forth between journal and ledger.

Accounting Principles

The double-entry system, which is the foundation of accounting, evolved during the

Renaissance. Goethe described the system as “one of the finest discoveries of the

human intellect”. The double-entry system is based on natural “duality” that exists in

every business transaction. All business transactions can be analyzed in terms of two

aspects, such as:

Effort – Reward

Sacrifice – Benefit

Source – Use

In any business, these aspects will offset or balance one another. All accounting

systems, no matter how simplistic or complex are based on this principle of duality. So

how exactly are these principles used in contemporary accounting? This unit focuses

on duality and practice by examining the general ledger system and accruals and


The General Ledger System

Using the principle of duality, financial information is reorganized from a

chronological account into a general ledger through a process of posting. The general

ledger is now the primary record of the financial information of the business and is

organized around basic classification units or accounts. Primary accounts include the


Assets: These are defined as economic resources owned by a business that is

expected to provide future economic benefits to the company. Assets include

cash, accounts receivable, inventories, machinery, buildings and land.

Liabilities: Liabilities are claims against the assets of the company and

represent future economic sacrifices of the business. Liabilities are obligations

held by a company to perform services to customers, employees, creditors and

government bodies.

Owner’s Equity: The residual value of the business for the owners after all

liabilities are satisfied by the assets.

Revenues: The reward the company receives through its sacrifices.

Expenses: Sacrifices made by the company in hopes of rewards.

Accruals and Deferrals

In order to assess how effectively expenses
help generate revenues, the matching
principal requires that expenses are matched to the revenues they helped generate,

regardless of whether cash has been received or paid. Accruals and deferrals are a

means to do just that. For example,To recognize an expense in the period in which it helped generate revenue, we

either accrue or defer based upon the following:

o If cash has already been paid, but the benefit has not been received, we

defer recognizing this expense until the benefit is realized.

o If cash has not yet been paid, but the benefit has been received, we

accrue the expense to match it to the revenue it helped generate.

To recognize a revenue in the period in which the company exerted efforts

(made sacrifices) rather than the period in
which the cash was received, we will
also either accrue or defer now based upon the following:

o If cash has been received for services not yet rendered, the company has

received a benefit, but has not yet made a sacrifice to earn the benefit.

Under this circumstance, we defer recognition until the sacrifice has

been made.

o If cash has not yet been received for services rendered, we accrue the

benefit because a sacrifice has been made to help generate that benefit.

Through the use of accruals and deferrals, the income statement (which

presents the net results of benefits and sacrifices) will provide more useful

information for investors and creditors who, of necessity, rely on that information.

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