ACCOUNTING PROCESS AND FINANCIAL STATEMENTS

Review of Accounting Process and Financial Statements

Review of Accounting Process and Financial Statements

Part 1

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles Barron's Dictionary of Business Terms defines the generally accepted accounting rules (GAAP) as “conventions, rules, and procedures that define accepted accounting practice, including broad guidelines as well as detailed procedures”.

Essentially these guidelines are established and interpreted by the Financial Accounting Standards Board (FASB) to create a somewhat uniform standard, in this case rules and procedures, for all business entities to abide by in relation to their public accounting activities. These GAAP rules set standards in order to ensure the level practice of accounting in the preparation and presentation of financial reports for all companies (Silbiger, 1993).

Double-Entry System

In recording transactions using the accounting principle, two accounts are always affected to remain in balance. This is often called double-entry system. For example: the company realized revenue during the month of March. The double -entry is: an increase in revenue (from the income statement) and an increase in Asset (from the balance sheet). Another example is the company is required to pay rent for the month of March. The double-entry is: an increase in expense (income statement) and an increase in liability (balance sheet).

Historical Cost

Historical cost is an “accounting principle requiring assets to be based on original cost” (Friedman, 2000).

Historical cost is an aspect of accounting conservatism. This principle utilizes the theory that until a gain is realized it can not be recognized (Silbiger, 1993). In essence, historical cost means that any asset purchased by a business will be valued on the balance sheet at the cost for which it was purchased regardless of its current market value. This principle of historical cost is juxtaposed to current market value. Because an asset's current market value is ignored in financial reports, those meant for external purposes at least, the use of historical cost can be misleading in regards to an item's true value or the businesses' overall financial position.

Cash basis of accounting

Cash basis of accounting is an accounting method in which income is documented when cash is received and expenses are recognized when paid. The cash basis of accounting is not very common amongst large organizations. It does not fall in line with the accounting's matching principle and thus is not accepted by GAAP.

Accrual Basis of Accounting

Accrual basis of accounting is an accounting technique in which income and expenses are recognized when they occur and not when the cash is actually received or paid. Balance sheet of an organization reflects adjustments when revenues are earned either in the form of Cash (if a service or sale takes place) or an increase in Accounts Receivable occurs when the transaction takes place on credit, or when the Unearned Revenues decreases which means that the service was performed after the client had paid the payments in advance. (Gieson, 1995)

Cash vs. Accrual Basis of Accounting

On the basis of cash, acceptance of revenues is just when cash is received as well as expenses are accepted just ...