Accounting Principles

If everyone involved in the process of accounting followed their own system, or no system at all, there's be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are huge tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.

If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they're used and are bound to avoid using titles in its financial statements that could mislead the person examining it.

GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.

GAAP are not cut and dried, however. They're guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You've surely heard the phrase "creative accounting" and this is when a company pushes the envelope a little (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.

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Six Key Principles of Corporate Accountability

The foundation of any business transaction is the promise of fair deal. In complex organizational relationships, it is all too easy to lose sight of the existence and terms of this deal. On the surface, that employer/employee relationship, called a job, is a fair deal wherein the employer's money is traded for the employee's time and talent. The deeper reality, however, is that the employer is actually trading resources for a set of desirable results, which the employee is expected to deliver. The promise to faithfully deliver as agreed by both parties is the essence of accountability.

We recommend that organizations give voice to their accountability through a document called an Accountability Agreement. An Accountability Agreement clearly states the results that each member of an organization, from the most senior to the most junior, is expected to bring about [For specific examples of Accountability Agreements, please see our online tool at http://www.AlignOnline.com]. The following six principles form the foundation for negotiating and understanding accountability. Together they form a practical theory of accountability, the transforming effect it can have on an organization, and its essential role in creating significant business results.

I. Accountability is a Statement of Personal Promise

Accountability is both a promise and an obligation to deliver specific, defined results. Accountability, as we define it, does not apply in an abstract way to departments, work groups, or entire organizations. Accountability applies to individuals and their personal promise that these functions will deliver the agreed results. Accountability is first and foremost a personal commitment to the organization and to those the organization serves. It is more than just trying, doing your best, or behaving in certain ways. Accountability empowers individuals to push their circle of influence outwards in pursuit of results.

II. Accountability for Results Means Activities Aren't Enough

Everyone in an organization, from the CEO to the janitor, has some piece of the business and a corresponding set of results which are theirs to achieve. Distinguishing results from activities requires a shift in traditional thinking built on an awareness of why we do what we do. For example, a typical supervisor's job description includes activities such as "training," "performance evaluations," and "timely communication". In contrast, a supervisor's accountabilities should include a result such as "the success of all direct reports." This concept addresses the common observation that everyone is busy but only some people are productive.

III. Accountability for Results Requires Room for Judgment and Decision Making

If you're not allowed to use any judgment or discretion on the job, if you're told to follow the rules no matter what, if no decision is up to you, then your boss can only hold you accountable for activities. You can be held accountable for doing what you're told, but you can't be held accountable for the outcome. Judgment and innovation can never be fully described in a job description. When employees are expected to be resourceful in the achievement of results, they are held accountable for capturing opportunities or ignoring them.

IV. Accountability is Neither Shared nor Conditional

Accountability Agreements are individual, unique, and personal strategies. No two people at the same level in an organization should have the exact same accountabilities. Separating each person's accountabilities can be challenging, but valuable clarity results from the struggle to eliminate overlaps.

V. Accountability for the Organization as a Whole Belongs to Everyone

Every employee's first accountability is for thinking about and acting on what is best for the organization, even if doing so means putting aside one's individual, functional, or departmental priority. The most successful organizations expect and allow every person to be of practical assistance in realizing the organization's goals.

VI. Accountability is Meaningless Without Consequences

In Accountability Agreements, consequences need to be negotiated. Negotiated consequences that are personally significant to the employee in question are an essential element of Accountability Agreements and are fundamental to forging a fair deal. This is a key step in forging an interdependent and mutually beneficial relationship with one's employer.

Organizational accountability entirely subverts the tendency to make excuses and shift blame. When employees make clear and specific commitments for their own work, entire organizations become aligned and achieve specific measurable results.

Shaun Murphy, Ph.D. and Bruce Klatt, M.A. are senior partners in Murphy Klatt Consulting. This article has been adapted from a chapter of their book, Accountability: Getting a Grip on Results (2nd Ed.1997). Their other publications include Aligned Like a Laser (2004), The Encyclopedia of Leadership (2001), and The Ultimate Training Handbook (1999). They are internationally recognized experts in the field of Accountability Alignment, Organizational Effectiveness, and Project Development whose books have sold over 100,000 copies internationally.

For more information please go to http://www.murphyklatt.com or try their online Accountability Alignment tool at http://www.AlignOnline.com

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What is Accounting? Learn Basic Accounting Principles

If you ever wanted to know what is accounting then this is your change to learn? Who is in charge of setting basic accounting standards that we all follow? Is there some type of regulatory system is place to investigate and arrest people for accounting fraud? Well guess what, there is, at least to a certain degree any way. So hear is a quick accounting principles education that can explain everything.

First, just what is accounting anyway? Well in simple terms accounting is the comprehensive system of gathering and recording financial information of a business for the purpose of preparing summaries for tax authorizing, investors, managers and other who make decisions within the companies or organizations that they are involved in. The accounting terminology or terms can get tricky at times and you may need to keep handy an accounting glossary that explains the terms in plain language if you are a beginner. To keep people from ethics frauds in accounting the United States top experts created the Financial Accounting Standards Board or (FASB) for short. This was established in 1973 and it replaced the Accounting Principles Board(APB). The job of the (FASB) is to analyze and review problems in the field that is brought to them. After much deliberation they will make an assessment of what type of action that will be taken when an accounting issue occurs.

This was mainly voluntary and it had very good success. Double-entry accounting was founded in Italy in the 1400's and the accounting formula has change since then. The reason why the basic accounting concepts worked or well was that the business community would not be able to function properly if there were no consistency in the reporting of finances.The FASB has its' own private financing and is not government organized. The American Institute of Certified Public Accountants(AICPA) are a big supporter of the FASB and many of our Certified Public Accountants(CPAs) are members of this prestigious organization. Accounting careers are shaped on you being a member. They are bound by the guidelines and principles that they offer as other countries also have similar boards that require a high level of accounting conduct.

The FASB created the basic accounting concepts code known as General Accepted Accounting Principles(GAAP). The idea behind this is if everyone uses the same business financial statement prepared according to GAAP, then who ever uses the information can trust or rely on the information more steadily than if prepare differently. Any business that prepare their statements without using the GAAP standards, like a lot of small businesses do, cannot say that their statements are created under GAAP guidelines and they should let the user know they are not and let the buyer beware.

To keep a watch out on everything the government relies on the Securities Exchange Commission(SEC) to sort of police the accounting world. They mostly focus on public companies because they are responsible for protecting investors from fraudulent misrepresentation. The SEC has established it own set of accounting standards and with the economy the way it is today they really have their hands full with this.

Accountants are now more involved with preparing income tax returns and they use their business financial statements. The Internal Revenue Service(IRS) may review those financial records when they perform an audit and not following the rules can get you in to big trouble risking fines and penalties.

As you can see the principles and standards in many ways are a combination of voluntary and regulatory guidelines. There is a push to create an international accounting standards board or (IASB) due to the growing globalization process. This will be a huge undertaking that will surely take years to build. Now that the stock markets around the world are in trouble it is obviously needed.

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Basic Accounting Principles

Accounting has been defined as, by Professor of Accounting at the University of Michigan William A Paton as having one basic function: "facilitating the administration of economic activity. This function has two closely related phases: 1) measuring and arraying economic data; and 2) communicating the results of this process to interested parties."

As an example, a company's accountants periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss that's called an income statement. These statements include elements such as accounts receivable (what's owed to the company) and accounts payable (what the company owes). It can also get pretty complicated with subjects like retained earnings and accelerated depreciation. This at the higher levels of accounting and in the organization.

Much of accounting though, is also concerned with basic bookkeeping. This is the process that records every transaction; every bill paid, every dime owed, every dollar and cent spent and accumulated.

But the owners of the company, which can be individual owners or millions of shareholders are most concerned with the summaries of these transactions, contained in the financial statement. The financial statement summarizes a company's assets. A value of an asset is what it cost when it was first acquired. The financial statement also records what the sources of the assets were. Some assets are in the form of loans that have to be paid back. Profits are also an asset of the business.

In what's called double-entry bookkeeping, the liabilities are also summarized. Obviously, a company wants to show a higher amount of assets to offset the liabilities and show a profit. The management of these two elements is the essence of accounting.

There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be chaos!

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Basic Accounting Principles - What Are They?

There are four basic accounting principles that, along with four basic accounting assumptions and four basic accounting constraints, fabricate up the generally well-liked accounting principles, or GAAP, in the U.S. The GAAP are the accounting rules under which businesses portray and record their financial earnings and losses for the accounting period. These rules are issued by the Financial Accounting Standards Board, usually in conjunction with other government entities. Accountants are not necessarily required to follow the rules, but the rules should be followed as closely as possible as they position standards that should be met to ensure appropriate accounting activity, understandability and comparability of the accounting data for different businesses.  Below is a list of the four basic accounting principles and a brief explanation of each one.



1. The Cost Principle



Businesses are required to characterize and relate assets based on the proper cost incurred to accept them rather then the free-market value of the acquired assets themselves. The view gradual this principle is that this contrivance of recording and reporting is obedient and lessens the opportunity for factors such as biased market values to interfere with the accounting.  However, this blueprint may be viewed as irrelevant as it relates to the right value of assets.



2. The Accrual Principle



Businesses are required to relate and portray revenue at the time it is earned and realized by the business, not when the cash for the revenue is received by the business.  This way is known as accrual basis accounting. The purpose of this principle is to actually exhibit what work has been completed and not what is to be done in the future.



3. The Matching Principle



This principle allows for sincere time analysis of the expenses and revenues. Using this principle will prove unbiased how well the business has done financially and how effective it was.  Somewhat like the Accrual Principle, expenses in this case can only be recorded and reported when revenue is to which such expenses are related was earned.



4. The Disclosure Principle



The accounting records of a business must be disclosed so that judgment about the financial place of a business can be easily made.  However, the disclosure of accounting and financial information should not cause the business to accrue unreasonable expenses or cause counterfeit opinions.

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Basic Accounting Principles - peek Accrual Accounting

Considering basic accounting principles we can settle them as the main rules how the books of any business must be kept and how the financial statements must be prepared. These rules are needed to ensure that it is possible to compare financial statements and accounting information of different businesses and also of the same business for the different periods of time. One of the main basic accounting principles is accrual basis or accrual accounting.



Accrual Accounting - Essence And Examples



According to the accrual basis revenues are recognized in that accounting period when they were earned and expenses are recognized in that accounting period when they were incurred despite the time cash related to such revenues or expenses was received or paid. Such definitions might sound quite complicated, therefore let us observe some practical examples for better notion.



Revenues



engage that we have a company which sells chairs to its clients and clients are allowed to pay for the chairs within 30 days after the sale was made. On September 15 the company sells chairs for $670 and the chairs were delivered to the customer on the same day, i.e. the customer got the ownership title to the goods on September 15. Company will obtain cash for the goods sold within 30 days from the sale date, i.e. the customer will have to pay for the chairs until October 15.



According to the accrual accounting revenue for the sale of chairs has to be recognized on September 15, since on that day real sale occurred, the company transferred ownership title for the chairs to the customer and this fact allow the company to claim the payment for the goods sold. According to accrual basis the fact that cash will be received later after the sale does have an impact on the moment when sale is recognized. Of course it might happen that the customer will fail to pay for the goods acquired. If this will happen peaceful the company will have to yarn for sales revenue and in addition will have to notice loss caused by the customer failing to pay for the goods.



Expenses



The same principle as for revenue accrual accounting is applied for expenses accrual accounting. seize that we have a company, which rents office area and is liable to pay rent and utility expenses related to the set rented. The payment must be done within 10 days after the ruin of the rent month, i.e. for September rent and utilities the company will be paying until October 10. If the rent and utility expenses for month amount to $700, in September the company will to stare $700 administrative expenses according to the accrual accounting despite the fact that payment for these expenses will be done only the next month.



Why Is It principal?



So why accrual accounting is so primary? This principle allows to mediate revenue, accounts receivable, expenses and accounts payable properly and financial statement will point to proper amounts the company can claim from its customers for the goods sold or services provided and also financial statements will show the accurate amounts the company is liable to pay its suppliers for goods or services acquired. If we chronicle for revenue or expenses only when cash is received or paid, financial statements will not mediate all the receivables from customers and we will never gape how many customers were dreadful and failed to pay their debts. Also financial statements will not believe accurate liability of the company to the suppliers.

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Principles of Accounting and Accounting Assumptions

In the modem world no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, public and government etc., are enthusiastic to know about the affairs of the business. Affairs of the business can be studied mainly by consulting final accounts and the balance sheet of the particular business. Final accounts and the balance sheet are slay products of book-keeping. Because of the importance of these statements it became principal for the accountants to do some principles, concepts and conventions which may be regarded as fundamentals of accounting. Such fundamentals having wide acceptance give reliability and creditability to the financial statements prepared by the accountants. The need for 'generally approved accounting principles' arises for two reasons: First, to be logical and consistent in recording the transactions and second, to conform to, the established practices and procedures.



There is no agreement among the accountants as regards the basic concepts of accounting. There is no uniformity in generally common accounting principles (GAPP) . The terms-axioms, assumptions, conventions, concepts, generalizations, methods, rules, doctrines, techniques, postulates, standards and canons are passe freely and inconsistently in the same sense.



Principles



"A general law or rule, adopted or professed as a guide to action, a settled ground or basis of conduct or practice." This definition given by dictionaries comes nearest to describing what most accountants mean by the word 'Principle'. Care should be taken to create it definite that as applied to accounting practice, the world principle, does not connote a rule for which there can be no deviation. An accounting principle is not a principle in the sense that it admits of no conflict with other principles.



Postulates



Mean to pick without proof, to remove for granted or obvious consent, a plot assumed as self- evident. Postulates are assumptions but they are not arbitrary deliberate assumptions but generally recognized assumptions which deem the judgment of 'facts' or trend or events, assumptions which have been borne out in past by facts supposed by fair institutions making them enforceable to some extent.



Doctrines



Mean principles of belief: what the scriptures squawk on any subject. It refer to an established principle propagated by a teacher which is followed in strict faith. But in accounting practice, no such doctrine need be adhered to but the word denotes the general principles or policies to be followed.



Axiom



Denotes a statement of truth which cannot be questioned by anyone.



Standards



Refer to the basis expected in accounting practice, under different circumstances. In Indian context, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standards Board on 21st April, 1977. The main function of ASB is to formulate accounting standards taking into consideration the applicable laws, customs, usages and business environment.



Accounting Assumptions



The International Accounting Standards Committee (lASC) as well as the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the following as the fundamental accounting assumptions:



(1) Going concern



In the ordinary course, accounting assumes that the business will continue to exist and carry on its operations for an indefinite period in the future. The entity is assumed to remain in operation sufficiently long to carry out its objects and plans. The values attached to the assets will be on the basis of its novel worth. The assumption is that the fixed assets are not intended for re-sale. Therefore, it may be contended that a balance sheet which is prepared on the basis of relate of facts on historical costs cannot exhibit the just or right worth of the inconvenience at a particular date. The underlying principle there is that the earning power and not the cost is the basis for valuing a continuing business. The business is to continue indefinitely and the financial and accounting policies are followed to enjoy the continuity of the business unit.



(2) Consistency



There should be uniformity in accounting processes and policies from one period to another. Material changes, if any, should be disclosed even though there is improvement in technique. A change of way from one period to another will affect the result of the trading materially. Only when the accounting procedures are adhered to consistently from year to year the results disclosed in the financial statements will be uniform and comparable.



(3) Accrual



Accounting attempts to observe non-cash events and circumstances as they occur. Accrual is concerned with expected future cash receipts and payments: it is the accounting process of recognizing assets, liabilities or income for amounts expected to be received or paid in future. approved examples of accruals include purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we produce represent of all expenses and incomes relating to the accounting period whether valid cash has been disbursed or received or not. If a fundamental accounting assumption (i.e. Going exertion, consistency and accrual) is not followed (in the preparation of financial statements) the fact should be disclosed. [AS-I para 27].

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What is Accounting? Learn Basic Accounting Principles

If you ever wanted to know what is accounting then this is your change to learn? Who is in charge of setting basic accounting standards that we all follow? Is there some type of regulatory system is situation to investigate and arrest people for accounting fraud? Well guess what, there is, at least to a sure degree any arrangement. So hear is a speedy accounting principles education that can interpret everything.



First, unbiased what is accounting anyway? Well in simple terms accounting is the comprehensive system of gathering and recording financial information of a business for the purpose of preparing summaries for tax authorizing, investors, managers and other who earn decisions within the companies or organizations that they are alive to in. The accounting terminology or terms can rep tricky at times and you may need to preserve handy an accounting glossary that explains the terms in slow language if you are a beginner. To support people from ethics frauds in accounting the United States top experts created the Financial Accounting Standards Board or (FASB) for short. This was established in 1973 and it replaced the Accounting Principles Board(APB) . The job of the (FASB) is to analyze and review problems in the field that is brought to them. After great deliberation they will design an assessment of what type of action that will be taken when an accounting mumble occurs.



This was mainly voluntary and it had very helpful success. Double-entry accounting was founded in Italy in the 1400's and the accounting formula has change since then. The reason why the basic accounting concepts worked or well was that the business community would not be able to function properly if there were no consistency in the reporting of finances.The FASB has its' have private financing and is not government organized. The American Institute of Certified Public Accountants(AICPA) are a broad supporter of the FASB and many of our Certified Public Accountants(CPAs) are members of this prestigious organization. Accounting careers are shaped on you being a member. They are waddle by the guidelines and principles that they offer as other countries also have similar boards that require a high level of accounting conduct.



The FASB created the basic accounting concepts code known as General common Accounting Principles(GAAP) . The notion gradual this is if everyone uses the same business financial statement prepared according to GAAP, then who ever uses the information can trust or rely on the information more steadily than if prepare differently. Any business that prepare their statements without using the GAAP standards, like a lot of minute businesses do, cannot say that their statements are created under GAAP guidelines and they should let the user know they are not and let the buyer beware.



To sustain a view out on everything the government relies on the Securities Exchange Commission(SEC) to sort of police the accounting world. They mostly focus on public companies because they are responsible for protecting investors from fallacious misrepresentation. The SEC has established it beget space of accounting standards and with the economy the intention it is today they really have their hands stout with this.



Accountants are now more fervent with preparing income tax returns and they expend their business financial statements. The Internal Revenue Service(IRS) may review those financial records when they fabricate an audit and not following the rules can pick up you in to enormous grief risking fines and penalties.



As you can glance the principles and standards in many ways are a combination of voluntary and regulatory guidelines. There is a push to originate an international accounting standards board or (IASB) due to the growing globalization process. This will be a substantial undertaking that will surely catch years to create. Now that the stock markets around the world are in grief it is obviously needed.

READ MORE - What is Accounting? Learn Basic Accounting Principles

Generally popular Accounting Principles (GAAP) - An Introduction For Beginners

Accounting practices follow positive guidelines and procedures. Such guidelines and procedures are referred to as generally common accounting principles (GAAP) . GAAP include a combination of legally mandatory standards and commonly celebrated ways of calculating financial records. GAAP veil such things as revenue recognition, balance sheet item classification, and outstanding part measurements. The Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices.



Although there is some discretion in interpretation of accounting principles, GAAP are based on four general components:



Consistency - All information should be obtained and presented consistently across all periods. If there is a contrast in the means of reporting from one period to the next, this must be famed in the financial statements along with a worthy reason for the inequity.



Reliability - The procedures and results must be able to be replicated by an independent party. This ensures that the business is representing adequate financial records. If procedures and results are not favorable and instead are based on subjective information, they are likely to be disputed.



Disclosure - All relevant information that could influence the notion and assessment of the financial records of the business should be disclosed in the financial statements. This should include all information that is famous enough to affect assessments and decisions



Comparability - The financial statements and documentations of such in a business must be able to be compared to similar businesses within its industry. This is well-known so that investors may decide the success of a business in relation to others in its same category.



Relevance - The information obtained from financial statements should provide information that is famous in predicting the future financial spot of the business.



Although adherence to GAAP is not required, it lends credibility with creditors and stockholders because it adds validity to financial statements and prevents financial misrepresentation. Creditors and stockholders are able to regain an true represent of the financial state of a business and form sound decisions based on the financial records of the business. Furthermore, outside agencies will steal that the business has adhered to GAAP. Also, when a business follows GAAP, management is more able to follow the records in order to execute runt adjustments within departments or grand decisions regarding the financial future of the business. Adherence to GAAP principles also helps to minimize erroneous and criminal practices because it provides guidelines and procedures for ethical accounting practices.

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