The Basic Accounting - Report Example

There are certain academic disciplines whose applications have changed the world forever, the accounting field is one of them. The basic principles of the accounting profession date back more than 5000 years (Tama). The profession as we know it today was not formalized until about 500 years ago. The person that introduced the profession to the general public who also the scholar who wrote the first accounting textbook was Luca Pacioli regarded by many as the father of accounting. In 1494 Pacioli wrote an accounting textbook that provided the first printed description of the double entry accounting system (Jonson, 2009). The double entry system is the foundation of accounting and its principles are based on the basic accounting equation. The basic accounting equation states that assets equal liabilities plus stockholders equity (Purbhoo & Purbhoo). This term paper describes the purpose of accounting, the four primary financial statements, and how these statements are interrelated with each other and with the stakeholders. Accounting is the discipline dedicated to recording the economic and financial activity of an enterprise in order to provide relevant data to the users of financial information. Accountants are very important in order for a business to have chance to succeed. Some of the practical applications of their work include taxing forms, payroll, cost accounting, auditing work, accounting information systems, bookkeeping, managerial accounting, and the preparation of financial statements. The accounting framework is based on the utilization of journal entries to record financial transactions. In today’s high tech business world there are specialized software such as QuickBooks and Peachtree which facilitate the accounting recording process. These software options constitute a computerized accounting information system. The information and data created by an accounting information system allow manager to make better decision concerning the operation of a company. The users of financial information include both internal and external users. The accounting cycle culminates with the preparation of financial statements. The four primary financial statements are the income statement, the balance sheet, the statement of stockholders equity, and the statement of cash flow (Quickmba, 2009). The income statement is the financial statement that provides information concerning the profitability of a company after the completion of an accounting cycle. The typical accounting cycle is one year. The statement is divided into two parts. The top part provides information about the revenues and cost of good sold of the operation, while the bottom part provides of the expenses and taxes the company incurred. The cost of good sold are subtracted from the revenues to arrive at gross profit, then the expenses and taxes are deducted to arrive at the net income. If the expenses exceed the revenues the company will end up with a net loss. Most companies can not sustain multiple years of net losses because if this occurs the company run a high risk of running out of business. The balance sheet is the financial statement that provides information about the financial standing of a firm. A balance sheet can be created at any point in time because the passage of time does is not depend for the creation of the statement as in the case of the income statement. The balance sheet provides information about the assets, liabilities, and equity totals of a corporation. The basic accounting equation formula provides the precise logical framework for the creation of this financial statement. High assets and equity totals are preferred over high liability totals. The balance sheet illustrates the accumulation of wealth of a corporation. The third financial statement is called the statement of retained earnings. The statement of retained earning shows the user of financial information the transfer of wealth or losses from one financial statement to another. At the end of the year the net income or losses must be transfer into the balance sheet. The statement of retained earnings serves as mechanism to transfer the year end earnings into the balance sheet. At the end of the year the management can either transfer the earnings into the balance sheet or convert these earnings into dividends to be paid out to the shareholders. The portion of the earnings that is not paid out as dividends are referred too as retained earnings. The fourth financial statement is called the statement of cash flow. The statement of cash flow provides information concerning the inflow and outflow of cash within a business. The statement divides the cash movement of a company into three activities. The three cash activities are operating, financing, and investing activity. This statement is very important because it provides detailed information about the most important asset of a company which is cash. Even if a company has a positive net income the firm may run into trouble and can go bankrupt if it does not have adequate cash reserves. Without cash a business becomes insolvent and unable to pay its operating bills. There are internal and external users of financial information which are referred too as the stakeholder groups. Some of the major stakeholder groups include the employees, investors, lenders, business partners, managerial team among others. The employees for example are interest in the financial information of the company they work for in order to evaluate their job security and to evaluate their leverage to negotiate better wages. The investors rely in financial information in order to make decision concerning whether to keep or sell their common stock in the open market. The lenders utilize the financial statements of a company to determine if a company is eligible for credit and to determine the interest rate they will charge the company if they decide to extend a credit offer to a firm. The managerial team utilizes financial information to make operating and strategic decisions. The accounting profession is a very important business function whose output helps managers make better decisions and it provides relevant information that can be used by all stakeholders of a firm. The four basic financial statements are great tools because they are prepared in consistent and concise standardized format utilizing the generally accepted accounting principles. This allows the users of financial information to compare the information provided in the statement with other companies. References Jonson, E. (2009). History of Accounting. Retrieved July 17, 2009 from http://ezinearticles.com/?History-of-Accounting&id=1960182 Purbhoo, M., Purbhoo, D. Basic Accounting. Retrieved July 17, 2009 from http://www.pearsoned.ca/highered/divisions/bande/purbhoo_8/BasicAccounting.PDF Quickmba.com (2009). The four financial statements. Retrieved July 17, 2009 from http://www.quickmba.com/accounting/fin/statements/ Tamu.edu. Accounting History Page. Retrieved July 17, 2009 from http://acct.tamu.edu/giroux/history.html Read More