Balance Sheet, Income Statement and Objectives of Accounting and Firms - Assignment Example

Assignment Accounting software can help keep accurate accounting records but in order to enter the data you have you must understand the differencebetween debits and credits. The rule of credits and debits varies for different accounts and basically add to or subtract based on the account. Here is an explanation based on the balance sheet and income statement: Balance Sheet Asset accounts comprise of cash, inventory, accounts receivable and other current assets, as well as fixtures, equipment, buildings and other fixed assets all increase with a debit and credits decrease the assets. Contra Asset accounts are accounts that are offsetting accounts for certain asset accounts which are often called valuation allowances. Credits increase contra asset accounts, and debits decrease these accounts. Accounts such as doubtful accounts, and accumulated depreciation. Liability accounts are accounts that increase with credits and decrease with debits. The examples of the liability accounts are accounts payable, long term debt (loan), taxes payable and wages payable. Contra liability accounts are accounts that are offsetting accounts for certain liability accounts which are often called valuation allowances. Debits increase contra liability accounts, and credits decrease these accounts. Short term portion of mortgage payable is an example of a contra liability account. Equity accounts are similar to liability accounts in that these accounts decrease with debits and increase with credits. Accounts for Equity are Retained Earnings, and Capital. Income Statement The accounts in the income statement are closed out every ending period and transferred to Retained Earnings and entered into the Income Statement. The two types of accounts used in the Income Statement are called Revenue and Expense accounts. Revenue accounts decrease by debiting, and increase by crediting. Examples of revenue accounts are Sales revenue, interest revenue, and subscription revenue. Expense accounts increase by debiting, and decrease by crediting. Examples of expense accounts are interest expense, bad debt expense, and wage expense. Journal entry that would affect the Balance sheet would be: DR CR Cash $5,000 Equity $5000 Assumption: Cash would increase thus increasing the Cash account in the Balance Sheet, and Equity would increase thus increasing the Equity account in the Balance Sheet. Both sides of the Balance Sheet increase by $5000. Journal entry that would affect the Income Statement would be: DR CR Retained Earnings $2000 Wages Expense $2000 Assumption: Retained Earnings decreases with the debiting and Wages Expense account decrease while being posted to the expenses in the Income Statement. Assignment 2 The primary objectives of accounting are to fairly present the financial information in the financial statements with necessary disclosures in accordance with Generally Accepted Accounting Principles (GAAP) so that users of the financial statements can use them to make informative decisions. This fulfills one of the main objectives which is to give assurance to the public about financial statements. The main objective of the firm producing financial statements is to monitor business performance throughout the year and possibly compare with past results. When comparative financial statements are compiled, a better understanding of the level of consistency can be obtained. A part of this objective of accounting is to judge the performance of management and employees. Why isnt the company doing well when Sales have gone up? Are employees being careless with materials? Using this financial information the company can analyze the data to find out why the budgeted amounts for the operations budget and the actual data differ. In doing this, management will be able to answer questions about employee performance and its own performance. Another objective is to record all expenses and revenues in the correct period. This is important since in order to find the financial position we must know when to post revenues and expense to the income statement. We also need this information to prepare tax records. Another objective is to prepare for the future of the company. Management needs to know which parts of the company are functioning inefficiently or efficiently. Certain departments may be functioning inefficiently and its important to know why and what can be done to prevent waste or inefficiency. Another objective is to keep track of ownership. A company needs to be able to track the equity of the company as owners either provide cash and property or use cash and property. Another objective is to keep track of company assets. The company needs to know the value of the assets, how much the asset has been depreciated, the cost of maintenance, and whether or not inventory has been counted consistently. The cash of the company needs to be accounted for both on hand and in the companys bank account. Another objective is to keep track of the liabilities. The company needs to know the value the loans, accounts payable, and other debt. These accounts need to be recorded and accounted for in order for the financial statements to be whole and for the company to pay debts on time. Accounting is the language of business and allows a company to transform the companies transactions into useful financial information. The process of accounting is based on certain steps that a accountant or bookkeeper must follow. First every account starts off with a beginning balance so if the business is just starting the accountant or bookkeeper must enter the beginning balance for the year in the accounts that have balances. Otherwise with every business related transaction a journal entry is made, first on the debit side and then on the credit side. There are different journals for different transactions and these journals reference transactions that are recorded in the individual account. For example Jethro James purchases $50 in good from the company on credit. The following journal entry would result: Sales Journal Accounts Receivable – Jethro James $50 Sales $50 To record the sale of goods All accounts would be listed in the general ledger. Next we need to understand how revenues, expenses, assets, liabilities and equity function in the accounting system. Revenues are the monetary gains a company experiences when selling a good or providing a service. The revenue is not recognized until the product or service is delivered or payment is received and realized or the payment is realizable; except in the case of installment sales. In the case of the prepayment for services, the company records deferred revenue. Expenses are the costs that the company incurs in providing the product or service that the company sells. Expenses are accrued as soon as incurred. Assets are the future benefits of the company. Assets must be measured in monetary value, and most assets have monetary value already attached to them based on a historical costs, other assets value is less easily obtained. A great example of an asset that has value based on judgment is Goodwill. A company, proprietor, or partnership can purchase a company yet have differing values on the purchase price above the market value of the total assets. Liabilities are future obligations that must be paid by the company. Liabilities is always in monetary value and supported by purchase orders or debt agreements. Equity is the monetary value of the investment an investor, owner, or partner has in the company. Capital accounts are one of the main kinds of equity accounts, as well as retained earnings, and additional paid in capital. Accounting has some of the same principles everyone uses in daily life. To drive that home Ill be using examples of these day-to-day tasks that relate to each professional standard of accounting. Accounting has affected my professional life in the following ways: Accounting requires integrity. As an accountant you learn about internal control and all the ways that employees perpetrate fraud. On a personal level, integrity is returning a lost wallet, paying my debts, and obeying the laws of the land as well as I can. The accounting profession demands proficiency and due care. During the course of taking accounting classes, proficiency is what I learned. That characteristic isnt something that is only related to accounting but to life. Weve all learned to be proficient at reading, writing, speaking and the daily tasks of this life, otherwise we wouldnt be functioning members in society. Accounting requires independence and objectivity. You cant allow yourself to always be caught up in the moment of a situation and due to a relationship with a person or group, make poor decisions for the future. Having your own opinion about things is not only healthy, it is the most important trait of an accountant. Accounting requires knowledge. This has affected my approach to and desire for learning. In order to use any information to ones advantage, you must have knowledge about that material. This applies to buying a car or choosing a career. You have to possess adequate knowledge in order to make informed decisions. Accounting requires planning and performance. Every goal requires a plan, and then performance, without either the goal will never be accomplished. This is one of the greater lessons I have learned. There are so many other applications of the principles of accounting and the professions ethics to our daily lives but these are central to the main objectives of accounting. IT in Small Business Accounting The way that IT helps small businesses is that it saves the owner or management the time of recording and producing financial reports and statements. Most software packages can produce these statements and reports once the transactions have been entered. This limits the potential for manual entry mistakes. Enterprise Resource Planning (ERP) systems “A process by which a company (often a manufacturer) manages and integrates the important parts of its business. An ERP management information system integrates areas such as planning, purchasing, inventory, sales, marketing, finance, human resources, etc.” [1] In the past ERP systems have helped companies integrate all of its systems. This is costly and requires a lot of time. At times ERP doesnt help because the company can not match the system with its needs thus causing major issues for the company. This happened in the case of Hershey when it tried to implement an ERP system during the busy season for the company [2]. Online Accounting Quickbooks and many other accounting software providers are offering accounting services online. This allows businesses access to records on any computer at any location, at any time. Also it becomes less likely that a company can lose records due to natural disaster. References ERP. (n.d) In Investopedia.com. Retrieved from: http://www.investopedia.com/terms/e/erp.asp Motwani, J., Mirchandani, D., Madan, M., and Gunasekaran, A. (2002) Successful implementation of ERP projects: Evidence from two case studies. International Journal of Production Economics. Volume 75, Issues 1-2, Pages 83-96 Read More