Acc/537 Week 1 Basic Accounting Concepts

The accrual basis of accounting uses the adjusting process to recognize revenues when earned and expenses when incurred. The cash basis of accounting recognizes revenues when cash is received and records expenses when cash is paid. An example of accrual basis of accounting is if a company is insuring a building. The insurance company bills the company $600 every six months. If each bill is for six months of coverage, then under the accrual method, the company would not record a $600 expense in January and a $600 expense in July. It would instead record a $100 expense each month for the whole year.

To enhance a user’s ability to understand and compare an entity’s operating results, reporting entities are required to describe all significant accounting policies in their financial statements. As such to decide if an accounting principal is significant, is the management’s decision.

Quality of reported financial information is a critical element in evaluating financial statement data. The higher the quality of financial reporting, the more useful the information is for business decision making.

Representations are faithful if there is a correspondence or agreement between the accounting measures or descriptions in the financial reports and the economic phenomena they purport to represent (FASB, 1980: 6; FASB, 2005: 3). The difference between reliability and a faithful representation is ambiguous. Since the attributes neutrality, completeness and substance of economic phenomena (substance over form) can be classified as qualities of faithful representation, reliability becomes redundant. Consequently, a point of attention is to discuss what exactly the notions reliability and faithful representation mean and what they do not mean (FASB, 2005: 2-3).In both frameworks neutrality is defined as free from bias. 'To that end, the common conceptual framework should not include conservatism or prudence among the desirable qualitative characteristics of accounting information. However the framework should note the continuing need to be careful in the face of uncertainty' (FASB, 2005: 3).

Please do not quote from any references; use your own words and cite the references in a separate reference page. Also, avoid footnotes.

Accruals. This occurs when sales and expenses are recorded when they incur, not when they are paid out or the payment is received. In other words, the record should be made immediately no matter if the payment was received or not, paid out or not yet. Accruals can be called unpaid bills, sales on credit and other expenses over due.

Accrual accounting is a system of accounting that is based on the accrual principal accounting. This principal requires revenue to be recognized and recorded when earned. Expenses are to be recorded when they occur. The accrual basis of accounting is used by most companies. Very small businesses and individuals use cash basis accounting.

Generally accepted accounting principles (GAAP) are the standard structure of the guideline for financial accounting. GAAP contain balance sheet item sorting, share measurement and revenue recognition, organizations need to carefully scan their financial statement when they use GAAP. When accountants record and summarize financial statement, they need to apply these standards into their work. The Financial

This paper explains different types of accounting phrases and how they directly affect the accounting field. Phrases which are included and defined in the paper are Generally Accepted Accounting Principles, Contra-Asset Accounts, Historical Cost, Accrual Basis vs. Cash Basis Accounting, and Accounting Standards Codification. Definitions and examples of these terms are included as well as explanations of how they are important to financial statements. The financial statements of Samsung, Lockheed Martin and RTL Group will also be examined. Their financial data will be dissected in order to understand their success and highlight their operating activities.

This paper explores the question whether the financial statements can be made more useful. This leads to an important concept in accounting-- the concept of decision usefulness. To properly understand this concept, this paper outlines other theories from economics and finance to assist in conceptualizing the meaning of useful financial statement information.

Companies who use an accrual-basis accounting system are supposed to record their revenue according to the standards set by the generally accepted accounting principles (GAAP) for what is revenue recognition. This helps to ensure that each disbursement of cash that is received is applied in a consistent manner.

Accrual accounting is an accounting method that is utilized to size the performance and of a company by recognizing circumstances regardless of when cash transactions occur. They are documented by matching revenues to expenses at the time in which the transaction occurs rather than when a payment is processed. This method allows the current cash credits and debits to be combined with future expected cash flows to give a more accurate picture of a company 's current financial state. It is ideal to use this method of accounting if an organization has a revenue of more than five million per year. While the accrual method shows the flow of business income and debts more accurately, the downside to this method of accounting is that financial advisers may be blindsided as to what cash reserves are available, which could ultimately result in some serious cash flow obstacles. A common example that I have seen used which helps me understand is when your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven 't paid you yet. Cash Basis accounting is when revenues are documented when cash is received and expenses are recognized when paid. The cash basis of accounting is usually utilized by small companies with a revenue of less than one million annually. The cash method provides a more accurate picture of how much actual cash your business has. Cash basis accounting is allowed for tax purposes only for smaller

The accrual concept in accounting represents the expenses and incomes that are made in the period they take place, involving cash payments at the same time. The advantage side of the accrual approach is that financial statements include all the expenditures of the reported revenues for an accounting period.

Accounting is the art of measuring and communicating financial information. To maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules or principles are classified as concepts and conventions. One of the important concept in accounting is “Measurement” (Mattessich, 1977)

Accounting information must have both relevance and reliability but sometime the information is very relevance but not reliability. For example when a report about cost of building which have proper detail of information but the building was acquire in 1980. Information require to balance and contrast relevance and reliability when determining how to account for particular items (Alford et al. 1993). Produce information quickly and measuring the information more accurate are the benefits if the accounting information contain of reliability and relevance.