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Accounting Principles - Coggle Diagram

- - - - Generally Accepted Accounting Principles (GAAP) As a Financial Specialist in the United States Army you have regulations known as the DoDFMR and the JFTR that governs the finances of the Army. Much like these two super regulations, accounting is governed by the GAAP and the FASB. Using the GAAP, we can count on the consistency in the methods used for preparing the financial statements from year to year.
      - Economic Entity Assumption: It is important to keep the business transactions of your sole proprietorship separate from your personal transactions, and your accountant will ensure this is maintained.
        Time Period Assumption: Through this principle we can assume that it is possible to report the complex and ongoing activities of your business in relatively short and distinct time intervals.
        Cost Principle: Accountants are all about money. From their point of view, cost will refer to the amount spent when an item was originally obtained.
        Full Disclosure Principle: This principle is very important, especially for investors. When you prepare your financial statements and feel that there is essential information that is useful to your investors, you must include that information in the financial statements or in the footnotes.
        Going Concern Principle: With this principle, we assume that your company will continue to exist long enough to carry out the objectives and commitments that will not be liquidated in the foreseen future.
        Matching Principle: Through this principle, you will be required to use the accrual basis of accounting. When you make your calculations, your expenses and revenues must match.
        Revenue Recognition Principle: When you use the accrual basis of accounting, your revenues will be recognized as soon as the product is sold or the service has been performed.
        Materiality: This principle provides a possible loophole. Your accountant may be able to violate another principle if the amount is insignificant.
      - Financial Accounting Standards Board (FASB)
        The Financial Accounting Standards Board (FASB) is an independent, private-sector, not-for-profit organization based in Norwalk, Connecticut. Established in 1973, their primary responsibility is to set the financial accounting and reporting standards for all the public and private companies. The FASB sets the standards for both the public and private sectors of accounting.
      - International Financial Reporting Standards (IFRS)
        The IFRS is a not-for-profit, public interest organization that enforces and sets the globally accepted accounting standards. They promote and facilitate the adoption of the standards. Their mission is to bring transparency, accountability and efficiency to the financial markets throughout the world through the development of the IFRS standards.
      - Characteristics of the Information from Accounting
        The expectations we have of accountants is that are . They are professionals, and you expect them to ensure that all the financial statements and bookkeeping is done in accordance with the principles, guides and financial laws that are set forth for your business.
        
        There are three skills that you expect from your accountant.
        
        Reliable, Verifiable and Objective: We have already introduced you to the basic principles; however, based on these principles, your accountant should be reliable, verifiable and objective.
        Consistency: Accountants are expected to be consistent when they apply the accounting principles, procedures and practices, although when there are changes it does need to be clearly disclosed.
        
        Comparability:* Anyone who is interested in your company such as investors, lenders and customers expect the financial statements from your company prepared to be compared against another company within the same industry.
      - How Does the GAAP Affect the Financial Statements?
        The basic principles that we have covered will directly affect the way your financial statements are prepared and read. The principles influence three main areas.
        
        Balance Sheet: When you look at the balance sheet, consider it as a snapshot of your company’s assets, liabilities and owner’s equity during a period. With the cost principle, if you have land, it is shown in the asset account as Land with the amount showing the original price and not the appraised amount.
        Income Statement: With the income statement, we will see a period such as a year, quarter, month or possibly four weeks. When the statement is prepared on the accrual basis of accounting, it will show how profitable a company was during that period.
        The Notes to Financial Statements: Another principle is that of full disclosure. This principle states that your company must have full disclosure of the financial statements and the notes that will accompany them
- - - - Step 1 – Analyzing and Measure the Transactions:
        During step 1 you will collect your transactions that are needed for analyzing, measuring and recording. The question is, what needs to be recorded? At minimum you should record:
        All cash sales
        All purchases (no matter how small)
        Anything that’s measurable, relevant or reliable.
        All events such as the external and internal transactions.
        Step 2 – Record Your Transactions in the Journal:
        A better and more simple term for step 2 is journalizing. Each entry will consist of four parts.
        The accounts and amounts that will be debited.
        The accounts and amounts that will be credited.
        The date of each transaction.
        A simple explanation of the transaction.
        Step 3 – Post Information from the Journal to the Ledger:
        These ledgers are highly important to the financial statements. Each journal entry or transaction will have a ledger that it is posted to.You must have a complete record of all your transactions in the general ledger.
        Step 4 – Prepare an Unadjusted Trial Balance:
        Before any adjustments are made you will create a list of accounts and their balances. This list will have the order in which they appear in the ledger and the totals in the corresponding debit or credit column.
        Step 5 – Preparing Adjusting Entries: These entries are journal entries that will be posted at the end of the accounting period after the final balances are calculated in the general ledger accounts, making the required adjusting entries fall in line with the revenue recognition and matching principles.
        Step 6 – Prepare Your Adjusted Trial Balance: Now that you have the journalizing and posting of all the adjusting entries, it is good to prepare another trial balance.
        Step 7 – Prepare Your Financial Statements: Using your adjusted trial balance sheet you can prepare your financial statements.
        Step 8 – Prepare Your Closing Entries: Now that you have the financial statements prepared, it is time to close your temporary accounts and set them to zero. This starts to prepare them for the next accounting period.
        Step 9 – Preparing Your Post-Closing Trial Balance: That’s right! Another trial balance. This time it will only consist of the assets, liabilities and owners’ equity. Basically, these are the real or permanent accounts. This will be evidence that you have properly closed out the temporary accounts.
- - - - Advantages of the Double-Entry Accounting: There are a few advantages to the double-entry accounting.
        Your business will be able to maintain a complete record of every transaction as they are classified into assets, liabilities, expenses, revenue and capital. You will also have them recorded to indicate which accounts are affected.
        he double-entry accounting will allow for you to prepare your financial statements easily as all the records are recorded within the accounts that are involved.
        The trial balance this system creates will help in maintaining the accuracy of all your accounts.
        With the matching principle, your company can accurately assess the profits earned or the losses suffered in detail during a period with the help of your profit and loss reports.
        Your financial position can be ascertained at the end of each accounting period with the balance sheet.
        The beautiful thing about this system is the checks and balances. They will prevent fraud and misappropriation as the assets and liabilities are recorded.
        It will solicit comparative study of results of one year to another and ascertain reasons for change or for making decisions.
        It will also afford complete information with each transaction for the purpose of control permitting accounts to be maintained in all the details as necessary.
      - Disadvantages of the Double-Entry Accounting: Just like everything, there are disadvantages to this system.
        This system is complex and harder to understand
        When it comes to the cost of maintenance, it could get high. This is especially true if you have your bookkeeping maintained at different places and need to hire more employees for your bookkeeping department. Keep in mind, the more complex the accounts, the costlier it gets.
        here is a great deal of time required to recording and maintaining this system. This is due to every entry being recorded twice and crosschecked.
        You may come across a case where both sides of a transaction are not recorded. In this case, it is hard to detect that error on the trial balance due to both the credits and debits balancing.