Introduction To Accounting

Introduction to Accounting
Financial Accounting

Introduction
The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities. Managerial accountingcontrasts with financial accounting in that managerial accounting is for internal decision making and does not have to follow any rules issued by standard-setting bodies. Financial accounting, on the other hand, is performed according to Generally Accepted Accounting Principles (GAAP) guidelines.

CPA's
The primary accounting professional association in the U.S. is the American Institute ofCertified Public Accountants (AICPA). The AICPA prepares the Uniform CPA Examination, which must be completed in order to become a certified public accountant. To be eligible to become a CPA, one needs an undergraduate degree in any major with 150 credit hours of course work. Of these 150 credit hours, a minimum of 36 credit hours must be in accounting. Only about 10% of those taking the CPA exam pass itthe first time.

Accounting Standards
In order that financial statements report financial performance fairly and consistently, they are prepared according to widely accepted accounting standards. These standards are referred to as Generally Accepted Accounting Principles, or simply GAAP. Generally Accepted Accounting Principles are those that have "substantial authoritative support".Accrual vs. Cash Method
Many small businesses utilize an accounting system that recognizes revenue and expenses on a cash basis, meaning that neither revenue nor expenses are recognized until the cash associated with them actually is received. Most larger businesses, however, use the accrual method.
Under the accrual method, revenues and expenses are recorded according to when they are earned andincurred, not necessarily when the cash is received or paid. For example, under the accrual method revenue is recognized when customers are invoiced, regardless of when payment is received. Similarly, an expense is recognized when the bill is received, not when payment is made.
Under accrual accounting, even though employees may be paid in the next accounting period for work performed near theend of the present accounting period, the expense still is recorded in the current period since the current period is when the expense was incurred.

Underlying Assumptions, Principles, and Conventions
Financial accounting relies on the following underlying concepts:
* Assumptions: Separate entity assumption, going-concern assumption, stable monetary unit assumption, fixed time periodassumption.
* Principles: Historical cost principle, matching principle, revenue recognition principle, full disclosure principle.
* Modifying conventions: Materiality, cost-benefit, conservatism convention, industry practices convention.

Financial Statements
Businesses have two primary objectives:
* Earn a profit
* Remain solvent
Solvency represents the ability of the businessto pay its bills and service its debt.
The four financial statements are reports that allow interested parties to evaluate the profitability and solvency of a business. These reports include the following financial statements:
* Balance Sheet
* Income Statement
* Statement of Owner's Equity
* Statement of Cash Flows
These four financial statements are the final product ofthe accountant's analysis of the transactions of a business. A large amount of effort goes into the preparation of the financial statements. The process begins with bookkeeping, which is just one step in the accounting process. Bookkeeping is the actual recording of the company's transactions, without any analysis of the information. Accountants evaluate and analyze the information, making sense...