Foundational Accounting Principles and Terminology
Shane R. Wagner
Module 1 Case Study
29 August 2010
This paper will discuss the common fundamental accounting principles and analyze the financial statements of three major businesses. A basic understanding of the General Accepted Accounting Principles and the standards established within these practices, allow for investors to obtain an accurate snapshot of the financial health of a business. The different methods of documenting both current and future transactions, can have an impact on the information portrayed by the financial statements of an organization. In ...view middle of the document...
Generally Accepted Accounting Principles (GAAP)
The Generally Accepted Accounting Principles (GAAP), are established rules for processing, preparing and presenting business financial statements within the United States (Bradford, 2007). These rules establish the standard for the creation and upkeep of financial records is to ensure US businesses (or those foreign business that have interests in the US) present a comparable financial health of an organization in addition to ensuring compliance with the Securities and Exchange Commission (SEC). The SEC delegates authority to the Financial Accounting Standards Board (FASB) for establishment and maintenance of the GAAP (Bradford, 2007). The GAAP revolve around four main principles; consistency, relevance, reliability, and comparability. These principles establish the foundation of any US company’s financial statements, allowing flexibility for customization while remaining in compliance with the SEC rules and regulations (Bradford, 2007).
Double Entry Accounting
Double-entry accounting is a checks and balance system utilized by business’ to ensure the balance and GAAP compliance of financial records (Toolkit Media Group, 2010). The checks and balance condition is accomplished through the use of a two entry method; credits and debits. This methodology is comparable Newton’s Law of motion; for every action, there is an equal and opposite reaction. The same principle applies to double-entry accounting; for every addition of monies to an account, an equal subtraction of monies must be applied to another account, thus ensuring the books remain balanced. This equal addition and subtraction principle allows for identification of bookkeeping errors; if the credits and debits of the financial documents are not equal, a mistake exists in the bookkeeping calculations or figure entries (Toolkit Media Group, 2010). Double-entry accounting is a table representation of the accounting equation (Assets = liabilities + owner’s equity); the assets will be listed on the left with the liabilities and owner’s equity listed on the right (or separated by sections) (Toolkit Media Group, 2007).
Historical cost is a method of accounting for the assets of an organization utilizing the original cost vice the fair market value (what the company could obtain from the sale of the asset)(Thompson, 2007). The main concern utilizing this method is the absence of the current market value of the asset that would identify if the assets value is higher or lower than the original cost (showing whether the company gained or lost money) (Thompson, 2007). The absence of this value presents a false snapshot of the organizations net income (or net worth) thus not disclosing the complete investment potential of the organization. Organizations that utilize this method are interested in the allocation costs of assets vice the worth of the asset over time and how it could impact the net worth of an...