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Accounting concepts and business structures memo

Assume the role of an accounting intern who receives an email from an old high school friend. Your friend is planning to open a new business and does not have an accounting background. He has been talking to a bank about a loan to start his business and he knows he will need an accounting system for his new enterprise. He is asking you for some basic information.

Write an email to your friend addressing the following concerns:

o He has heard that his financial statements must be in accordance with GAAP and wants to know what that means.

o He has also been told that he needs an accrual basis accounting system. He asks you if that is any different than just keeping track of cash coming in and going out. He wants to know what makes for good accounting information.

o The bank has also suggested he consider having another investor for his business. He has heard of partnerships, but the bank also mentioned LLCs and corporations. He would like to know what options exist for different business structures, and which structure might be the best option for him.

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o He has heard that his financial statements must be in accordance with GAAP and wants to know what that means.
The GAAP means the Generally Accepted Accounting Principles. The GAAP has rules, conventions and standards that accountants are required to follow in the preparation of the financial statements. The Generally Accepted Accounting Principles allows variations in the preparation of the financial statement but these need to be consistent and should follow the general principles that have been enshrined in the Generally Accepted Accounting Principles. This is an environment in which financial accounting is done and reports are generated. There are several important principles that are contained in the Generally Accepted Accounting Principles and should be followed by the friend. To name a few, the principle of periodicity, the principle of continuity, the principle of non-compensation, ...

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Explanation of questions.

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