Share
Explore BrainMass

Financial Accounting & Bookkeeping

Financial accounting is the accounting discipline that looks at manipulating and presenting financial information for external users. These users include investors and creditors and other lendors, who use this information to make resource allocation decisions. Financial accounting must conform to applicable accounting standards, such as IFRS or US GAAP. These accounting standards require that companies prepare four financial reports every fiscal period: a balance sheet, an income statement, a statement of cash flows, and a statement of owner's equity. The standards are developed with the ultimate goal of improving the decision-usefulness of a firm's financial information. 

The discipline of financial accounting began with the invention and proliferation of the double entry book-keeping system in the mid-fifteenth centruy. The double entry bookkeeping system is a system of accounting for transactions that requires two equal entries for every transaction. When the system was first developed, business operators used it to record transactions such as accounts receivable. These transactions were conceptually easy, since cash and accounts receivable have a physical and legal basis. When an account was collected, there would be an increase in cash equal to the decrease in the accounts receivable.

By 1494, a complete description of accounting had appeared, written by an Italian monk and mathematician Luca Paciolo. By Paciolo’s time, the double entry bookkeeping system had expanded to be able to handle transactions such as sales. When a good is sold, there is an increase in accounts receivable and a decrease in cost of goods sold - but what about the difference? Abstract concepts such as “income” had to be developed to handle this conceptual difficulty. (1) Paciolo defined income as the rate of change of capital in a business (we often call capital owners' equity). Using this definition, Paciolo outlined the Golden Rule of Accounting, that held that all transactions must be recorded in a way that balance, and that follow the accounting equation Assets = Liabilities + Owners' Equity.

Paciolo did not invent the system, but he did record in detail the double-entry bookkeeping system that had been developing over time. His work was eventually translated into English, and continued developing with the advent of the joint-stock company. As a result, external users began asking for accounting information to inform their investment decisions.

Other external users followed. In 1909, the United States introduced the corporate income tax. As a result, the government became an important stakeholder in the corporation, and required financial information to determine income and income taxes.

Another important external user is the US regulatory body the Securities and Exchange Commission. Founded in 1934 following the stock market collapse and Great Depression, the SEC is responsible for ensuring that financial reports meet disclosure-based standards in order to protect investors. However, the actual accounting standards required for reporting are delegated by the SEC to the Financial Accounting Standards Board (FASB) who are responsible for determining authoritative generally accepted accounting principles (GAAP) in the United States.

Since the 1970s, accountants have been working to harmonize accounting standards internationally, a project known as International Financial Reporting Standards (IFRS). Furthermore, since the financial scandals surrounding Enron, WorldCom and Arthur Anderson, we now see ethics, integrity and conflict of interest issues as paramount to address in order to preserve the reputation and value of the accounting profession.  

                                                                                    

(1) Paciolo on Accounting, by R. Gene Brown and Kenneth S. Johnston (1963)

Categories within Financial Accounting & Bookkeeping

Accounting Standards

Postings: 418

Accounting standards involve four levels of guidance for the preparation of financial accounting statements. The first level of general guidance comes from the conceptual framework of accounting. The second level of guidance is a series of basic GAAP, which are a number of assumptions, conventions, and principles derived from the conceptual framework of accounting that accountants follow. The third level of guidance is US GAAP, which is a codified set of rules and procedures determined by the Financial Accounting Standard Board (FASB) in the US. The third level of guidance comes from conventions developed as a part of generally accepted industry practices in accounting.

The Accounting Cycle

Postings: 366

The accounting cycles shows how accounting information is collected, manipulated and presented on the financial statements. When a transaction occurs, accounting information is recorded as a journal entry and posted into the ledger accounts. At the end of the period, accountants prepare the unadjusted trial balance, record adjusting entries, prepare the adjusted trial balance, prepare the financial statements, record the closing entries, prepare a post-closing trial balance, and the cycle begins again.

Journal Entries

Postings: 587

The general journal is a chronological record used to record all of the firm's transactions. When a transaction occurs, the first step in the accounting cycle is to record the transaction in the company's general journal.

Trial Balance

Postings: 150

Trial balances are prepared to ensure that we have made no errors in recording our transactions over the period and that we've posted each transaction correctly to the general ledger. The balances of all of the T-accounts are added together in the trial balance to ensure that the total debit balances equal the total credit balances at the end of the period.

Correcting Accounting Errors

Postings: 13

If the trial balance does not balance, a number of tools and techniques are used to help us determine where an error may have been made. If necessary, correcting entries can be done to bring the T-accounts to the correct balances after the errors are found.

The Adjusting Process

Postings: 229

Because we use an accrual basis, some accounts need to be reconciled at the end of the period. These accounting adjustments fall into three basic categories: deferrals, depreciation and accruals.

The Closing Process

Postings: 36

Closing the books refers to preparing the books for the beginning of the next period in the accounting cycle. We do this by setting the revenue, expense and withdrawals accounts back to zero.

Financial Ratios

Postings: 1,767

Financial ratios are calculated based on information found in the financial statements. They help communicate the meaning behind the information presented on the financial statements and help users better evaluate the performance of the firm. Most financial ratios fall into one of four categories: solvency ratios, activity ratios, profitability ratios, and market value ratios.

Revenue Recognition

Postings: 575

When accounting is done on a cash-basis, revenue is recognized when cash is received, regardless of when the sale of goods occurs. However, most accounting is done on an accrual basis. Under accrual accounting, according to the revenue recognition principle, revenues are recognized when they are realized, or realizable and earned. This makes the issue of when to recognize revenue one of the constant dilemmas in accrual accounting.

Cash

Postings: 231

This section looks at the accounting treatment of cash. Cash is the most liquid asset. It is the standard medium of exchange for business transactions (except in bartering transactions). As well, since cash is currency, it is the basis for measuring and accounting for all business transactions and the related items that appear on the financial statements of a business.

Investments in Securities

Postings: 41

This section looks at the accounting treatment of short-term investments in items such as cash equivalents and debt and equity securities.

Receivables

Postings: 101

This section looks at the accounting treatment of financing receivables. Financing receivables (or simply receivables) are claims that a company has against customers and others for money, goods, or services. Understanding the proper accounting for receivables is especially important considering the ease by which receivables information can be manipulated for fraudulent purposes.

Purchases, Inventory and Cost of Goods Sold (COGS)

Postings: 1,209

This section looks at the accounting treatment of purchases, inventory, and cost of goods sold. It includes inventory-measurement systems such as FIFO, LIFO, specific-unit cost and weighted average costs. It also looks at estimating inventories as well as writing down the value of inventories based on the lower of cost or net realizable value rule.

Triple Creek Hardware: Strength of a Perpetual Inventory System

Triple Creek Hardware Store currently uses a periodic inventory system. Kevin Carlton, the owner, is considering the purchase of a computer system that would make it feasible to switch to a perpetual inventory system. Kevin is unhappy with the periodic inventory system because it does not provide timely information on inventory

Funkie Video Inc.

Activity 2 FunkieVideo.com, a hypothetical start-up, opened for business on April 1 this year. FunkieVideo.com allows anyone to upload short personal videos, on which viewers then vote each month. The videos with the most votes will receive cash and other rewards, with a "grand prize" in a runoff among the winning monthly vid

Introduction to accounting and bookkeeping

Hello, this is my first time using Brainmass. I have become stuck on an accounting and bookkeeping module I have taken also for the first time. I have made some progress, but have now hit a brick wall and have a limited time to get the end if module assessment submitted. I would like your help with this subject area, but not req

Practice exam questions: Earnings per share, basic and diluted

11. In calculating diluted earnings per share, which should be included: a. The weighted average number of preferred shares outstanding. b. Undeclared dividends on nonconvertible noncumulative preferred shares. c. The amount of cash dividends declared on common shares. d. Common shares resulting from the assumed conversion o

Information Needs of Users Based on Qualitative Characteristics

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to users of financial statements...in making decisions about providing responses to the entity (IFRS, 2013). I need you help me to (a) Discuss the information needs of users in terms of the qual

Employees and Payroll

In bookkeeping there are four types of employees you should know and there are five categories of pay they can receive. List them with a brief description.

Tomas Co: Depreciation & asset disposal journal entries

Show the journal entries for the following, including any entries to depreciation to update through date of disposal. Assume straight-line method and that depreciation was last recorded on Dec 31, 2013. Jan 1, 2014: Tomas Company disposed of a piece of machinery that was purchased on January 1, 2004 . The machine cost $60,4

Activity-Based Costing: Unit Product Cost

Larner Corporation is a diversified manufacturer of industrial goods. The company's activity-based costing system contains the following six activity cost pools and activity rates: Activity Cost Pool Activity Rates Labor-related $ 7.30 per direct labor-hour Machine-related $ 2.96 per machine-hour Machi

Individual Taxation: Practice Exam Questions

1. Which of the following taxes are proportional (rather than progressive)? a. State general sales tax. b. Federal income tax. c. Federal estate tax. d. Federal gift tax. 2. Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2014 and plans to use the election to

Impact of Transactions on T-Accounts

During the year 2015, the company had the following summarized activities: a. Purchased short-term investments for $10,000 cash. b. Lent $5,000 to a supplier who signed a two-year note. c. Purchased equipment that cost $18,000; paid $5,000 cash and signed a one-year note for the balance

ABC Corp compute ending retained earnings 2007

During 2007, ABC had sales of $93,054. Cost of goods sold, administrative expenses and selling expenses, and depreciation expenses were $31,629, $7,194, and $7,635, respectively. In addition, the company had an interest expense of $4,406, and a tax rate of 37%. The company paid$2,399 as dividends. If the retained earnings is 200

Impact of Interest Rates on Bond Value

Time Value of Money. 1. If you were to win $1,000,000 in the state lottery and had a choice to either receive $50,000 a year for 20 years or $560,000 now, which would you choose and why? What factors would you need to consider? 2. Construct some simple examples to illustrate your answers to the following: a. If interes

Discussion on contingent liability

While I found it very interesting to focus on a specific aspect of financial accounting that is not clear-cut, the conclusive determination that contingency liabilities must be properly valued is quite compelling.  As our courts have gone about slicing up the merits that distinguish between what is reasonable suspicion and prob

Inventory Errors in Books of Account

There may be instances of incorrect recording of inventory data in the books of account. As closing inventory is carried forward in the general ledger of the next accounting period, as opening inventory, an incorrect recording of inventory in one accounting period can affect the accounts of the subsequent period. Consider the

Perpetual inventory system, record of inventory

A perpetual inventory system maintains an up-to-date record of inventory. It thus allows an organization to have a timely and more accurate inventory data. Consider the features of perpetual inventory and respond to the following: - Discuss the advantages and disadvantages of accounting for inventory under the perpetual in

FIFO vs LIFO Methods

Prepare a report comparing the accounting implications of valuing inventory under FIFO and LIFO methods of a fast moving consumer goods (FMCG) company during a period of rising prices. Provide the required references, if applicable. Should be 1 page minimum.

Bank Reconciliation Statement for a Restaurant Supply Company

The bank account as a control device helps to protect cash. One of the requirements is to conduct periodic bank statement reconciliations. Using the following data, complete the bank statement reconciliation. Prepare a bank reconciliation using B & B's Restaurant Supply Inc.'s information for August 31. - A NSF check fr

Ethical consideration in accounting

On a recent trip to Africa, J.T. Brown, sales manager of Prompt Technology, took his wife along at company expense. Linda White, vice president of sales and Brown's boss, thought his travel and entertainment expenses seemed excessive. But White approved the reimbursement because she owed Brown a favor. White was aware that the c

Leases Problem

On August 1, 1993, Creative Works (lessee) and Netsis Computer Industries (lessor) signed a lease with the following terms: 1. Term: 5 years 2. Annual payments of $39,000 3. Implicit interest rate (not known to lessee) 10% 4. Lessor retains ownership of asset at end of lease 5. Fair value of asset $168,834 6. Cost of as

Methods of Depreciation - Choosing the Correct Method

There are various methods of asset depreciation. The methods of depreciation include the straight-line method, units-of-production method, and double-declining balance method. Consider the methods of depreciation and respond to the following: What are the various points or factors you would consider while choosing a method

Cash versus accrual accounting

Cash versus accrual accounting. Jack Block opens a tax and bookkeeping services business, Block's Tax and Bookkeeping Services, on July 1, 2008. He invests $40,000 for all the common stock of the business, and the firm borrows $20,000 from the local bank, promising to repay the loan on December 31, 2008, along with interest at

Accounting: General jounal vs General Ledger

A journal is used to chronologically record all transactions of a business. These transactions are then posted to the ledger. Consider the steps involved in recording transactions in the books of account and respond to the following: - Discuss whether entering a transaction in a journal and posting it again in the ledger invo

Determining Financial Statement Effects of Several Transactions

Information for TAB M2-9, M2-10 and M2-11 is below: a. Borrowed $3,940 from a local bank on a note due in six months. b. Received $4,630 cash from investors and issued stock to them. c. Purchased $1000 in equipment, paying $200 cash and promising the rest on a note due in one year. d. Paid $300 cash for supplies. e. Bough

Various Quickbooks and accounting related questions

1.What does Bank Reconciliation mean? A) It means to reconcile with the banker after getting into a fight for bank errors B)Verifies which transactions have cleared or not to verify that the amounts in the QuickBooks register match the bank C)It automatically downloads the bank transactions so you do not have enter any data

Accounting: Contribution Margin Format

ABC Electronics manufactures Blue-Ray drive, which has a fixed manufacturing overhead budget for year 20X3 of $2,000,000. The sales of Blue-Ray drive are expected to be 500,000 units for the year. All variable manufacturing costs are expected to be $8 per unit. The company has budgeted $5,000,000 for selling and administra

Accounting records

100 words-Read "Sometimes the Most Important Evidence is Not Found in the Accounting Records" at the beginning of Ch. 7 of Auditing and Assurance Services. Discuss the steps that Ralph Smalley could have taken to prevent the bankruptcy of Crenshaw. Do you believe these steps would have been reasonable and logical to take at that

Accounting

In detail, Describe the three major activities the statement of cash flows reports. Cite examples of cash flows for each activity.

Managerial Accounting Quality Management and Activity Based Costing

1. Review the Managerial Application "Toyota: Growth versus Reputation" (see attachment) a. Who benefitted from management's decision to grow at the potential risk of lower quality? b. Who suffered from that decision? 2. Why does just-in-time require total quality management? 3. Why might managers be more concerned ab

Accounting for income taxes payable: Deferred taxes, NOL

QUESTION ONE: Shetland Inc. had pretax financial income of $154,000 in 2014. Included in the computation of that amount is insurance expense of $4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland's journal entry to record 2014