The importance of education is quite clear. Education is the knowledge of putting one's potentials to maximum use. One can safely say that a human being is not in the proper sense till he is educated.
This importance of education is basically for two reasons. The first is that the training of a human mind is not complete without education. Education makes man a right thinker. It tells man how to think and how to make decision.
The second reason for the importance of education is that only through the attainment of education, man is enabled to receive information from the external world; to acquaint himself with past history and receive all necessary information regarding the present. Without education, man is as though in a closed room and with education he finds himself in a room with all its windows open towards outside world.
This is why Islam attaches such great importance to knowledge and education. When the Qur'an began to be revealed, the first word of its first verse was 'Iqra' that is, read. Education is thus the starting point of every human activity.
A scholar (alim) is accorded great respect in the hadith. According to a hadith the ink of the pen of a scholar is more precious than the blood of a martyr. The reason being that a martyr is engaged in defense work while an alim (scholar) builds individuals and nations along positive lines. In this way he bestows a real life to the world.
The Qur'an repeatedly asks us to observe the earth and the heavens. This instills in man a desire to learn natural science. All the books of hadith have a chapter on knowledge (ilm). In Sahih Bukhari there is a chapter entitled "The virtue of one who acquires ilm (learning) and imparts that to others."
How great importance is attached to learning in Islam can be understood from an event in the life of the Prophet. At the battle of Badr in which the Prophet gained victory over his opponents, seventy people of the enemy rank were taken prisoner. These prisoners of war were literate people. In order to benefit from their education the Prophet declared that if one prisoner teaches ten Medinan children how to read and write, this will serve as his ransom and he will be set free.
This was the first school in the history of Islam established by the Prophet himself with all its teachers being non-Muslims. Furthermore, they were all war prisoners. There was all the risk that after their release they will again create problems for Islam and Muslims. This Sunnah of the Prophet shows that education is to be received whatever the risk involved.
On the one hand Islam places great emphasis on learning, on the other, all those factors which are necessary to make progress in learning have provided by God. One of these special factors is the freedom of research. One example of it is that in Makkah, the birthplace of the Prophet, dates were not grown. Afterwards the Prophet migrated to Medina, the city of dates. One day the Prophet saw that some people were atop the date trees busy in doing something. On being asked what they were engaged in, they replied that they were pollinating.
The Prophet suggested them not to do so. The following year date yield was considerably very low. The Prophet enquired them of the reason. They told him that the date crop depended on pollination. Since he suggested them to do otherwise, they had refrained from that. The Prophet then told them to go on doing as they used to, and that, "You know the worldly matters better than me."
In this way, the Prophet of Islam separated scientific research from religion. This meant that in the world of nature, man must enjoy full opportunity to conduct free research and adopt the conclusions arrived at after the research. Placing such great emphasis on knowledge. This process began in Makkah, then it reached to Medina and Damascus, afterwards it found its center in Baghdad. Ultimately it entered Spain. Spain flourished with extraordinary progress made in various academic and scientific disciplines. This flood of scientific progress entered Europe and ultimately resulted in producing the modern scientific age.
Curriculum Revision
Government of Pakistan has appointed Higher Education Commission (erstwhile UGC) as the competent authority for the supervision of curricula and text-books beyond class XII. HEC has also been entrusted to maintain the standards of education in keeping with the nation’s changing social and economic needs which are compatible with the basic national ideology. The aim is to ascend from general education to more purposeful agro-technical education. The Curriculum Section guides all Degree colleges, Universities and other Institutions of higher learning in designing curricula that provides appropriate content regarding Basic Sciences, Social Sciences, Humanities along with Engineering and Technology. It also guides them to establish minimum standards for good governance and management of Institutions. HEC may also advise the Chancellor of any institution on its statutes and regulation. Educational programs are thus designed not only to meet the needs of the employment market but to promote the study of Basic and Applied Sciences in every field of national and international importance. HEC may also advise the Chancellor of any institution on its statutes and regulation.
National Curriculum Revision Committee
National Curriculum Revision Committee
Initiatives in Social Sciences
Quality education in Social Sciences & Humanities plays a major role in the socio-economic development of any country. In Pakistan there has been sporadic development in this sector over the past years but no substantial effort has been undertaken until recently. The Higher Education Commission since its inception in year 2003 has taken a number of initiatives ranging from human resource development to providing research grants, and developing linkages at both National and International level in order to revive quality education in Social sciences and Humanities.
A committee on development of Social Sciences, Arts and Humanities in Pakistan comprising of eminent social scientists has been constituted by Chairman, Higher Education Commission. This committee has been given the task to deliberate upon, identify the problems and to recommend immediate, short term as well as long term measures to make social sciences education, vibrant, dynamic and attuned to the present and future needs of Pakistan. The committee is currently being chaired by Dr. Ishrat Husain.
At a cost of Rs 24 Million the Higher Education Commission has also established the Social Sciences and Humanities Research Council of Pakistan. It provides funding for Research Grants, helps in establishing National/International linkages between universities and provides funds for organizing Seminars and Conferences. A well equipped library along with database of faculty and their related research is also being established for the researchers through the research council.
At present the total amount allocated for all ongoing projects related to the promotion Social Sciences; Arts & Humanities by HEC is Rs.4.744 billion. This amount is being spent through initiatives taken by HEC focusing over three main dimensions:
A committee on development of Social Sciences, Arts and Humanities in Pakistan comprising of eminent social scientists has been constituted by Chairman, Higher Education Commission. This committee has been given the task to deliberate upon, identify the problems and to recommend immediate, short term as well as long term measures to make social sciences education, vibrant, dynamic and attuned to the present and future needs of Pakistan. The committee is currently being chaired by Dr. Ishrat Husain.
At a cost of Rs 24 Million the Higher Education Commission has also established the Social Sciences and Humanities Research Council of Pakistan. It provides funding for Research Grants, helps in establishing National/International linkages between universities and provides funds for organizing Seminars and Conferences. A well equipped library along with database of faculty and their related research is also being established for the researchers through the research council.
At present the total amount allocated for all ongoing projects related to the promotion Social Sciences; Arts & Humanities by HEC is Rs.4.744 billion. This amount is being spent through initiatives taken by HEC focusing over three main dimensions:
Foreign Students Admission
Higher Education Commission holds the mandate to promote higher education with in the country while encouraging Pakistani nationals as well as foreign nationals to seek admission in Universities and higher educational institutions of Pakistan. Currently, foreign students from different countries are studying in various educational institutions all over Pakistan.
The professional institutions of Pakistan are rated amongst the best institutions of this region. Foreign students from South Asia, Central Asia, Arab Gulf region along with students from various developing and under developed countries of Africa and South East Asia consider the institutions of Pakistan as excellent learning institutes.
Recently, Higher Education Commission with the collaboration of various administrative agencies which includes Ministry of Education, Ministry of Foreign Affairs, Ministry of Interior and Economic Affairs Division has streamlined the admission procedure (see below) for foreign students. The main objective behind this revision of admission procedure was to facilitate and encourage foreign nationals to seek admission in Pakistan.
Currently, there are two broad categories in which foreign students apply for admission. The detail information regarding these two categories are given below:
The professional institutions of Pakistan are rated amongst the best institutions of this region. Foreign students from South Asia, Central Asia, Arab Gulf region along with students from various developing and under developed countries of Africa and South East Asia consider the institutions of Pakistan as excellent learning institutes.
Recently, Higher Education Commission with the collaboration of various administrative agencies which includes Ministry of Education, Ministry of Foreign Affairs, Ministry of Interior and Economic Affairs Division has streamlined the admission procedure (see below) for foreign students. The main objective behind this revision of admission procedure was to facilitate and encourage foreign nationals to seek admission in Pakistan.
Currently, there are two broad categories in which foreign students apply for admission. The detail information regarding these two categories are given below:
Life and culture
Immersing yourself in a different culture is a great way to develop a broader view of the world. Once you’ve arrived in the UK a vibrant multi-ethnic culture will be all around you, with lots of exciting experiences to discover, traditions, music, celebrations, accents, people to meet and places to visit. The UK has its own fascinating customs but you may find many that are familiar to you. It is such a cosmopolitan society you may find you settle in faster than you think. Read more about life and culture in the UK.
Living in the UK
Where you live can have a big impact on how much you enjoy your studies in the UK, so choose your home away from home with care. You have many options, depending on your circumstances, such as boarding, staying in halls of residence, renting a privately owned property, or homestay with a UK family.
Looking for a scholarship
Are you looking for financial assistance to help fund your studies? If so, we’ve got a wide range of options for you. Read more information about scholarship opportunities or try searching our...
MBBS Programme
The Medical College offers a five-year undergraduate programme leading to the degree of Bachelor of Medicine and Bachelor of Surgery (MBBS). The programme is designed to equip students with appropriate knowledge, skills, attitude, values and behaviours necessary to understand and influence factors that affect the health of individuals and of communities. The curriculum conforms to the requirements of the Pakistan Medical and Dental Council (PMDC), which is the registering body in Pakistan.
Aga Khan University (AKU) attaches great emphasis to the professional, personal and intellectual development of students, so that its medical graduates become contributory members and leaders of society. The courses are structured to engender an understanding of human biology and behaviour consistent with current trends in medical education, with an emphasis on man as an organism as well as a social being.
The faculty of AKU Medical College has been deliberating and planning for curriculum renewal since 1999. While the renewed curriculum builds on strengths of the present one, it addresses areas needing improvement. It will maintain its high quality, but increase its flexibility, allowing students to develop more broadly and function effectively in low cost settings. It is based on the principles of adult learning and incorporates current Evidence-Based Medical Education concepts.
Degrees Upon satisfactory completion of the curricular requirements of the five-year course and certifying examinations, graduates are awarded the degree of Bachelor of Medicine, Bachelor of Surgery (MBBS) by AKU.
Since the establishment of the Medical College in 1983, PMDC has inspected the curriculum, the clinical studies, and the examinations of the Medical College, and has approved the University degrees for registration.
License to Practice Graduates will be required to register with PMDC in order to obtain a licence to practise in Pakistan. The Council requires experience of the practice of medicine and surgery or allied disciplines under supervision for a period of one year in an approved hospital prior to full registration. Aga Khan University Hospital has been inspected by PMDC and is approved for internship experiences.
Aga Khan University (AKU) attaches great emphasis to the professional, personal and intellectual development of students, so that its medical graduates become contributory members and leaders of society. The courses are structured to engender an understanding of human biology and behaviour consistent with current trends in medical education, with an emphasis on man as an organism as well as a social being.
The faculty of AKU Medical College has been deliberating and planning for curriculum renewal since 1999. While the renewed curriculum builds on strengths of the present one, it addresses areas needing improvement. It will maintain its high quality, but increase its flexibility, allowing students to develop more broadly and function effectively in low cost settings. It is based on the principles of adult learning and incorporates current Evidence-Based Medical Education concepts.
Degrees Upon satisfactory completion of the curricular requirements of the five-year course and certifying examinations, graduates are awarded the degree of Bachelor of Medicine, Bachelor of Surgery (MBBS) by AKU.
Since the establishment of the Medical College in 1983, PMDC has inspected the curriculum, the clinical studies, and the examinations of the Medical College, and has approved the University degrees for registration.
License to Practice Graduates will be required to register with PMDC in order to obtain a licence to practise in Pakistan. The Council requires experience of the practice of medicine and surgery or allied disciplines under supervision for a period of one year in an approved hospital prior to full registration. Aga Khan University Hospital has been inspected by PMDC and is approved for internship experiences.
Opposition PRI may get absolute majority in House of Representatives
According to several opinion polls, Mexico's opposition Institutional Revolutionary Party (PRI) holds a firm lead against the government’s National Action Party (PAN) ahead of mid-term congressional elections to renew the House of Representatives. The polls also predicted a high level of abstention by voters.
Most of the pollsters gave a six point advantage to the PRI – which ruled Mexico for 71 years until 2000 – obtaining between 210 and 220 seats. If it forms an alliance with the Ecologist Green Party, the PRI could even obtain an absolute majority in the lower house, reported EFE, something no political force has achieved since 1994.
A poll published in Reforma showed that PRI could get 38 percent of votes, the conservative PAN party 33 percent and the leftist Party of the Democratic Revolution (PRD) 14 percent. Meanwhile, the number of swing voters rose from 21.3 percent to 28.8 percent.
Another poll published in Demotecnia and conducted by pollster María de la Heras showed that out of 1,000 people interviewed, 35 per cent would vote for PRI, 30 percent for PAN and 15 for the PRD. A survey published in El Universal put PRI in the lead with 29.9 percent of the votes, PAN with 23.8 percent and PRD with 10.8 percent.
According to Publimetro, the Federal Electoral Court was expecting an abstention level of 41 percent among the population. Leonardo Valdés, president of the Federal Election Institute (IFE), remarked that Mexicans' voting habits went through cycles and “this level of participation is normal and demonstrates that the electoral system has stabilized”.
Approximately 77 million people are eligible to vote to renew the 500-seat House of Representatives. Currently, the governing PAN party has a majority of 206 congressmen followed by PRD's 126 seats and the PRI's 106 seats. Six state governors will also be chosen, along with 600 mayors and local representatives in 11 of the country's 32 states.
On July 2 a “period of reflection” begins with a ban on campaigning and opinion polls. Political commentator Javier Aparicio wrote in his column for El Universal, “It's paradoxical that this should happen just when information about the candidates, their parties and their odds of winning is most important to allow citizens to compare alternatives and make up their minds”.
Research and Development
A dynamic world-class research culture is not only crucial to the economic growth of a country but is also imperative for the development of the academia of a country. HEC, being cognizant of this fact, thus aims to enhance the capacity of institutions of higher learning to carry out cutting edge research in the area of Science and Engineering as well as Social Sciences and Humanities. To achieve this objective, HEC has launched a number of research support programs.
HEC research grants program aims to instill research culture in institutions of higher learning which shall in turn promote and facilitate high quality indigenous research for fast industrialization, production of high value added goods and import substitutions along with export enhancement.
The funding policy supports and rewards world-class research, encourages effective collaborations and provides capacity for developing and extending research capability in frontier technologies. It is responsive to changes in the research environment and the requirement of researchers. The programs provide funding to enhance skill levels and working conditions for researchers and research students.
CIGARETTES VS BEEDI,s
In these times of recession when government is reducing taxes on everything, one product which does not deserve this benefit is cigarettes. let face it, CIGARETTES cause CANCER. did you know that every year more than 106 BILLION cigarettes are consumed by Indians compared to 1 TRILLION beedi's. And did u also know that there is no tax on beedi as compared to heavy and essential tax on cigarettes.Imagine if we tax beedi too ..........what could happen? let us enlist the effect first. We could collect an extra revenue worth Rs. 15,000 crore, at the same time this might have an influence on the poor and might make them quit.
so why haven't any of the finance minister realised any of this. well reason is simple enough beedi factories employ millions of poor. the poor like to buy cheap products. but lets face it it is cheap killer besides there are no warning on beedi packets.tax in crease can here be used as measure to preserve the health of the citizens.
A recent study by Emil Sunley, an IMF consultant, estimates that beedis account for 77% of all tobacco consumption but only 5% of excise duty His data refer mostly to 2007-08, but the dimensions of the problem have not changed materially since. Sunley says that the tax per thousand is Rs 14 for hand-made beedis and Rs 26 for machine-made ones. For cigarettes, the tax per thousand varies from Rs 168 for micro non-filter cigarettes to Rs 819 for the standard 70 mm filter cigarette and a whopping Rs 2,163 for filter cigarettes longer than 85 mm.
no wonder's about these the small things ......i still dont understand why it hasn't come to any one's notice but it would take an awakening to get this problem and many more like these to disappear.
Let us hope this reaches FM's eyes
JOHN F. KENNEDY
Change is the law of life. And those who look only to the past or present are certain to miss the future.
so why haven't any of the finance minister realised any of this. well reason is simple enough beedi factories employ millions of poor. the poor like to buy cheap products. but lets face it it is cheap killer besides there are no warning on beedi packets.tax in crease can here be used as measure to preserve the health of the citizens.
A recent study by Emil Sunley, an IMF consultant, estimates that beedis account for 77% of all tobacco consumption but only 5% of excise duty His data refer mostly to 2007-08, but the dimensions of the problem have not changed materially since. Sunley says that the tax per thousand is Rs 14 for hand-made beedis and Rs 26 for machine-made ones. For cigarettes, the tax per thousand varies from Rs 168 for micro non-filter cigarettes to Rs 819 for the standard 70 mm filter cigarette and a whopping Rs 2,163 for filter cigarettes longer than 85 mm.
no wonder's about these the small things ......i still dont understand why it hasn't come to any one's notice but it would take an awakening to get this problem and many more like these to disappear.
Let us hope this reaches FM's eyes
JOHN F. KENNEDY
Change is the law of life. And those who look only to the past or present are certain to miss the future.
Owner's Equity
Portion of a company belonging to the owners, represented by capital investments and accumulated earnings less any dividends or other financial obligation.
Can depreciation on Fixed Asset be carried as a contra-asset on its own line on the balance sheet or does it have to be deducted from the Fixd Asset?
Depreciation of a Fixed Asset is always carried on the Balance Sheet in the Accumulated Depreciation Account (contra-asset). It is never deducted from the Fixed Asset. One reason for the Accumulated Depreciation account is that eventually, individual assets will be fully depreciated and their net values will be zero. If the depreciation were deducted from the asset, it would "fall off" the balance sheet. The accumulated depreciation account allows the assets to remain at book value in the asset account to maintain their visual presence on the books. The depreciation entry debits depreciation expense and credits accumulated depreciation.
AssetMeans
A useful or valuable quality, person, or thing; an advantage or resource: proved herself an asset to the company.
A valuable item that is owned.
A spy working in his or her own country and controlled by the enemy.
assets
Accounting. The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.
The entire property owned by a person, especially a bankrupt, that can be used to settle debts.
A valuable item that is owned.
A spy working in his or her own country and controlled by the enemy.
assets
Accounting. The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.
The entire property owned by a person, especially a bankrupt, that can be used to settle debts.
What do you mean by assets and liabilities?
Assets are things which have a value and you are the beneficiary for those. ex: land, house, stocks, bank deposits, money receivable from others etc Liabilities are things which have a value and you are the one who has to make those payments. ex: salary to employees, loans etc.
Liabilities
A liability is a debt assumed by a business entity as a result of its borrowing activities or other fiscal obligations (such as funding pension plans for its employees). Liabilities are paid off under either short-term or long-term arrangements. The amount of time allotted to pay off the liability is typically determined by the size of the debt; large amounts of money usually are borrowed under long-term plans.
Payment of a liability generally involves payment of the total sum of the amount borrowed. In addition, the business entity that provides the money to the borrowing institution typically charges interest, figured as a percentage of the amount that has been lent.
A company's liabilities are critical factors in understanding its status in any industry in which it is involved. As John Brozovsky noted in Journal of Commercial Lending, "a basic understanding of accounting for liabilities is necessary to assess the viability of any company. Companies are required to follow certain accounting rules; however, the rules allow considerable flexibility in how a company accounts for liabilities."
Types of Liabilities
CURRENT LIABILITIES.
Current liabilities are short-term financial obligations that are paid off within one year or one current operating cycle, whichever is longer. (A normal operating cycle, while it varies from industry to industry, is the time from a company's initial investment in inventory to the time of collection of cash from sales of that inventory or of products created from that inventory.) Typical current liabilities include such accrued expenses as wages, taxes, and interest payments not yet paid; accounts payable; short-term notes; cash dividends; and revenues collected in advance of actual delivery of goods or services.
Economists, creditors, investors, and other members of the financial community all regard a business entity's current liabilities as an important indicator of its overall fiscal health. One financial indicator associated with liabilities that is often studied is known as working capital. Working capital refers to the dollar difference between a business's total current liabilities and its total current assets. Another financial barometer that examines a business's current liabilities is known as the current ratio. Creditors and others compute the current ratio by dividing total current assets by total current liabilities, which provides the company's ratio of assets to liabilities. For example, a company with $1.5 million in current assets and $500,000 in current liabilities would have a three-toone ratio of assets to liabilities.
LONG-TERM LIABILITIES.
Liabilities that are not paid off within a year, or within a business's operating cycle, are known as long-term or noncurrent liabilities. Such liabilities often involve large sums of money necessary to undertake opening of a business, major expansion of a business, replace assets, or make a purchase of significant assets. Such debt typically requires a longer period of time to pay off. Examples of long-term liabilities include notes, mortgages, lease obligations, deferred income taxes payable, and pensions and other post-retirement benefits.
When debt that has been classified as long-term is paid off within the next year, the amount of that paid-off liability should be reported by the company as a current liability in order to reflect the expected drain on current assets. An exception to this rule, however, comes into effect if a company decides to pay off the liability through the transfer of noncurrent assets that have been previously accumulated for that very purpose.
CONTINGENT LIABILITIES.
A third kind of liability accrued by companies is known as a contingent liability. The term refers to instances in which a company reports that there is a possible liability for an event, transaction, or incident that has already taken place; the company, however, does not yet know whether a financial drain on its resources will result. It also is often uncertain of the size of the financial obligation or the exact time that the obligation might have to be paid.
Contingent liabilities often come into play when a lawsuit or other legal measure has been taken against a company. An as yet unresolved lawsuit concerning a business's products or service, for example, would qualify as a contingent liability. Environmental cleanup and/or protection responsibility sometimes falls under this classification as well, if the monetary impact of new regulations or penalties on a company is uncertain.
Companies are legally bound to report contingent liabilities. They are typically recorded in notes that are attached to a company's financial statement rather than as an actual part of the financial statement. If a loss due to a contingent liability is seen as probable, however, it should be included as part of the company's financial statement.
Payment of a liability generally involves payment of the total sum of the amount borrowed. In addition, the business entity that provides the money to the borrowing institution typically charges interest, figured as a percentage of the amount that has been lent.
A company's liabilities are critical factors in understanding its status in any industry in which it is involved. As John Brozovsky noted in Journal of Commercial Lending, "a basic understanding of accounting for liabilities is necessary to assess the viability of any company. Companies are required to follow certain accounting rules; however, the rules allow considerable flexibility in how a company accounts for liabilities."
Types of Liabilities
CURRENT LIABILITIES.
Current liabilities are short-term financial obligations that are paid off within one year or one current operating cycle, whichever is longer. (A normal operating cycle, while it varies from industry to industry, is the time from a company's initial investment in inventory to the time of collection of cash from sales of that inventory or of products created from that inventory.) Typical current liabilities include such accrued expenses as wages, taxes, and interest payments not yet paid; accounts payable; short-term notes; cash dividends; and revenues collected in advance of actual delivery of goods or services.
Economists, creditors, investors, and other members of the financial community all regard a business entity's current liabilities as an important indicator of its overall fiscal health. One financial indicator associated with liabilities that is often studied is known as working capital. Working capital refers to the dollar difference between a business's total current liabilities and its total current assets. Another financial barometer that examines a business's current liabilities is known as the current ratio. Creditors and others compute the current ratio by dividing total current assets by total current liabilities, which provides the company's ratio of assets to liabilities. For example, a company with $1.5 million in current assets and $500,000 in current liabilities would have a three-toone ratio of assets to liabilities.
LONG-TERM LIABILITIES.
Liabilities that are not paid off within a year, or within a business's operating cycle, are known as long-term or noncurrent liabilities. Such liabilities often involve large sums of money necessary to undertake opening of a business, major expansion of a business, replace assets, or make a purchase of significant assets. Such debt typically requires a longer period of time to pay off. Examples of long-term liabilities include notes, mortgages, lease obligations, deferred income taxes payable, and pensions and other post-retirement benefits.
When debt that has been classified as long-term is paid off within the next year, the amount of that paid-off liability should be reported by the company as a current liability in order to reflect the expected drain on current assets. An exception to this rule, however, comes into effect if a company decides to pay off the liability through the transfer of noncurrent assets that have been previously accumulated for that very purpose.
CONTINGENT LIABILITIES.
A third kind of liability accrued by companies is known as a contingent liability. The term refers to instances in which a company reports that there is a possible liability for an event, transaction, or incident that has already taken place; the company, however, does not yet know whether a financial drain on its resources will result. It also is often uncertain of the size of the financial obligation or the exact time that the obligation might have to be paid.
Contingent liabilities often come into play when a lawsuit or other legal measure has been taken against a company. An as yet unresolved lawsuit concerning a business's products or service, for example, would qualify as a contingent liability. Environmental cleanup and/or protection responsibility sometimes falls under this classification as well, if the monetary impact of new regulations or penalties on a company is uncertain.
Companies are legally bound to report contingent liabilities. They are typically recorded in notes that are attached to a company's financial statement rather than as an actual part of the financial statement. If a loss due to a contingent liability is seen as probable, however, it should be included as part of the company's financial statement.
Depreciation
Definition 1
A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.Definition 2A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
Definition 2
A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
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A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.Definition 2A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
Definition 2
A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
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Depreciation Cost
Depreciation cost means a reduction in value. The diagram shows it is a normal farm cost, like the cost of labor and farm imputs (Fig. 1). Why is it included as a farm expense, even though it is not paid every year? This is because the value of farm machinery is partly used up every year until the end of its life.
Let us take a simple example. A farmer operates his farm with 5,000 US dollars of his own capital at the beginning of the year 2000. He uses this amount to purchase fertilizer, pesticides and the oil for his farm tractor. These cost 2,000 US dollars, 2,500 US dollars and 500 US dollars, respectively. He owns his farm tractor, which he bought one year previously, in1999.
In this case, how much are the farm expenses during the year 2000? It is very easy for the farmer to think of them as only 5,000 US dollars, because only the fertilizer, pesticides and oil were consumed completely, while on the other hand he still has his farm tractor. But the real farm expenses are more than 5,000 US dollars, because the depreciation cost of his farm machinery should be added to the cost. Even though he still has his tractor at the end of the year 2000, it has undergone some wear, and its working life has been reduced by perhaps10%. Thus, the farmer should add the estimated depreciation cost to his farm expenses. If the depreciation cost of the farm tractor is 2,250 US dollars per year, the operating expenses of this farm become 7,250 US dollars.
Importance of Annual Assessment of the Cost
If you don't consider the depreciation cost to be part of the farm expenses, you will overestimate your farm income. This will cause two kinds of problems.
First, you will be faced with a big financial problem when the life of your farm tractor and other equipment comes to an end, because it will be hard for you to find a large sum of money to buy new ones. And if this happens when you are already having difficulties, the situation may become really severe.
Second, you will be tempted to spend more than your actual income. This will have a bad effect not only on your home economy but also on your farm economy, because in family farming, the two are mixed together.
How to Calculate Depreciation Cost
Let us say that a farmer buys his farm tractor for 30,000 US dollars in1999, that the life span of that tractor is 12 years, and its remaining resale value after 12 years is 10% of the purchase price. This is shown in Table 1. The formula for calculating the depreciation cost is as follows.
Depreciation cost = (purchase price - remaining value) / life span
Note: This is not the only way to calculate the cost, but it is the simplest one.
Thus, the depreciation cost of the farm tractor can be calculated as follows:
Depreciation cost = (30,000-30,000 x 0.1)/12
= US$ 2,250
This amount, US$ 2,250 is used every year, even though it may not actually be paid every year. Therefore, the farmer should include it when he calculates his farm expenses.
Note: The depreciation cost must be applied, not only to farm machinery, but also to farm buildings and farm facilities.
Depreciation Cost Is an Important Expense Item
Farm income is the main aim of family farming. It is necessary for every farmer to understand its meaning, and be able to calculate the process of achieving a good farm income. In the simplest terms, farm income equals gross farm receipts minus farm expenses.
The depreciation cost of farm machinery, farm buildings and farm facilities is an expense, so it should be included when farmers are adding up their farm expenses. However, it is very easy for them to forget the existence of the depreciation cost in calculating their farm expenses, because it does not seem as if the the depreciation cost has to be paid every year.
In this leaflet, we first try to understand the depreciation cost, by analyzing the concept of farm income. Second, we will see what the depreciation cost is, and finally, we will see how to calculate how much it comes to.
How are fully depreciated assets reported on the balance sheet?
Fully depreciated assets that continue to be used are reported at cost in the Property, Plant and Equipment section of the balance sheet. The accumulated depreciation for these assets is also reported in this section. As a result, the combination of these assets’ costs minus their accumulated depreciation will likely be a net amount of zero. This net amount is the carrying amount, carrying value or book value.
The cost and accumulated depreciation will continue to be reported until the company disposes of the assets. The disposal might be the sale or the retirement of the assets.
Fully depreciated assets and their resulting book value of zero reinforces accountants’ position that depreciation is a process to allocate assets’ costs to expense; it is not a process for valuing assets.
The cost and accumulated depreciation will continue to be reported until the company disposes of the assets. The disposal might be the sale or the retirement of the assets.
Fully depreciated assets and their resulting book value of zero reinforces accountants’ position that depreciation is a process to allocate assets’ costs to expense; it is not a process for valuing assets.
What is the accounting treatment for an asset that is fully depreciated, but continues to be used in a business?
An asset that is fully depreciated and continues to be used in the business will be reported on the balance sheet at its cost along with its accumulated depreciation. There will be no depreciation expense recorded after the asset is fully depreciated. No entry is required until the asset is disposed of through retirement, sale, salvage, etc.
To illustrate this, let’s assume that a machine with a cost of $100,000 was expected to have a useful life of five years and no salvage value. The company depreciated the asset at the rate of $20,000 per year for five years. If the machine is used for three more years, the depreciation expense will be $-0- in each of those three years. During those three years, the balance sheet will report its cost of $100,000 and its accumulated depreciation of $100,000 for a book value of $-0
To illustrate this, let’s assume that a machine with a cost of $100,000 was expected to have a useful life of five years and no salvage value. The company depreciated the asset at the rate of $20,000 per year for five years. If the machine is used for three more years, the depreciation expense will be $-0- in each of those three years. During those three years, the balance sheet will report its cost of $100,000 and its accumulated depreciation of $100,000 for a book value of $-0
Basic Accounting Principles
Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The table below lists the ten main accounting principles and guidelines together with a highly condensed explanation of each.
Basic Accounting Principle
What It Means in Relationship to a Financial Statement?
1. Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
2. Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2008 transaction.
3. Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2008, or the 5 weeks ended May 1, 2008. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2008, the amount is known; but for the income statement for the three months ended March 31, 2008, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ending December 31, 2008 the month ending December 31, 2008 the three months ending December 31, 2008 or the year ended December 31, 2008.
4. Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser.
5. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements.
6. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
7. Matching Principle
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2008 revenues as a bonus on January 15, 2009, the company should report the bonus as an expense in 2008 and the amount unpaid at December 31, 2008 as a liability. (The expense is occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.
(To learn more about adjusting entries go to Explanation of Adjusting Entries and Drills for Adjusting Entries.)
8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt.
9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.
Basic Accounting Principle
What It Means in Relationship to a Financial Statement?
1. Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
2. Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2008 transaction.
3. Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2008, or the 5 weeks ended May 1, 2008. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2008, the amount is known; but for the income statement for the three months ended March 31, 2008, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ending December 31, 2008 the month ending December 31, 2008 the three months ending December 31, 2008 or the year ended December 31, 2008.
4. Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser.
5. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements.
6. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
7. Matching Principle
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2008 revenues as a bonus on January 15, 2009, the company should report the bonus as an expense in 2008 and the amount unpaid at December 31, 2008 as a liability. (The expense is occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.
(To learn more about adjusting entries go to Explanation of Adjusting Entries and Drills for Adjusting Entries.)
8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt.
9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.
Accounting Principles
There are general rules and concepts that govern the field of accounting. These general rules—referred to as basic accounting principles and guidelines—form the groundwork on which more detailed, complicated, and legalistic accounting rules are based. For example, the Financial Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.
The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices.
If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company's stock is publicly traded, federal law requires the company's financial statements be audited by independent public accountants. Both the company's management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.
The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices.
If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company's stock is publicly traded, federal law requires the company's financial statements be audited by independent public accountants. Both the company's management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.
Accounting Method
Accounting methods refer to the basic rules and guidelines under which businesses keep their financial records and prepare their financial reports. There are two main accounting methods used for record-keeping: the cash basis and the accrual basis. Small business owners must decide which method to use depending on the legal form of the business, its sales volume, whether it extends credit to customers, and the tax requirements set forth by the Internal Revenue Service (IRS). Some form of record-keeping is required by law and for tax purposes, but the resulting information can also be useful to managers in assessing the company's financial situation and making decisions. It is possible to change accounting methods later, but the process can be complicated. Therefore it is important for small business owners to decide which method to use up front, based on what will be most suitable for their particular business.
Cash Vs. Accrual Basis
Accounting records prepared using the cash basis recognize income and expenses according to real-time cash flow. Income is recorded upon receipt of funds, rather than based upon when it is actually earned, and expenses are recorded as they are paid, rather than as they are actually incurred. Under this accounting method, therefore, it is possible to defer taxable income by delaying billing so that payment is not received in the current year. Likewise, it is possible to accelerate expenses by paying them as soon as the bills are received, in advance of the due date. The cash method offers several advantages: it is simpler than the accrual method; it provides a more accurate picture of cash flow; and income is not subject to taxation until the money is actually received.
Since the recognition of revenues and expenses under the cash method depends upon the timing of various cash receipts and disbursements, however, it can sometimes provide a misleading picture of a company's financial situation. For example, say that a company pays its annual rent of $12,000 in January, rather than paying $1,000 per month for the year. The cash basis would recognize a rent expense for January of $12,000, since that is when the money was paid, and a rent expense of zero for the remainder of the year. Similarly, if the company sold $5,000 worth of merchandise in January, but only collected $1,000 from customers, then only $1,000 would appear as revenue that month, and the remainder of the revenue would be held over until payment was received.
In contrast, the accrual basis makes a greater effort to recognize income and expenses in the period to which they apply, regardless of whether or not money has changed hands. Under this system, revenue is recorded when it is earned, rather than when payment is received, and expenses recorded when they are incurred, rather than when payment is made. For example, say that a contractor performs all of the work required by a contract during the month of May, and presents his client with an invoice on June 1. The contractor would still recognize the income from the contract in May, because that is when it was earned, even though the payment will not be received for some time. The main advantage of the accrual method is that it provides a more accurate picture of how a business is performing over the long-term than the cash method. The main disadvantages are that it is more complex than the cash basis, and that income taxes may be owed on revenue before payment is actually received.
Under generally accepted accounting principles (GAAP), the accrual basis of accounting is required for all businesses that handle inventory, from small retailers to large manufacturers. It is also required for corporations and partnerships that have gross sales over $5 million per year, though there are exceptions for farming businesses and qualified personal service corporations—such as doctors, lawyers, accountants, and consultants. A business that chooses to use the accrual basis must use it consistently for all financial reporting and for credit purposes. For anyone who runs two or more businesses, however, it is permissible to use different accounting methods for each.
Changing Accounting Methods
In some cases, businesses find it desirable to change from one accounting method to another. Changing accounting methods requires formal approval of the IRS, but new guidelines adopted in 1997 make the procedure much easier for businesses. A company wanting to make a change must file Form 3115 in duplicate and pay a fee. A copy should be attached to the taxpayer's income tax return and the other copy must be sent to the IRS Commissioners.
Any company that is not currently under examination by the IRS is permitted to file for approval to make a change. Applications can be made at any time during the tax year, but the IRS recommends filing as early as possible. Taxpayers are granted automatic six-month extensions provided they file income taxes on time for the year in which the change is requested. The amended tax returns using the new accounting method must also be filed within the six-month extension period. In considering whether to approve a request for a change in accounting methods, the IRS looks at whether the new method will accurately reflect income and whether it will create or shift profits and losses between businesses.
Changes in accounting methods generally result in adjustments to taxable income, either positive or negative. For example, say a business wants to change from the cash basis to the accrual basis. It has accounts receivable (income earned but not yet received, so not recognized under the cash basis) of $15,000, and accounts payable (expenses incurred but not paid, so not recognized under the cash basis) of $20,000. Thus the change in accounting method would require a negative adjustment to income of $5,000. It is important to note that changing accounting methods does not permanently change the business's long-term taxable income, but only changes the way that income is recognized over time.
If the total amount of the change is less than $25,000, the business can elect to make the entire adjustment during the year of change. Otherwise, the IRS permits the adjustment to be spread out over four tax years. Obviously, most businesses would find it preferable for tax purposes to make a negative adjustment in the current year and spread a positive adjustment over subsequent years. If the accounting change is required by the IRS because the method originally chosen did not clearly reflect income, however, the business must make the resulting adjustment during the current tax year. This provides businesses with an incentive to change accounting methods on their own if they realize that there is a problem.
Cash Vs. Accrual Basis
Accounting records prepared using the cash basis recognize income and expenses according to real-time cash flow. Income is recorded upon receipt of funds, rather than based upon when it is actually earned, and expenses are recorded as they are paid, rather than as they are actually incurred. Under this accounting method, therefore, it is possible to defer taxable income by delaying billing so that payment is not received in the current year. Likewise, it is possible to accelerate expenses by paying them as soon as the bills are received, in advance of the due date. The cash method offers several advantages: it is simpler than the accrual method; it provides a more accurate picture of cash flow; and income is not subject to taxation until the money is actually received.
Since the recognition of revenues and expenses under the cash method depends upon the timing of various cash receipts and disbursements, however, it can sometimes provide a misleading picture of a company's financial situation. For example, say that a company pays its annual rent of $12,000 in January, rather than paying $1,000 per month for the year. The cash basis would recognize a rent expense for January of $12,000, since that is when the money was paid, and a rent expense of zero for the remainder of the year. Similarly, if the company sold $5,000 worth of merchandise in January, but only collected $1,000 from customers, then only $1,000 would appear as revenue that month, and the remainder of the revenue would be held over until payment was received.
In contrast, the accrual basis makes a greater effort to recognize income and expenses in the period to which they apply, regardless of whether or not money has changed hands. Under this system, revenue is recorded when it is earned, rather than when payment is received, and expenses recorded when they are incurred, rather than when payment is made. For example, say that a contractor performs all of the work required by a contract during the month of May, and presents his client with an invoice on June 1. The contractor would still recognize the income from the contract in May, because that is when it was earned, even though the payment will not be received for some time. The main advantage of the accrual method is that it provides a more accurate picture of how a business is performing over the long-term than the cash method. The main disadvantages are that it is more complex than the cash basis, and that income taxes may be owed on revenue before payment is actually received.
Under generally accepted accounting principles (GAAP), the accrual basis of accounting is required for all businesses that handle inventory, from small retailers to large manufacturers. It is also required for corporations and partnerships that have gross sales over $5 million per year, though there are exceptions for farming businesses and qualified personal service corporations—such as doctors, lawyers, accountants, and consultants. A business that chooses to use the accrual basis must use it consistently for all financial reporting and for credit purposes. For anyone who runs two or more businesses, however, it is permissible to use different accounting methods for each.
Changing Accounting Methods
In some cases, businesses find it desirable to change from one accounting method to another. Changing accounting methods requires formal approval of the IRS, but new guidelines adopted in 1997 make the procedure much easier for businesses. A company wanting to make a change must file Form 3115 in duplicate and pay a fee. A copy should be attached to the taxpayer's income tax return and the other copy must be sent to the IRS Commissioners.
Any company that is not currently under examination by the IRS is permitted to file for approval to make a change. Applications can be made at any time during the tax year, but the IRS recommends filing as early as possible. Taxpayers are granted automatic six-month extensions provided they file income taxes on time for the year in which the change is requested. The amended tax returns using the new accounting method must also be filed within the six-month extension period. In considering whether to approve a request for a change in accounting methods, the IRS looks at whether the new method will accurately reflect income and whether it will create or shift profits and losses between businesses.
Changes in accounting methods generally result in adjustments to taxable income, either positive or negative. For example, say a business wants to change from the cash basis to the accrual basis. It has accounts receivable (income earned but not yet received, so not recognized under the cash basis) of $15,000, and accounts payable (expenses incurred but not paid, so not recognized under the cash basis) of $20,000. Thus the change in accounting method would require a negative adjustment to income of $5,000. It is important to note that changing accounting methods does not permanently change the business's long-term taxable income, but only changes the way that income is recognized over time.
If the total amount of the change is less than $25,000, the business can elect to make the entire adjustment during the year of change. Otherwise, the IRS permits the adjustment to be spread out over four tax years. Obviously, most businesses would find it preferable for tax purposes to make a negative adjustment in the current year and spread a positive adjustment over subsequent years. If the accounting change is required by the IRS because the method originally chosen did not clearly reflect income, however, the business must make the resulting adjustment during the current tax year. This provides businesses with an incentive to change accounting methods on their own if they realize that there is a problem.
What Is Accounting?
Accounting is a body of principles and conventions as well as an established general process for capturing financial information related to an entity's resources and their use in meeting the entity's goals. Accounting is a service function that provides information of value to all operating units and to other service functions, such as the headquarters offices of a large corporation.
Origin of Accounting Modern accounting is traced to the work of an Italian monk, Luca Pacioli, whose publication in A.D. 1494 described the double-entry system, which continues to be the fundamental structure for contemporary accounting systems in all types of entities. When double-entry accounting is used, the balance sheet identifies both the resources controlled by the entity and those parties who have claims to those assets.
Early histories of business identify the bookkeeper as a valuable staff member. As businesses became more complex, the need for more astute review and interpretation of financial information was met with the development of a new profession—public accounting. In the United States, public accounting began in the latter part of the nineteenth century. The first organization was established in 1887; the first professional examination was administered in December 1896.
In the early days of the twentieth century, numerous states established licensing requirements and began to administer examinations. During the first century of public accounting in the United States, the American Institute of Certified Public Accountants (and its predecessor organizations) provided strong leadership to meet the changing needs of business, not-for-profit, and governmental entities.
Generally Accepted Accounting Principles (GAAP) No single source provides principles for handling all transactions and events. Over time, conventional rules have developed that continue to be relevant. Additionally, groups have been authorized to establish accounting standards. The Financial Accounting Standards Board (FASB) assumed responsibility for accounting standards and principles in 1973. It is authorized to amend existing rules and establish new ones. In 1992, the Auditing Standards Board established the GAAP hierarchy. At the highest level of the hierarchy are FASB statements and interpretations; APB opinions were issued from 1959 to 1973 by the Accounting Principles Board (APB), and Accounting Research Bulletins, issued until 1959 by the Committee on Accounting Procedure (CAP); both the APB and CAP were committees of the American Institute of Certified Public Accountants (AICPA).
What type of unit is served by accounting? Probably no concept or idea is more basic to accounting than the accounting unit or entity, a term used to identify the organization for which the accounting service is to be provided and whose accounting or other information is to be analyzed, accumulated, and reported. The entity can be any area, activity, responsibility, or function for which information would be useful. Thus, an entity is established to provide the needed focus of attention. The information about one entity can be consolidated with that of a part or all of another, and this combination process can be continued until the combined entity reaches the unit that is useful for the desired purpose.
Accounting activities may occur within or outside the organization. Although accounting is usually identified with privately owned, profit-seeking entities, its services also are provided to not-for-profit organizations such as universities or hospitals, to governmental organizations, and to other types of units. The organizations may be small, owner-operated enterprises offering a single product or service, or huge multi-enterprise, international conglomerates with thousands of different products and services. The not-for-profit, governmental, or other units may be local, national, or international; they may be small or very large; they may even be entire nations, as in national income accounting. Since not-for-profit and governmental accounting are covered elsewhere in this encyclopedia, the balance of this article will focus on accounting for privately owned, profit-seeking entities.
What is the work of accountants? Accountants help entities be successful, ethical, responsible participants in society. Their major activities include observation, measurement, and communication. These activities are analytical in nature and draw on several other disciplines (e.g., economics, mathematics, statistics, behavioral science, law, history, and language/communication).
Accountants identify, analyze, record, and accumulate facts, estimates, forecasts, and other data about the unit's activities; then they translate these data into information that can be useful for a specific purpose.
The data accumulation and recording phase traditionally has been largely clerical; typically and appropriately, this has been called bookkeeping, which is still a common and largely manual activity, especially in smaller firms that have not adopted state-of-the-art technology. But with advances in information technology and user-friendly software, the clerical aspect has become largely electronically performed, with internal checks and controls to assure that the input and output are factual and valid.
Accountants design and maintain accounting systems, an entity's central information system, to help control and provide a record of the entity's activities, resources, and obligations. Such systems also facilitate reporting on all or part of the entity's accomplishments for a period of time and on its status at a given point in time.
An organization's accounting system provides information that (1) helps managers make decisions about assembling resources, controlling, and organizing financing and operating activities; and (2) aids other users (employees, investors, creditors, and others—usually called stakeholders) in making investment, credit, and other decisions.
The accounting system must also provide internal controls to ensure that (1) laws and enterprise policies are properly implemented; (2) accounting records are accurate; (3) enterprise assets are used effectively (e.g., that idle cash balances are being invested to earn returns); and (4) steps be taken to reduce chances of losing assets or incurring liabilities from fraudulent or similar activities, such as the carelessness or dishonesty of employees, customers, or suppliers. Many of these controls are simple (e.g., the prenumbering of documents and accounting for all numbers); others require division of duties among employees to separate record keeping and custodial tasks in order to reduce opportunities for falsification of records and thefts or misappropriation of assets.
An enterprise's system of internal controls usually includes an internal auditing function and personnel to ensure that prescribed data handling and asset/liability protection procedures are being followed. The internal auditor uses a variety of approaches, including observation of current activities, examination of past transactions, and simulation—often using sample or fictitious transactions—to test the accuracy and reliability of the system.
Accountants may also be responsible for preparing several types of documents. Many of these (e.g., employees' salary and wage records) also serve as inputs for the accounting system, but many are needed to satisfy other reporting requirements (e.g., employee salary records may be needed to support employee claims for pensions). Accountants also provide data for completing income tax returns.
What is the accountant's role in decision making? Accountants have a major role in providing information for making economic and financial decisions. Rational decisions are usually based on analyses and comparisons of estimates, which in turn, are based on accounting and other data that project future results from alternative courses of action.
External or financial accounting, reporting, and auditing are directly involved in providing information for the decisions of investors and creditors that help the capital markets to efficiently and effectively allocate resources to enterprises; internal, managerial, or management accounting is responsible for providing information and input to help managers make decisions on the efficient and effective use of enterprise resources.
The accounting information used in making decisions within an enterprise is not subject to governmental or other external regulation, so any rules and constraints are largely self-imposed. As a result, in developing the data and information that are relevant for decisions within the enterprise, managerial accountants are constrained largely by cost-benefit considerations and their own ingenuity and ability to predict future conditions and events.
But accounting to external users (financial accounting, reporting, and auditing) has many regulatory constraints—especially if the enterprise is a "public" corporation whose securities are registered (under the United States Securities Acts of 1933 and 1934) with the Securities and Exchange Commission (SEC) and traded publicly over-the-counter or on a stock exchange. Public companies are subject to regulations and reporting requirements imposed and enforced by the SEC; to rules and standards established for its financial reports by the FASB and enforced by the SEC; to regulations of the organization where its securities are traded; and to the regulations of the AICPA, which establishes requirements and standards for its members (who may be either internal or external accountants or auditors).
If the entity is a state or local governmental unit, it is subject to the reporting standards and requirements of the Government Accounting Standards Board. If the entity is private and not a profit-seeking unit, it is subject to various reporting and other regulations, including those of the Internal Revenue Service, which approves its tax status and with which it must file reports.
Largely as a result of the governmental regulation of private profit-seeking businesses that began in 1933, an increasingly clear distinction has been made between managerial or internal accounting and financial accounting that is largely for external users. One important exception to this trend, however, was the change adopted in the 1970s in the objectives of financial reporting such that both managerial and financial accounting now have the same objective: to provide information that is useful for making economic decisions.
But it must be recognized that although the financial accounting information reported to stakeholders comes from the organization's accounting system, its usefulness for decision making is limited. This is because it is largely historical—it reflects events and activities that occurred in the past, not what is expected in the future. Even estimated data such as budgets and standard costs must be examined regularly to determine whether these past estimates continue to be indicative of current conditions and expectations and thus are useful for making decisions. Thus historical accounting information must be examined carefully, modified, and supplemented to make certain that what is used is relevant to expectations about the future.
But it also must be recognized that accounting can and does provide information that is current and useful in making estimates about future events. For example, accounting provides current-value information about selected items, such as readily marketable investments in debt and equity securities and inventories, and it provides reports on what the organization plans to accomplish and its expectations about the future in budgets and earnings forecasts.
Who uses accounting information for decision making? The information developed by the accountant's information system can be useful to:
Managers in planning, controlling, and evaluating their organization's activities
Owners, directors, and others in evaluating the performance of the organization and determining operating, compensation, and other policies
Union, governmental, regulatory, taxing, environmental, and other entities in evaluating whether the organization is conforming with applicable contracts, rules, laws, and public policies and/or whether changes are needed;
Existing and potential owners, lenders, employees, customers, and suppliers in evaluating their current and future commitments to the organization
Accounting researchers, security analysts, security brokers and dealers, mutual-fund managers, and others in their analyses and evaluations of enterprises, capital markets, and/or investors
The services that accounting and the accountant can provide have been enhanced in many ways since the 1970s by advances in computers and other information technology. The impact of these changes is revolutionizing accounting and the accounting profession. But the changes have yet to reach their ultimate potential. For example, accounting in the 1990s began to provide current-value information and estimates about the future that an investor or other user would find useful for decision making. The availability of computer software and the Internet greatly enhanced the potential for data and information services. Such changes create opportunities for accounting and accountants and also will require substantial modifications in the traditional financial accounting and reporting model.
What is the profession of accounting? At the core of the profession of accounting is the certified public accountant (CPA) who has passed the national CPA examination, been licensed in at least one state or territory, and engages in the practice of public accounting/auditing in a public accounting or CPA firm. The CPA firm provides some combination of two or more of four types of services: accounting, auditing, income tax planning and reporting, and management advising/consulting. Analysis of trends indicates that the demand for auditing services has peaked and that most of the growth experienced by public accounting firms is in the consulting area.
Accounting career paths, specializations, or subprofessions for CPAs who join profit-seeking enterprises include being controllers, chief financial officers, or internal auditors. Other career paths include being controllers or chief financial officers in not-for-profit or government organizations and teaching in colleges and universities. Students should note that non-CPAs also could enter these subprofessions and that certificates, but not licenses, could be earned by passing examinations in several areas, including internal auditing, management accounting, and bank auditing.
How do environmental changes impact the accounting profession? Numerous changes in the environment make the practice of accounting and auditing much different in the new century than it was in the 1970s. For example, professional accounting firms now actively compete for clients by advertising extensively in various media, a practice that at one time was forbidden by their code of professional conduct. Mergers of clients have led CPA firms into mergers as well, such that the Big Eight is now the Big Five and the second-tier group has been reduced from twelve firms to about five. Another result of competition and other changes has been that some of the largest employers of CPAs now include income tax and accounting services firms such as H&R Block and an American Express subsidiary.
Competition among CPAs also has led the SEC to expand its regulatory and enforcement activities to ensure that financial reports are relevant and reliable. From its inception, the SEC has had legal authority to prescribe the accounting principles and standards used in the financial reports of enterprises whose securities are publicly traded, but it has delegated this responsibility to the accounting profession. Since 1973, that organization has been the FASB, with which the SEC works closely. But since the FASB is limited to performing what is essentially a legislative function, the SEC has substantially increased its enforcement activities to ensure that the FASB's standards are appropriately applied in financial reports and that accountants/auditors act in the public interest in performing their independent audits—for which the Securities Acts have given the CPA profession a monopoly.
How does a student prepare for the accounting profession? Persons considering entering the accounting profession should begin by doing some self-analysis to determine whether they enjoy mathematical, problem-or puzzle-solving, or other analytical activities; by taking some aptitude tests; or by talking with accounting teachers or practitioners about their work.
Anyone interested in becoming an accounting professional should expect to enter a rigorous five-year education program and to earn a master's degree in order to qualify to enter the profession and to sit for the CPA examination. To build a base for rising to the top of the profession, students should select courses that help them learn how to think and to define and solve problems. The courses should help them to develop analytical (logical, mathematical, statistical), communication (oral, reading, writing), computer, and interpersonal skills. The early part of the program should emphasize arts and sciences courses in these skill-development areas.
The person should begin to develop word-processing, data-processing, and Internet skills long before entering college and should expect to maintain competence in them throughout his or her professional career. These skills greatly enhance and facilitate all phases and aspects of what accounting and accountants attempt to do. What can be done is limited only by technology and by the sophistication of the system, its operators, and users.
(See also: Accounting cycle; Careers in accounting; Financial Accounting Standards Board; Certified Management Accountant; Generally Accepted Accounting Principles; Government accounting; Institute for Internal Auditors; Institute of Management Accountants; International Accounting Standards; International Federation of Accountants; National Association of Boards of Accountancy; Public Oversight Board; Uniform Certified Public Accountant examination; United States General Accounting Office; Securities Acts: Requirements for accounting)
Bibliography
Hansen, Don R., and Mowen, Maryanne M. (2000). Management Accounting, 5th ed. Cincinnati, OH: Southwestern College Publishing.
Kimmel, Paul D., Weygandt, Jerry J., and Kieso, Donald E. (2000). Financial Accounting, 2d ed. New York: Wiley.
[Article by: HARVEY S. HENDRICKSON]
Britannica Concise Encyclopedia: accounting Top
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Systematic development and analysis of information about the economic affairs of an organization. The actual recording and summarizing of financial transactions is known as bookkeeping. When the data thus produced are abstracted in reports (usually quarterly or annually) for the use of persons outside the organization, the process is called financial accounting. Three reports are typically generated in financial accounting: the balance sheet, which summarizes the firm's assets and liabilities; the income statement, which reports the firm's gross proceeds, expenses, and profit or loss; and the statement of cash flow, which analyzes the flow of cash into and out of the firm. The creation of reports (usually monthly) for internal planning and decision-making is called managerial accounting. Its aim is to provide managers with reliable information on the costs of operations and on standards with which those costs can be compared, to assist them in budgeting.
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Columbia Encyclopedia: accounting Top
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accounting, classification, analysis, and interpretation of the financial, or bookkeeping, records of an enterprise. The professional who supplies such services is known as an accountant. Auditing is an important branch of accounting.
The Role of the Accountant
The accountant evaluates records drawn up by the bookkeeper and shows the results of this investigation as losses and gains, leakages, economies, or changes in value, so as to reveal the progress or failures of the business and also its future limitations and possibilities. Accountants must also be able to draw up a set of financial records and prescribe the system of accounts that will most easily give the desired information; they must be capable of arriving at a comprehensive view of the economic and the legal aspects of a business, envisaging the effect of every sort of transaction on the profit-and-loss statement; and they must recognize and classify all other factors that enter into the determination of the true condition of the business (e.g., statistics or memoranda relating to production; properties and financial records representing investments, expenditures, receipts, fiscal changes, and present standing). Cost accounting shows the actual cost, over a certain period of time, of particular services rendered or of articles produced; by this system unprofitable ventures, services, departments, and methods may be discovered.
Development of Modern Accounting
Although there were stewards, auditors, and bookkeepers in ancient times, the professional accountant is a 19th-century development. Unlike those precursors, modern accountants usually do not service a single client or employer; instead they offer their expertise, for a fee, to several individuals and businesses. The profession was first recognized in Great Britain in 1854, when the Society of Accountants in Edinburgh was given a royal charter. Similar societies were later established in Glasgow, Aberdeen, and London. In the United States the first such professional society was the American Association of Public Accountants, chartered by the state of New York in 1887.
All the states and Puerto Rico and the District of Columbia now have laws under which an accountant who fulfills certain educational and experience requirements and passes an examination may be granted the title Certified Public Accountant (CPA). CPAs have organized into state and national societies. The bodies representing the accounting profession in the United States are the American Institute of Certified Public Accountants, which is the contemporary successor organization of the American Association of Public Accountants, and the American Accounting Association, organized in 1916. In the United States, the Financial Accounting Standards Board, an independent nongovernmental organizaiton sponsored by financial-reporting industry groups, is the main institution responsible for establishing accounting standards and rules. The International Accounting Standards Board develops standards and rules that are accepted by many nations.
With the growth of corporate activity in the 20th cent., the field of accounting has increased greatly in importance and has seen many improvements in theory and techniques. The chief causes of changes in accounting methods have been more complex tax laws and regulations and the need to keep uniform accounts for possible governmental or public scrutiny. Contemporary accounting firms also have taken on managerial functions and are no longer concerned simply with ascertaining and reporting financial condition but also with advising a client how to act on this information; they also consult on information-technology systems and other services. This has greatly increased the potential for conflicts of interest, because the services provided to clients by accounting firms must be evaluated in their audits and because the fees paid by a client for such services may be more important to the accounting firm than that paid for an audit, potentially undermining the independence of the audit. As a result, in 2000 the Securities and Exchange Commission specified the types of services accounting firms could provide without compromising their independence as auditors.
A series of revelations concerning accounting firms' failure to detect or publicly challenge irregularities or fraud when auditing the finances of a number of corporations led Congress to establish (2002) the Public Company Accounting Oversight Board. The board is appointed by the Securities and Exchange Commission and has the power to register and regulate accountants and firms that act as auditors. It sets standards for audits and is responsible for reviewing audits and disciplining accountants and accounting firms.
Bibliography
See N. A. H. Stacey, English Accountancy, 1800–1954 (1954); M. Backer, ed., Modern Accounting Theory (1966); L. Goldberg and V. R. Hill, The Elements of Accounting (3d ed. 1966); J. D. Edwards, History of Public Accounting in the United States (1960); A. J. Briloff, Unaccountable Accounting (1972); M. Chatfield, A History of Accounting Thought (1977).
Law Encyclopedia: Accounting Top
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This entry contains information applicable to United States law only.
A system of recording or settling accounts in financial transactions; the methods of determining income and expenses for tax and other financial purposes. Also, one of the remedies available to enforce a right or redress a wrong asserted in a lawsuit.
There are various accounting methods. The accrual method shows expenses incurred and income earned for a given period of time whether or not such expenses and income have been actually paid or received by that time. The cash method records income and expenses only when monies have actually been received or paid out. The completed contract method reports gains or losses on certain long-term contracts. Gross income and expenses are recognized under this method in the tax year the contract is completed. The installment method of accounting is a way regulated utilities calculate depreciation for income tax purposes.
The cost method of accounting records the value of assets at their actual cost, and the fair value method uses the present market value for the recorded value of assets. Price level accounting is a modern method of valuing assets in a financial statement by showing their current value in comparison to the gross national product.
Where a court orders an accounting, the party against whom judgment is entered must file a complete statement with the court that accounts for his or her administration of the affairs at issue in the case. An accounting is proper to show how an executor has managed the estate of a deceased person or to disclose how a partner has been handling partnership business.
An accounting was one of the ancient remedies available in courts of equity. The regular officers of the Chancery, who represented the king in hearing disputes that could not be taken to courts of law, were able to serve as auditors and work through complex accounts when necessary. The chancery had the power to discover hidden assets in the hands of the defendant. Later, courts of law began to recognize and enforce regular contract claims, as actions in assumpsit, and the courts of equity were justified in compelling an accounting only when the courts at law could not give relief. A plaintiff could ask for an accounting in equity when the complexity of the accounts in the case made it too difficult for a jury or when a trustee or other fiduciary was charged with violating a position of trust.
Today, courts in the United States generally have jurisdiction both at law and in equity. They have the power to order an accounting when necessary to determine the relative rights of the parties. An accounting may be appropriate whenever the defendant has violated an obligation to protect the plaintiff's interests. For example, an accounting may be ordered to settle disputes when a partnership is breaking up, when an heir believes that the executor of an estate has sold off assets for less than their fair market value, or when shareholders claim that directors of a corporation have appropriated for themselves a business opportunity that should have profited the corporation.
An accounting may also be an appropriate remedy against someone who has committed a wrong against the plaintiff and should not be allowed to profit from it. For example, a bank teller who embezzles money and makes "a killing" by investing it in mutual funds may be ordered to account for all the money taken and the earnings made from it. A businessperson who palms off a product as that of a more popular manufacturer might have to account for all the profit made from it. A defendant who plagiarizes another author's book can be ordered to give an account and pay over all the profits to the owner of the copyrighted material. An accounting forces the wrongdoer to trace all transactions that flowed from the legal injury, because the plaintiff is in no position to identify the profits.
See: accrual basis; cash basis; income tax.
Origin of Accounting Modern accounting is traced to the work of an Italian monk, Luca Pacioli, whose publication in A.D. 1494 described the double-entry system, which continues to be the fundamental structure for contemporary accounting systems in all types of entities. When double-entry accounting is used, the balance sheet identifies both the resources controlled by the entity and those parties who have claims to those assets.
Early histories of business identify the bookkeeper as a valuable staff member. As businesses became more complex, the need for more astute review and interpretation of financial information was met with the development of a new profession—public accounting. In the United States, public accounting began in the latter part of the nineteenth century. The first organization was established in 1887; the first professional examination was administered in December 1896.
In the early days of the twentieth century, numerous states established licensing requirements and began to administer examinations. During the first century of public accounting in the United States, the American Institute of Certified Public Accountants (and its predecessor organizations) provided strong leadership to meet the changing needs of business, not-for-profit, and governmental entities.
Generally Accepted Accounting Principles (GAAP) No single source provides principles for handling all transactions and events. Over time, conventional rules have developed that continue to be relevant. Additionally, groups have been authorized to establish accounting standards. The Financial Accounting Standards Board (FASB) assumed responsibility for accounting standards and principles in 1973. It is authorized to amend existing rules and establish new ones. In 1992, the Auditing Standards Board established the GAAP hierarchy. At the highest level of the hierarchy are FASB statements and interpretations; APB opinions were issued from 1959 to 1973 by the Accounting Principles Board (APB), and Accounting Research Bulletins, issued until 1959 by the Committee on Accounting Procedure (CAP); both the APB and CAP were committees of the American Institute of Certified Public Accountants (AICPA).
What type of unit is served by accounting? Probably no concept or idea is more basic to accounting than the accounting unit or entity, a term used to identify the organization for which the accounting service is to be provided and whose accounting or other information is to be analyzed, accumulated, and reported. The entity can be any area, activity, responsibility, or function for which information would be useful. Thus, an entity is established to provide the needed focus of attention. The information about one entity can be consolidated with that of a part or all of another, and this combination process can be continued until the combined entity reaches the unit that is useful for the desired purpose.
Accounting activities may occur within or outside the organization. Although accounting is usually identified with privately owned, profit-seeking entities, its services also are provided to not-for-profit organizations such as universities or hospitals, to governmental organizations, and to other types of units. The organizations may be small, owner-operated enterprises offering a single product or service, or huge multi-enterprise, international conglomerates with thousands of different products and services. The not-for-profit, governmental, or other units may be local, national, or international; they may be small or very large; they may even be entire nations, as in national income accounting. Since not-for-profit and governmental accounting are covered elsewhere in this encyclopedia, the balance of this article will focus on accounting for privately owned, profit-seeking entities.
What is the work of accountants? Accountants help entities be successful, ethical, responsible participants in society. Their major activities include observation, measurement, and communication. These activities are analytical in nature and draw on several other disciplines (e.g., economics, mathematics, statistics, behavioral science, law, history, and language/communication).
Accountants identify, analyze, record, and accumulate facts, estimates, forecasts, and other data about the unit's activities; then they translate these data into information that can be useful for a specific purpose.
The data accumulation and recording phase traditionally has been largely clerical; typically and appropriately, this has been called bookkeeping, which is still a common and largely manual activity, especially in smaller firms that have not adopted state-of-the-art technology. But with advances in information technology and user-friendly software, the clerical aspect has become largely electronically performed, with internal checks and controls to assure that the input and output are factual and valid.
Accountants design and maintain accounting systems, an entity's central information system, to help control and provide a record of the entity's activities, resources, and obligations. Such systems also facilitate reporting on all or part of the entity's accomplishments for a period of time and on its status at a given point in time.
An organization's accounting system provides information that (1) helps managers make decisions about assembling resources, controlling, and organizing financing and operating activities; and (2) aids other users (employees, investors, creditors, and others—usually called stakeholders) in making investment, credit, and other decisions.
The accounting system must also provide internal controls to ensure that (1) laws and enterprise policies are properly implemented; (2) accounting records are accurate; (3) enterprise assets are used effectively (e.g., that idle cash balances are being invested to earn returns); and (4) steps be taken to reduce chances of losing assets or incurring liabilities from fraudulent or similar activities, such as the carelessness or dishonesty of employees, customers, or suppliers. Many of these controls are simple (e.g., the prenumbering of documents and accounting for all numbers); others require division of duties among employees to separate record keeping and custodial tasks in order to reduce opportunities for falsification of records and thefts or misappropriation of assets.
An enterprise's system of internal controls usually includes an internal auditing function and personnel to ensure that prescribed data handling and asset/liability protection procedures are being followed. The internal auditor uses a variety of approaches, including observation of current activities, examination of past transactions, and simulation—often using sample or fictitious transactions—to test the accuracy and reliability of the system.
Accountants may also be responsible for preparing several types of documents. Many of these (e.g., employees' salary and wage records) also serve as inputs for the accounting system, but many are needed to satisfy other reporting requirements (e.g., employee salary records may be needed to support employee claims for pensions). Accountants also provide data for completing income tax returns.
What is the accountant's role in decision making? Accountants have a major role in providing information for making economic and financial decisions. Rational decisions are usually based on analyses and comparisons of estimates, which in turn, are based on accounting and other data that project future results from alternative courses of action.
External or financial accounting, reporting, and auditing are directly involved in providing information for the decisions of investors and creditors that help the capital markets to efficiently and effectively allocate resources to enterprises; internal, managerial, or management accounting is responsible for providing information and input to help managers make decisions on the efficient and effective use of enterprise resources.
The accounting information used in making decisions within an enterprise is not subject to governmental or other external regulation, so any rules and constraints are largely self-imposed. As a result, in developing the data and information that are relevant for decisions within the enterprise, managerial accountants are constrained largely by cost-benefit considerations and their own ingenuity and ability to predict future conditions and events.
But accounting to external users (financial accounting, reporting, and auditing) has many regulatory constraints—especially if the enterprise is a "public" corporation whose securities are registered (under the United States Securities Acts of 1933 and 1934) with the Securities and Exchange Commission (SEC) and traded publicly over-the-counter or on a stock exchange. Public companies are subject to regulations and reporting requirements imposed and enforced by the SEC; to rules and standards established for its financial reports by the FASB and enforced by the SEC; to regulations of the organization where its securities are traded; and to the regulations of the AICPA, which establishes requirements and standards for its members (who may be either internal or external accountants or auditors).
If the entity is a state or local governmental unit, it is subject to the reporting standards and requirements of the Government Accounting Standards Board. If the entity is private and not a profit-seeking unit, it is subject to various reporting and other regulations, including those of the Internal Revenue Service, which approves its tax status and with which it must file reports.
Largely as a result of the governmental regulation of private profit-seeking businesses that began in 1933, an increasingly clear distinction has been made between managerial or internal accounting and financial accounting that is largely for external users. One important exception to this trend, however, was the change adopted in the 1970s in the objectives of financial reporting such that both managerial and financial accounting now have the same objective: to provide information that is useful for making economic decisions.
But it must be recognized that although the financial accounting information reported to stakeholders comes from the organization's accounting system, its usefulness for decision making is limited. This is because it is largely historical—it reflects events and activities that occurred in the past, not what is expected in the future. Even estimated data such as budgets and standard costs must be examined regularly to determine whether these past estimates continue to be indicative of current conditions and expectations and thus are useful for making decisions. Thus historical accounting information must be examined carefully, modified, and supplemented to make certain that what is used is relevant to expectations about the future.
But it also must be recognized that accounting can and does provide information that is current and useful in making estimates about future events. For example, accounting provides current-value information about selected items, such as readily marketable investments in debt and equity securities and inventories, and it provides reports on what the organization plans to accomplish and its expectations about the future in budgets and earnings forecasts.
Who uses accounting information for decision making? The information developed by the accountant's information system can be useful to:
Managers in planning, controlling, and evaluating their organization's activities
Owners, directors, and others in evaluating the performance of the organization and determining operating, compensation, and other policies
Union, governmental, regulatory, taxing, environmental, and other entities in evaluating whether the organization is conforming with applicable contracts, rules, laws, and public policies and/or whether changes are needed;
Existing and potential owners, lenders, employees, customers, and suppliers in evaluating their current and future commitments to the organization
Accounting researchers, security analysts, security brokers and dealers, mutual-fund managers, and others in their analyses and evaluations of enterprises, capital markets, and/or investors
The services that accounting and the accountant can provide have been enhanced in many ways since the 1970s by advances in computers and other information technology. The impact of these changes is revolutionizing accounting and the accounting profession. But the changes have yet to reach their ultimate potential. For example, accounting in the 1990s began to provide current-value information and estimates about the future that an investor or other user would find useful for decision making. The availability of computer software and the Internet greatly enhanced the potential for data and information services. Such changes create opportunities for accounting and accountants and also will require substantial modifications in the traditional financial accounting and reporting model.
What is the profession of accounting? At the core of the profession of accounting is the certified public accountant (CPA) who has passed the national CPA examination, been licensed in at least one state or territory, and engages in the practice of public accounting/auditing in a public accounting or CPA firm. The CPA firm provides some combination of two or more of four types of services: accounting, auditing, income tax planning and reporting, and management advising/consulting. Analysis of trends indicates that the demand for auditing services has peaked and that most of the growth experienced by public accounting firms is in the consulting area.
Accounting career paths, specializations, or subprofessions for CPAs who join profit-seeking enterprises include being controllers, chief financial officers, or internal auditors. Other career paths include being controllers or chief financial officers in not-for-profit or government organizations and teaching in colleges and universities. Students should note that non-CPAs also could enter these subprofessions and that certificates, but not licenses, could be earned by passing examinations in several areas, including internal auditing, management accounting, and bank auditing.
How do environmental changes impact the accounting profession? Numerous changes in the environment make the practice of accounting and auditing much different in the new century than it was in the 1970s. For example, professional accounting firms now actively compete for clients by advertising extensively in various media, a practice that at one time was forbidden by their code of professional conduct. Mergers of clients have led CPA firms into mergers as well, such that the Big Eight is now the Big Five and the second-tier group has been reduced from twelve firms to about five. Another result of competition and other changes has been that some of the largest employers of CPAs now include income tax and accounting services firms such as H&R Block and an American Express subsidiary.
Competition among CPAs also has led the SEC to expand its regulatory and enforcement activities to ensure that financial reports are relevant and reliable. From its inception, the SEC has had legal authority to prescribe the accounting principles and standards used in the financial reports of enterprises whose securities are publicly traded, but it has delegated this responsibility to the accounting profession. Since 1973, that organization has been the FASB, with which the SEC works closely. But since the FASB is limited to performing what is essentially a legislative function, the SEC has substantially increased its enforcement activities to ensure that the FASB's standards are appropriately applied in financial reports and that accountants/auditors act in the public interest in performing their independent audits—for which the Securities Acts have given the CPA profession a monopoly.
How does a student prepare for the accounting profession? Persons considering entering the accounting profession should begin by doing some self-analysis to determine whether they enjoy mathematical, problem-or puzzle-solving, or other analytical activities; by taking some aptitude tests; or by talking with accounting teachers or practitioners about their work.
Anyone interested in becoming an accounting professional should expect to enter a rigorous five-year education program and to earn a master's degree in order to qualify to enter the profession and to sit for the CPA examination. To build a base for rising to the top of the profession, students should select courses that help them learn how to think and to define and solve problems. The courses should help them to develop analytical (logical, mathematical, statistical), communication (oral, reading, writing), computer, and interpersonal skills. The early part of the program should emphasize arts and sciences courses in these skill-development areas.
The person should begin to develop word-processing, data-processing, and Internet skills long before entering college and should expect to maintain competence in them throughout his or her professional career. These skills greatly enhance and facilitate all phases and aspects of what accounting and accountants attempt to do. What can be done is limited only by technology and by the sophistication of the system, its operators, and users.
(See also: Accounting cycle; Careers in accounting; Financial Accounting Standards Board; Certified Management Accountant; Generally Accepted Accounting Principles; Government accounting; Institute for Internal Auditors; Institute of Management Accountants; International Accounting Standards; International Federation of Accountants; National Association of Boards of Accountancy; Public Oversight Board; Uniform Certified Public Accountant examination; United States General Accounting Office; Securities Acts: Requirements for accounting)
Bibliography
Hansen, Don R., and Mowen, Maryanne M. (2000). Management Accounting, 5th ed. Cincinnati, OH: Southwestern College Publishing.
Kimmel, Paul D., Weygandt, Jerry J., and Kieso, Donald E. (2000). Financial Accounting, 2d ed. New York: Wiley.
[Article by: HARVEY S. HENDRICKSON]
Britannica Concise Encyclopedia: accounting Top
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Systematic development and analysis of information about the economic affairs of an organization. The actual recording and summarizing of financial transactions is known as bookkeeping. When the data thus produced are abstracted in reports (usually quarterly or annually) for the use of persons outside the organization, the process is called financial accounting. Three reports are typically generated in financial accounting: the balance sheet, which summarizes the firm's assets and liabilities; the income statement, which reports the firm's gross proceeds, expenses, and profit or loss; and the statement of cash flow, which analyzes the flow of cash into and out of the firm. The creation of reports (usually monthly) for internal planning and decision-making is called managerial accounting. Its aim is to provide managers with reliable information on the costs of operations and on standards with which those costs can be compared, to assist them in budgeting.
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Columbia Encyclopedia: accounting Top
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accounting, classification, analysis, and interpretation of the financial, or bookkeeping, records of an enterprise. The professional who supplies such services is known as an accountant. Auditing is an important branch of accounting.
The Role of the Accountant
The accountant evaluates records drawn up by the bookkeeper and shows the results of this investigation as losses and gains, leakages, economies, or changes in value, so as to reveal the progress or failures of the business and also its future limitations and possibilities. Accountants must also be able to draw up a set of financial records and prescribe the system of accounts that will most easily give the desired information; they must be capable of arriving at a comprehensive view of the economic and the legal aspects of a business, envisaging the effect of every sort of transaction on the profit-and-loss statement; and they must recognize and classify all other factors that enter into the determination of the true condition of the business (e.g., statistics or memoranda relating to production; properties and financial records representing investments, expenditures, receipts, fiscal changes, and present standing). Cost accounting shows the actual cost, over a certain period of time, of particular services rendered or of articles produced; by this system unprofitable ventures, services, departments, and methods may be discovered.
Development of Modern Accounting
Although there were stewards, auditors, and bookkeepers in ancient times, the professional accountant is a 19th-century development. Unlike those precursors, modern accountants usually do not service a single client or employer; instead they offer their expertise, for a fee, to several individuals and businesses. The profession was first recognized in Great Britain in 1854, when the Society of Accountants in Edinburgh was given a royal charter. Similar societies were later established in Glasgow, Aberdeen, and London. In the United States the first such professional society was the American Association of Public Accountants, chartered by the state of New York in 1887.
All the states and Puerto Rico and the District of Columbia now have laws under which an accountant who fulfills certain educational and experience requirements and passes an examination may be granted the title Certified Public Accountant (CPA). CPAs have organized into state and national societies. The bodies representing the accounting profession in the United States are the American Institute of Certified Public Accountants, which is the contemporary successor organization of the American Association of Public Accountants, and the American Accounting Association, organized in 1916. In the United States, the Financial Accounting Standards Board, an independent nongovernmental organizaiton sponsored by financial-reporting industry groups, is the main institution responsible for establishing accounting standards and rules. The International Accounting Standards Board develops standards and rules that are accepted by many nations.
With the growth of corporate activity in the 20th cent., the field of accounting has increased greatly in importance and has seen many improvements in theory and techniques. The chief causes of changes in accounting methods have been more complex tax laws and regulations and the need to keep uniform accounts for possible governmental or public scrutiny. Contemporary accounting firms also have taken on managerial functions and are no longer concerned simply with ascertaining and reporting financial condition but also with advising a client how to act on this information; they also consult on information-technology systems and other services. This has greatly increased the potential for conflicts of interest, because the services provided to clients by accounting firms must be evaluated in their audits and because the fees paid by a client for such services may be more important to the accounting firm than that paid for an audit, potentially undermining the independence of the audit. As a result, in 2000 the Securities and Exchange Commission specified the types of services accounting firms could provide without compromising their independence as auditors.
A series of revelations concerning accounting firms' failure to detect or publicly challenge irregularities or fraud when auditing the finances of a number of corporations led Congress to establish (2002) the Public Company Accounting Oversight Board. The board is appointed by the Securities and Exchange Commission and has the power to register and regulate accountants and firms that act as auditors. It sets standards for audits and is responsible for reviewing audits and disciplining accountants and accounting firms.
Bibliography
See N. A. H. Stacey, English Accountancy, 1800–1954 (1954); M. Backer, ed., Modern Accounting Theory (1966); L. Goldberg and V. R. Hill, The Elements of Accounting (3d ed. 1966); J. D. Edwards, History of Public Accounting in the United States (1960); A. J. Briloff, Unaccountable Accounting (1972); M. Chatfield, A History of Accounting Thought (1977).
Law Encyclopedia: Accounting Top
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This entry contains information applicable to United States law only.
A system of recording or settling accounts in financial transactions; the methods of determining income and expenses for tax and other financial purposes. Also, one of the remedies available to enforce a right or redress a wrong asserted in a lawsuit.
There are various accounting methods. The accrual method shows expenses incurred and income earned for a given period of time whether or not such expenses and income have been actually paid or received by that time. The cash method records income and expenses only when monies have actually been received or paid out. The completed contract method reports gains or losses on certain long-term contracts. Gross income and expenses are recognized under this method in the tax year the contract is completed. The installment method of accounting is a way regulated utilities calculate depreciation for income tax purposes.
The cost method of accounting records the value of assets at their actual cost, and the fair value method uses the present market value for the recorded value of assets. Price level accounting is a modern method of valuing assets in a financial statement by showing their current value in comparison to the gross national product.
Where a court orders an accounting, the party against whom judgment is entered must file a complete statement with the court that accounts for his or her administration of the affairs at issue in the case. An accounting is proper to show how an executor has managed the estate of a deceased person or to disclose how a partner has been handling partnership business.
An accounting was one of the ancient remedies available in courts of equity. The regular officers of the Chancery, who represented the king in hearing disputes that could not be taken to courts of law, were able to serve as auditors and work through complex accounts when necessary. The chancery had the power to discover hidden assets in the hands of the defendant. Later, courts of law began to recognize and enforce regular contract claims, as actions in assumpsit, and the courts of equity were justified in compelling an accounting only when the courts at law could not give relief. A plaintiff could ask for an accounting in equity when the complexity of the accounts in the case made it too difficult for a jury or when a trustee or other fiduciary was charged with violating a position of trust.
Today, courts in the United States generally have jurisdiction both at law and in equity. They have the power to order an accounting when necessary to determine the relative rights of the parties. An accounting may be appropriate whenever the defendant has violated an obligation to protect the plaintiff's interests. For example, an accounting may be ordered to settle disputes when a partnership is breaking up, when an heir believes that the executor of an estate has sold off assets for less than their fair market value, or when shareholders claim that directors of a corporation have appropriated for themselves a business opportunity that should have profited the corporation.
An accounting may also be an appropriate remedy against someone who has committed a wrong against the plaintiff and should not be allowed to profit from it. For example, a bank teller who embezzles money and makes "a killing" by investing it in mutual funds may be ordered to account for all the money taken and the earnings made from it. A businessperson who palms off a product as that of a more popular manufacturer might have to account for all the profit made from it. A defendant who plagiarizes another author's book can be ordered to give an account and pay over all the profits to the owner of the copyrighted material. An accounting forces the wrongdoer to trace all transactions that flowed from the legal injury, because the plaintiff is in no position to identify the profits.
See: accrual basis; cash basis; income tax.
