Accounting is the activity which provides quantitative information, primarily financial in nature, to assist an entity in making economic decisions. The process requires an accounting system. All information related to this activity are accounting records. An entity can be an individual whose accounting system is nothing more than a checkbook and whose accounting records are kept in a shoe box.
This text is a brief introduction to the concepts and practices of double-entry accounting. The writer is an experienced full-charge bookkeeper of 20 years dealing with various types of businesses and various accounting systems. Being short and to the point, the text is admittedly dry reading.
The eight-column paper heading each page contains the mode of travel. Each column number will take you to a page. Each heading under a column with take you to that section. If you think you know the basics, jump to the Test for Fun under column 8 to see just how much you know about accounting.
A bookkeeper is primarily responsible for the recording of business transactions and should be capable of developing and maintaining an accounting system from the gathering of documents through the production of accurate reports. A bookkeeper may have gained his or her knowledge through application or training.
An accountant is an individual who holds a degree in accounting and whose knowledge further includes the ability to analyze financial records, budget, audit, prepare tax returns, and offer management advice. An accountant may or may not also be a CPA.
A CPA is an accountant who has met the requirements for the Certified Public Accountant license or certificate. This license requires the accountant to pass a three-day examination on accounting theory, accounting practice, auditing, and business law. The examination is prepared by the American Institute of Certified Public Accountants.
Individuals may seek the advice of financial consultants for their personal finances. Those not in complete understanding of tax laws affecting them should rely on the services of a CPA for personal tax return preparation. Small businesses may contract the services of a respected bookkeeper and a public accounting firm whose principals are CPAs. The bookkeeper will manage daily transactions and records, while the CPA handles yearly auditing and tax preparation services along with advice when needed. A medium-sized business may employ a full-time bookkeeper. Large corporations employ CPAs and would have many bookkeepers and accounting clerks to manage their financial records.
The process of accounting is governed by a set of principles and concepts set forth by interested organizations, associations, and government bodies.1 These principles and concepts form the underlying basis for accepted procedures in accounting. All aspects of accounting must be handled with integrity, honesty, and ethical behavior. Not only are there many legal issues involved in managing finances, but there are many personal issues as well. Businesses and individuals base important decisions on the results of the accounting process. The system used in keeping records has therefore evolved to minimize the possibility for errors.
When a new business is organized, it is set up as either a proprietorship, partnership, or corporation. The structure of organization depends on the needs of the owner(s) and the type of business. Regardless of organization, a business is an entity separate and distinct from its owner(s) and any other business.2 The accounting books will be set up and maintained on the basis that this business will be a continuing concern.3
A proprietorship has a single owner, while a partnership has two or more owners. All that is required to set up a proprietorship or partnership is to begin doing business. As with any business, the transactions of the business are kept separate from the personal transactions of the owners. However, the owner(s) of these types of businesses are personally responsible for the actions and debts of the business. His or her personal assets may be taken to meet business obligations. In the case of a partnership, regardless of the agreed share of business ownership, each partner is fully responsible for the entire debt of the business.
A corporation, unlike a proprietorship or partnership, is a separate legal entity. This type of business is created by securing a charter from the state or federal government under whose laws it will be incorporated. Those with an interest in the corporation purchase shares of stock and are called stockholders or shareholders. As a separate legal entity, the corporation is responsible for its own actions and debts. Although the organization and administration of a corporation requires more effort and expense than a proprietorship or partnership, the lack of liability to owners makes this a popular form of business organization.
Several legal variations on the partnership and corporation exist to meet the needs of business owners. An S Corporation and Limited Liability Corporation are recognized in most states and allow for the beneficial aspects of both a corporation and a proprietorship or partnership.
It is important for the bookkeeper to understand how transactions between the owners or shareholders and business are handled for each type of entity. However, this information, as pertains to a particular business, should be discussed with the CPA for that business.
1. Accounting Concepts and Principles
Concepts and principles govern the process of accounting. They are developed by such organizations as the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, the American Accounting Association, and the Securities and Exchange Commission.
2. Business Entity Concept
Every business is treated as distinct from its owner or owners and any other business. The transactions of each business entity are kept separate from the owner's personal transactions and the transactions of any other business.
3. Continuing- or Going-Concern Concept
Financial records of a business are maintained on the basis that it will continue forever. Since the property owned by the business is never expected to be sold, fluctuating market values are not considered under normal operating conditions. For this reason, the actual market value of a business will not be represented by the standard financial statements.