ARTICLE OF ACCOUNTING

ARTICLE OF ACCOUNTING.

DEFINITION.

What is accounting? Accounting is the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the results in various reports and analyses. Accounting consists of both external reporting issues known as “financial accounting,” and internal reporting issues related to “managerial accounting.” Financial accounting is concerned with external reporting to parties outside the firm. In contrast, managerial accounting is primarily concerned with providing information for internal management.

PRINCIPLES OF ACCOUNTING.

What is principles of accounting? Principles of accounting can also refer to the basic or fundamental accounting principles: cost principles, matching principles, full disclosure principles, materiality principles, going concern principles, economic entity principles, and so on. In this context, principles of accounting refers to the broad underlying concepts which guide accountants when preparing financial statements.

ACCOUNTING CYCLE.

What is accounting cycle? The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on financial statements, to closing the accounts. 

Steps in accounting cycle :

Ø  Transactions

Transactions : Financial transactions start the process. If there are no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.

Ø  Journal Entries

Journal Entries : With the transactions set in place, the next step is to record these entries in the company’s journal in chronological order. In debiting one or more accounts and crediting one or more accounts, the debits and credits must always balance.

Ø  Posting to the General Ledger (GL)

Posting to the GL: The journal entries are then posted to the general ledger where a summary of all transactions to individual accounts can be seen.

Ø  Trial Balance

Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or yearly depending on the company), a total balance is calculated for the accounts.

Ø  Worksheet

Worksheet: When the debits and credits on the trial balance don’t match, the bookkeeper must look for errors and make corrective adjustments that are tracked on a worksheet.

Ø  Adjusting Entries

Adjusting Entries : At the end of the company’s accounting period, adjusting entries must be posted to account for accruals and deferrals.

Ø  Closing

Closing: The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because revenue and expense accounts are income statement accounts, which show performance for a specific period. Balance sheet accounts are not closed because they show the company’s financial position at a certain point in time.

USER OF FINANCIAL STATEMENT.

There are many users of the financial statements produced by an organization. These are the common users of financial statements and the reasons why they need this information :

§  Company management - The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business.

§  Competitors - Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition. The knowledge they gain could alter their competitive strategies.

§  Customers - When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.

§  Employees - A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.

§  Governments - A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.

§  Investment analysts - Outside analysts want to see financial statements in order to decide whether they should recommend the company's securities to their clients.

§  Investors - Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment.

§  Lenders - An entity loaning money to an organization will require financial statements in order to estimate the ability of the borrower to pay back all loaned funds and related interest charges.

§  Rating agencies - A credit rating agency will need to review the financial statements in order to give a credit rating to the company as a whole or to its securities.

§  Suppliers - Suppliers will require financial statements in order to decide whether it is safe to extend credit to a company.

§  Unions - A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents.

ACCOUNTING THEORY.

Theory that we usually use as accountants are American Accounting and Association (AAA) and AICPA (American Institute of Certified Public Accountants).  American Accounting Association (AAA): Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. American Institute of Certified Public Accountants (AICPA): Accounting is the art of recording, classifying and summarizing in a significant manner and terms of money, transaction and events which are, in part at least, of finacial character, and interpreting the result there of. Accountants in Indonesia use International Financial Reporting Standards (IFRS) for a sandard of accounting,and it also used on a global scale. IFRS is a set of accounting standards developed by an independent, non profit organization it also called the International Accounting Standards Board (IASB).