assignment on accounting principles

Accounting Principles: A Business Perspective

(5 reviews)

Roger H. Hermanson, Georgia State University

James D. Edwards, University of Georgia

Michael W. Maher, University of California at Davis

Publisher: BCcampus

Language: English

Formats Available

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Reviewed by Kim Johnson, Professor, Hutchinson Community College on 1/25/22

Comprehensiveness rating: 5 see less

This is a book that explains a variety of financial accounting concepts, then dabbles in managerial accounting concepts toward the end of the book. It appears to be a good reference guide for someone to learn about how accounting is used in the business world. For a beginner’s guide, the depth of knowledge is outstanding in this text. For example, quality management is a topic that can be found repeatedly in this text. Explanations for how the content can be used to improve business processes are beneficial to learning. The text also explains how all stakeholders in the business can benefit from accounting knowledge.

Content Accuracy rating: 5

The book appears to be accurate. I don’t see any areas of concern when it comes to accuracy.

Relevance/Longevity rating: 4

The year 2010 is used in most of the exhibits. Sometimes a book loses credibility if it appears to be out of date, so the book could be updated to use 20XX to have the appearance of being up to date. The “Business Insight” areas of the text could lose relevance as companies leave the marketplace, but most appear to be currently relevant.

Clarity rating: 4

All exhibits are in black and white. I am not sure if this can be changed, but different colors of font or highlights might be appropriate when a new account or process is being displayed in the exhibit. The exhibits, however, seem to be very good and informational.

Consistency rating: 5

The book is consistent from chapter to chapter, with objectives coming first, then moving into the content. Key terms, questions, exercises, problems, case questions and group problems come at the end of the chapter. I especially like the group problems. I have my students work in small groups almost every day, so these short, content-specific group ideas will be useful for face-to-face classes or online group discussions.

Modularity rating: 5

The content is organized and easy-to-read. Information is given in small chunks of information, with exhibits and real world examples mixed into the reading material. Each section has its own set of questions to check for knowledge.

Organization/Structure/Flow rating: 5

The organization of the text is similar to most accounting textbooks I have used in the past, except for there is an omission of partnerships as a separate topic. The reason for this omission is explained in the first chapter. The authors omitted partnerships after surveying users and nonusers of their text because many small business owners do not operate as partnerships, but rather LLCs. So this text focuses on sole proprietorships and LLCs and only briefly discusses partnerships. Otherwise, the main concepts and flow of the book are very similar to most accounting textbooks, beginning with sole proprietorships and discussing inventory, payroll, etc. The book then moves to corporations, and ends with a few managerial accounting topics.

Interface rating: 4

It is only available in pdf format. A teacher could still link to the pdf within an online course, but a website for the book would likely help students access the book. The chapter titles in the table of contents are hyperlinks. When clicked, they take the viewer straight to the content.

Grammatical Errors rating: 5

I did not see any grammatical issues.

Cultural Relevance rating: 5

Accounting is typically not a topic that needs cultural references. The book should not be offensive to any culture.

Reviewed by Bangjun Wu, Accounting Instructor, Peralta Community College District on 1/1/20

This book covers materials taught in Financial Accounting and Managerial Accounting introductory courses. The table of contents contains links and can be clicked to reach specific sections. Key terms and excercises are provided at the end of each chapter. Concepts are explained clearly. There are also "ethical perspectives" and "uses of technology" sections throughout the chapters.

I sampled chapters to review. The book appear to be accurate and unbiased in the sections I reviewed.

The concepts and examples in this book are still very relevant and applicable as of 2019, although this book appear to be written in 2009. If possible please update "Salary potential of accountants" in Chapter 1. Also recommend evaluate new accounting pronouncements in the last decade to see if any updates needed in Chapter 5, "The Major Principles" section.

Clarity rating: 5

The book is written in accessible language and provides adequate context for accounting jargon/technical terminologies used.

Chapters follow consistent layouts, which makes it easier for students to follow.

The book is divided into smaller reading sections within chapters indicated with bold blue-colored headings. These smaller sections are also indexed in the table of contents.

Organization/Structure/Flow rating: 4

The book is overall well organized in the flow of concepts. I do, however, feel that chapter 5 "Accounting Theory" as a single chapter may not be the most effective for students' learning purpose. Accurate and important as this chapter is, it is close to 40 pages of hard concepts. If the audience of this book is students who are just starting to learn accounting, this chapter may feel hard and dry. As an instrutor, I would highlight the revenue recoginition principle and matching principle in the section where I explain accounting transactions (chapter 2). As a textbook, i think it's more effective to list these concepts in high level within the first 3 chapters- not as a separate chapter, reference these concepts throughout the chapters wherever applicable, and maybe keep all the accounting theory section as an appendix.

Interface rating: 5

I didn't notice interface issues.

The book appear to be grammatically correct.

The text is not culturally insensitive or offensive

Congratualtions on a book well-written! I appreciate the efforts the authors put into the creation of this book. I especially applaude the ethical discussions and "uses of technology" in the chapters.

Reviewed by Dr. Susan Weiss, Assistant Professor, Rhode Island College on 12/1/19

The textbook covers two semesters of accounting principles courses--both financial and managerial. Includes all the major requirements for covering asset, liability and equity accounts; in addition, covers CVP analysis, job costing, differential analysis, even simplified variance analysis and capital budgeting. Truly, for the access, it is solid coverage in a basic foundation for business students.

In general, the book provides coverage in appropriate depth to support the needs of a first year accounting curriculum. In reviewing some of the aspects within the internal control chapter, for instance, there is appropriate emphasis on the Foreign Corrupt Practices Act as well as the Sarbanes-Oxley Act. The problems which support learning objectives are of adequate difficulty to challenge principles level students. On page 93, noted "Trail balance" was indicated instead of "Trial balance."

Relevance/Longevity rating: 5

Overall, the basic theory of financial accounting changes incrementally over time, responding to new GAAP requirements as indicated. Noted were a few indications of SFASs originally numbered; a suggestion would be to include the equivalent Accounting Standards Codification (ASC) section as it has been in use for approximately a decade now. The Use of Technology sections are excellent examples of applicability which would pique interest in students of management information systems, data analysis, and finance as well as accounting. An update to replace The Limited as a subject company in the financial accounting area would be an enhancement.

The grammatical accuracy lends itself to the clarity presented. There is appropriate jargon employed when necessary. There is less depth in delving into reasons for overhead variances as an example. Certainly, the emphasis at the principles level is primarily on basic application and calculation. However, the basis is appropriate for building further complexity at the Intermediate and higher levels.

The text appropriately invokes the terminology required and maintains consistency throughout the text. This is especially critical when providing information regarding managerial accounting, which is a cumulative learning process. Although there is some terminology that is used that is not exact, it is much less the case than other textbooks I have used and reviewed.

There is potential for exclusion of chapters to conform to schedule requirements for a course, even if a different text is used for managerial or principles. Also, if there is a desire or need to exclude certain chapters the textbook provides that flexibility.

The topics within the book are sequentially arranged much like prominent texts within the discipline. The sequential presentation makes sense from a theoretical perspective, both in the financial and managerial sections.

There are no noted interface issues.

Overall I found the book to be excellently written. Many textbooks today are written in quite colloquial language. Accounting is a discipline which requires compliance with regulations and principles as established by many agencies, governments, and conventionality. We must maintain and instill compliance among the student learners of today. To do so requires a specific level of vocabulary. This text exemplifies the appropriate level of grammar in which a professional would be expected to communicate.

Noted no issues with respect to culturally or socially sensitive topics.

There are a number of times in which accounting profession career opportunities, salaries, etc. are mentioned incrementally throughout the text. It is rather interesting to remind students of these facts during the course of their studies. The text also highlights the importance of certification, as well as the requirements. This is also refreshing as students may consider their future career path as they progress through the course and become acquainted with topics that interest them. An improvement that would perhaps encourage adoption is the accompaniment of a MOOC-based homework manager for a small fee.

Reviewed by Colleen Everts, Associate Professor, Franklin College on 1/22/19

This text covers all appropriate content areas I would expect to find in a Principles textbook. The chapters mirror closely the current textbook I am using. I appreciate that the index is linked so you can click on the chapter you want and it will take you right there. The addition of a responsibility accounting chapter is my favorite topical area that is not always covered in traditional texts but is gaining traction.

I did not read all chapters thoroughly, however, what I did read was accurate and unbiased.

The content is up-to-date and is arranged in a way in which updates would be easy to make. The emphasis on going outside the book and "surf the net" is practical and needed in today's world. The authors also include "ethical perspectives" throughout each chapter highlighting the importance of integrity and honesty and asks the reader to think about what they would do.

Clarity rating: 3

The text itself is clear, however some pages are completely text and do not include pictures, graphics, breaks, color etc... While the content is clear to me I fear that my students would struggle jumping into this book. The introduction and first chapter cover too much material and include too much accounting jargon so my students would feel overwhelmed. I like the review section at the end of the chapter that reiterates, again, the main points of the chapter in a slightly different way adding another layer of clarity for the reader.

The text is consistent from chapter to chapter and follows GAAP while referencing IFRS. Each chapter has the same structure making it easy for students to get in the flow.

Modularity rating: 4

The text is easily divisible, however the chapter contents are not clearly broken into learning objectives as stated at the beginning of each chapter. To be clear the content is broken up that way, just not labelled. It would be fairly easy to divide the content, it would just take a little more work to find the right page.

This text is organized in a logical manner consistent with other accounting textbooks. The text includes links in the index to the content making it easier to maneuver.

I did not find any issues with the display of the text.

I did not find any major grammatical errors.

I did not find the text be culturally insensitive. The examples use a variety of company names and pronouns.

I am thankful to have the option to use a free textbook in my classes. Tuition rates and student-debt continue to rise so any chance I have to cut the cost for my students removes a barrier to their success. I am hesitant to use this specific text in my class because the overall appeal is uninviting as well the overwhelming amount of information included in the first few chapters. I plan to look at other options or incorporate pieces of free texts into my class even just as supplemental material.

Reviewed by Mike Matousek, Instructor, Portland Community College - Portland OR on 8/2/18

The book was comprehensive and covered a wide breadth of topics. There was an extensive table of contents but no index or glossary provided. The comprehensiveness of the book actually was a bit of a negative from my perspective because the on-ramp for students new to the subject was too steep, and I think my students would really struggle with being able to understand the material as deeply as it was presented almost from the very beginning of this text.

I did not notice any errors or biases in the content of the text. Examples and case studies seemed appropriate and correctly laid out and explained.

It seemed like the content was appropriately up to date and examples were relevant. The only thing that I noticed, and it may be a bit nit-picky, is that some really out of date years were used in the text as part of problems and examples. The oldest that I saw referred to 2009, which I guess isn't too bad but I'm used to seeing 201X as the year in the texts I regularly use.

Clarity of the text was OK. I thought the problems and examples were very well done but I did have a problem with the pacing of the material especially in the first few chapters. If these were early level accounting students I think they would have been lost in the first 3 chapters due to the complexity of the concepts introduced early in the text.

This appeared to be done well and I did not notice any inconsistencies.

The text read a lot like the texts I am currently using from major publishers. I thought the modularity of the text was probably its best feature as I found it easy to read, broken up well into sections with ample examples and sidebars. Very well done in my opinion.

Organization/Structure/Flow rating: 3

This was not terrible, but as I've already noted I thought the flow was off in the early chapters. It seemed too complex in the latter part of chapter 1 and through all of chapter 2 and the beginning of chapter 3. After that point it seemed to settle into a better pattern in terms of the flow, but by then I think many of my students would have been totally lost.

It looked like a very professionally laid out text and I did not notice anything in it that distracted or confused me in any way.

I did not notice any grammatical errors but admittedly I was skimming the material and not closely searching for them.

Cultural Relevance rating: 4

The text is not culturally insensitive. I did not notice a specific attempt to include a variety of backgrounds, although that can be somewhat difficult to include in accounting problems/scenarios without it seeming very forced. I thought the text was fine in this area.

I really enjoyed reading through this text. It was my first look at any open source material and I was surprised and impressed by the level of professionalism. I would not choose to use this book for my particular classes because of the complexity of the early "ramp-up" chapters, but I thought the problems, examples and overall layout of the material was excellent. It was far better than I expected and I look forward to reviewing and potentially using open source material in my classes in the future.

1. Accounting and its use in business decisions
2. Recording business transactions
3. Adjustments for financial reporting
4. Completing the accounting cycle
5. Accounting theory
6. Merchandising transactions
7. Measuring and reporting inventories
8. Control of cash
9. Receivables and payables
10. Property, plant, and equipment
11. Plant asset disposals, natural resources, and intangible assets
12. Stockholders' equity: Classes of capital stock
13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock
14. Stock investments
15. Long-term financing: Bonds
16. Analysis using the statement of cash flows
17. Analysis and interpretation of financial statements
18. Managerial accounting concepts/job costing
19. Process: Cost systems
20. Using accounting for quality and cost management
21. Cost-volume-profit analysis
22. Short-term decision making: Differential analysis
23. Budgeting for planning and control
24. Control through standard costs
25. Responsibility accounting: Segmental analysis
26. Capital budgeting: Long-range planning

Ancillary Material

About the book.

Accounting Principles: A Business Perspective uses annual reports of real companies to illustrate many of the accounting concepts in use in business today. Gaining an understanding of accounting terminology and concepts, however, is not enough to ensure your success. You also need to be able to find information on the Internet, analyze various business situations, work effectively as a member of a team, and communicate your ideas clearly. This text was developed to help you develop these skills.

About the Contributors

Professor Roger H. Hermanson, PhD, CPA Regents Professor Emeritus of Accounting and Ernst & Young-J. W. Holloway Memorial Professor Emeritus at Georgia State University. He received his doctorate at Michigan State University in 1963 and is a CPA in Georgia. Professor Hermanson taught and later served as chairperson of the Division of Accounting at the University of Maryland. He has authored or coauthored approximately one-hundred articles for professional and scholarly journals and has coauthored numerous editions of several textbooks, including Accounting Principles, Financial Accounting, Survey of Financial and Managerial Accounting, Auditing Theory and Practice, Principles of Financial and Managerial Accounting, and Computerized Accounting with Peachtree Complete III. He also has served on the editorial boards of the Journal of Accounting Education, New Accountant, Accounting Horizons, and Management Accounting. Professor Hermanson has served as co-editor of the Trends in Accounting Education column for Management Accounting. He has held the office of vice president of the American Accounting Association and served on its Executive Committee. He was also a member of the Institute of Management Accountants, the American Institute of Certified Public Accountants, and the Financial Executives Institute.

Professor James D. Edwards, PhD , DHC, CPA J. M. Tull Professor Emeritus of Accounting in the Terry College of Business at the University of Georgia. He is a graduate of Louisiana State University and has been inducted into the Louisiana State University Alumni Federation's Hall of Distinction. He received his MBA from the University of Denver and his PhD from the University of Texas and is a CPA in Texas and Georgia. He has served as a professor and chairman of the Department of Accounting and Financial Administration at Michigan State University, a professor and dean of the Graduate School of Business Administration at the University of Minnesota, and a Visiting Scholar at Oxford University in Oxford, England.

Professor Edwards is a past president of the American Accounting Association and a past national vice president and executive committee member of the Institute of Management Accountants. He has served on the board of directors of the American Institute of Certified Public Accountants and as chairman of the Georgia State Board of Accountancy. He was an original trustee of the Financial Accounting Foundation, the parent organization of the FASB, and a member of the Public Review Board of Arthur Andersen & Co.

Professor Michael W. Maher, PhD , CPA Professor of management at the University of California at Davis. He is a graduate of Gonzaga University (BBA) and the University of Washington (MBA, PhD). Before going to the University of California at Davis, he taught at the University of Michigan and the University of Chicago. He also worked on the audit staff at Arthur Andersen & Co. and was a self-employed financial consultant for small businesses while attending graduate school.

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What Are Accounting Principles?

How They Work

What Are the Basic Accounting Principles?

Accounting Principles FAQs

The Bottom Line

Corporate Finance
Financial statements: Balance, income, cash flow, and equity

Accounting Principles Explained: How They Work, GAAP, IFRS

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use.

The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with adoption in 167 jurisdictions. The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP) .

Key Takeaways

Accounting standards are implemented to improve the quality of financial information reported by companies.
In the United States, the Financial Accounting Standards Board (FASB) issues generally accepted accounting principles (GAAP).
GAAP is required for all publicly traded companies in the U.S.; it is also routinely implemented by non-publicly traded companies as well.
Internationally, the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).
The FASB and the IASB sometimes work together to issue joint standards on hot-topic issues, but there is no intention for the U.S. to switch to IFRS in the foreseeable future.

Ryan Oakley / Investopedia

The Purpose of Accounting Principles

The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable.

This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies. Accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags to be identified.

The ultimate goal of standardized accounting principles is to allow financial statement users to view a company’s financials with certainty that the information disclosed in the report is complete, consistent, and comparable.

Comparability

Comparability is the ability for financial statement users to review multiple companies’ financials side by side with the guarantee that accounting principles have been followed to the same set of standards.

Accounting information is not absolute or concrete, and standards are developed to minimize the negative effects of inconsistent data. Without these rules, comparing financial statements among companies would be extremely difficult, even within the same industry. Inconsistencies and errors also would be harder to spot.

Some of the most fundamental accounting principles include the following:

Accrual principle
Conservatism principle
Consistency principle
Cost principle
Economic entity principle
Full disclosure principle
Going concern principle
Matching principle
Materiality principle
Monetary unit principle
Reliability principle
Revenue recognition principle
Time period principle

The most notable principles include the revenue recognition principle, matching principle, materiality principle, and consistency principle. Completeness is ensured by the materiality principle, as all material transactions should be accounted for in the financial statements. Consistency refers to a company’s use of accounting principles over time.

When accounting principles allow a choice among multiple methods, a company should apply the same accounting method over time or disclose its change in accounting method in the footnotes to the financial statements .

Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) are uniform accounting principles for private companies and nonprofits in the U.S. These principles are largely set by the Financial Accounting Standards Board (FASB) , an independent nonprofit organization whose members are chosen by the Financial Accounting Foundation .

A similar organization, the Governmental Accounting Standards Board (GASB) , is responsible for setting the GAAP standards for local and state governments. And a third body, the Federal Accounting Standards Advisory Board (FASAB), publishes the accounting principles for federal agencies.

Although privately held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements to be listed on a stock exchange. Chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with GAAP.

Privately held companies and nonprofit organizations also may be required by lenders or investors to file GAAP-compliant financial statements. For example, annual audited GAAP financial statements are a common loan covenant required by most banking institutions. Therefore, most companies and organizations in the U.S. comply with GAAP, even though it is not a legal requirement.

Accounting principles differ around the world, meaning that it’s not always easy to compare the financial statements of companies from different countries.

International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). These standards are used in more than 120 countries , including those in the European Union (EU).

The Securities and Exchange Commission (SEC) , the U.S. government agency responsible for protecting investors and maintaining order in the securities markets, has expressed interest in transitioning to IFRS. However, because of the differences between the two standards, the U.S. is unlikely to switch in the foreseeable future.

However, the FASB and the IASB continue to work together to issue similar regulations on certain topics as accounting issues arise. For example, in 2014, the FASB and the IASB jointly announced new revenue recognition standards.

Since accounting principles differ around the world, investors should take caution when comparing the financial statements of companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. Still, caution should be used, as there is still leeway for number distortion under many sets of accounting principles.

Who sets accounting principles and standards?

Various bodies are responsible for setting accounting standards. In the United States, generally accepted accounting principles (GAAP) are regulated by the Financial Accounting Standards Board (FASB). In Europe and elsewhere, International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).

How does IFRS differ from GAAP?

IFRS is a standards-based approach that is used internationally, while GAAP is a rules-based system used primarily in the U.S. IFRS is seen as a more dynamic platform that is regularly being revised in response to an ever-changing financial environment, while GAAP is more static.

Several methodological differences exist between the two systems. For instance, GAAP allows companies to use either first in, first out (FIFO) or last in, first out (LIFO) as an inventory cost method . LIFO, however, is banned under IFRS .

When were accounting principles first set forth?

Standardized accounting principles date all the way back to the advent of double-entry bookkeeping in the 15th and 16th centuries, which introduced a T-ledger with matched entries for assets and liabilities. Some scholars have argued that the advent of double-entry accounting practices during that time provided a springboard for the rise of commerce and capitalism. What would become the American Institute of Certified Public Accountants (AICPA) and the New York Stock Exchange (NYSE) attempted to launch the first accounting standards to be used by firms in the United States in the 1930s.

What are some critiques of accounting principles?

Critics of principles-based accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe because companies do not have to follow specific rules that have been set out, their reporting may provide an inaccurate picture of their financial health. In the case of rules-based methods like GAAP, complex rules can cause unnecessary complications in the preparation of financial statements. These critics claim having strict rules means that companies must spend an unfair amount of their resources to comply with industry standards.

Accounting principles are rules and guidelines that companies must abide by when reporting financial data. Which method a company chooses at the outset—or changes to at a later date —must make sound financial sense. Whether it’s GAAP in the U.S. or IFRS elsewhere, the overarching goal of these principles is to boost transparency and basically make it easier for investors to compare the financial statements of different companies.

Without these rules and standards, publicly traded companies would likely present their financial information in a way that inflates their numbers and makes their trading performance look better than it actually was. If companies were able to pick and choose what information to disclose and how, it would be a nightmare for investors.

International Financial Reporting Standards (IFRS) Foundation. “ Who Uses IFRS Accounting Standards? ”

Financial Accounting Standards Board. “ About the FASB .”

Governmental Accounting Standards Board. “ About the GASB .”

Federal Accounting Standards Advisory Board. “ Standards and Guidance .”

CFA Institute. “ US GAAP: Generally Accepted Accounting Principles .”

American Institute of Certified Public Accountants. “ IFRS FAQs .”

U.S. Securities & Exchange Commission. “ Spotlight on Work Plan for Global Accounting Standards .”

Financial Accounting Standards Board, via Internet Archive. “ Revenue Recognition .”

American Institute of Certified Public Accountants. “ Is IFRS That Different from U.S. GAAP? ”

International Accounting Standards Board. “ Accounting Policies and Accounting Estimates ,” Page 16.

Financial Accounting Foundation. “ Accounting Standards .”

Securities and Exchange Commission Historical Society. “ The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting .”

Accounting Explained With Brief History and Modern Job Requirements 1 of 51
What Is the Accounting Equation, and How Do You Calculate It? 2 of 51
What Is an Asset? Definition, Types, and Examples 3 of 51
Liability: Definition, Types, Example, and Assets vs. Liabilities 4 of 51
Equity Meaning: How It Works and How to Calculate It 5 of 51
Revenue Definition, Formula, Calculation, and Examples 6 of 51
Expense: Definition, Types, and How Expenses Are Recorded 7 of 51
Current Assets vs. Noncurrent Assets: What's the Difference? 8 of 51
What Is Accounting Theory in Financial Reporting? 9 of 51
Accounting Principles Explained: How They Work, GAAP, IFRS 10 of 51
Accounting Standard Definition: How It Works 11 of 51
Accounting Convention: Definition, Methods, and Applications 12 of 51
What Are Accounting Policies and How Are They Used? With Examples 13 of 51
How Are Principles-Based and Rules-Based Accounting Different? 14 of 51
What Are Accounting Methods? Definition, Types, and Example 15 of 51
What Is Accrual Accounting, and How Does It Work? 16 of 51
Cash Accounting Definition, Example & Limitations 17 of 51
Accrual Accounting vs. Cash Basis Accounting: What's the Difference? 18 of 51
Financial Accounting Standards Board (FASB): Definition and How It Works 19 of 51
Generally Accepted Accounting Principles (GAAP): Definition, Standards and Rules 20 of 51
What Are International Financial Reporting Standards (IFRS)? 21 of 51
IFRS vs. GAAP: What's the Difference? 22 of 51
How Does US Accounting Differ From International Accounting? 23 of 51
Cash Flow Statement: What It Is and Examples 24 of 51
Breaking Down The Balance Sheet 25 of 51
Income Statement: How to Read and Use It 26 of 51
What Does an Accountant Do? 27 of 51
Financial Accounting Meaning, Principles, and Why It Matters 28 of 51
How Does Financial Accounting Help Decision-Making? 29 of 51
Corporate Finance Definition and Activities 30 of 51
How Financial Accounting Differs From Managerial Accounting 31 of 51
Cost Accounting: Definition and Types With Examples 32 of 51
Certified Public Accountant: What the CPA Credential Means 33 of 51
What Is a Chartered Accountant (CA) and What Do They Do? 34 of 51
Accountant vs. Financial Planner: What's the Difference? 35 of 51
Auditor: What It Is, 4 Types, and Qualifications 36 of 51
Audit: What It Means in Finance and Accounting, and 3 Main Types 37 of 51
Tax Accounting: Definition, Types, vs. Financial Accounting 38 of 51
Forensic Accounting: What It Is, How It's Used 39 of 51
Chart of Accounts (COA) Definition, How It Works, and Example 40 of 51
What Is a Journal in Accounting, Investing, and Trading? 41 of 51
Double Entry: What It Means in Accounting and How It's Used 42 of 51
Debit: Definition and Relationship to Credit 43 of 51
Credit: What It Is and How It Works 44 of 51
Closing Entry 45 of 51
What Is an Invoice? It's Parts and Why They Are Important 46 of 51
6 Components of an Accounting Information System (AIS) 47 of 51
Inventory Accounting: Definition, How It Works, Advantages 48 of 51
Last In, First Out (LIFO): The Inventory Cost Method Explained 49 of 51
The FIFO Method: First In, First Out 50 of 51
Average Cost Method: Definition and Formula with Example 51 of 51

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Mastering Accounting Principles: A Comprehensive Guide for Students

Mastering the Numbers: 10 Essential Accounting Principles Every Student Should Know

Embarking on the journey of understanding accounting principles may seem daunting, especially when faced with the challenge of completing assignments. Whether you're a novice or seasoned student, grasping the fundamental accounting principles is crucial not only for academic success but also for building a strong foundation for your future career. In this comprehensive guide, we will delve into 10 essential accounting principles that every student must master to not only excel in their coursework but also confidently tackle accounting assignments. So, buckle up as we navigate the intricate world of numbers and financial transactions, empowering you to conquer your accounting assignments with ease. If you need help with your accounting assignment , this guide can provide valuable insights and assistance in mastering the essential principles.

1. The Matching Principle:

The Matching Principle stands as a cornerstone in the realm of accounting, playing a pivotal role in ensuring the accurate representation of a company's financial health. At its core, this principle dictates that expenses should be recognized in the same period as the revenue they help generate. Let's delve deeper into the intricacies of the Matching Principle and explore how you can apply it effectively in your assignments.

Understanding the Essence:

The Matching Principle is rooted in the concept of cause and effect. It acknowledges the direct relationship between revenue generation and the expenses incurred to achieve that revenue. By aligning these two elements in the same reporting period, businesses can present a more realistic depiction of their profitability and financial performance.

In practical terms, consider a scenario where a company invests in marketing strategies to boost sales. According to the Matching Principle, the expenses associated with these marketing efforts should be recognized in the same period as the revenue generated from the increased sales. This ensures that the financial statements accurately reflect the true cost of earning that revenue.

Application in Assignments:

When tackling accounting assignments, it's crucial to showcase your understanding of the Matching Principle. Begin by identifying transactions where expenses are directly tied to revenue generation. For instance, explore scenarios involving production costs, advertising expenses, or any other costs directly linked to the sales process.

In your analysis, explicitly demonstrate how adhering to the Matching Principle provides a more transparent and accurate financial picture. Discuss the implications of recognizing expenses in the same period as the corresponding revenue, emphasizing the principle's role in preventing distortion of a company's financial performance.

Real-World Examples:

To reinforce your comprehension of the Matching Principle, consider incorporating real-world examples into your assignments. Explore case studies or financial reports of companies that effectively apply this principle. Highlight instances where businesses have successfully aligned expenses with revenue, showcasing the positive impact on their financial statements.

For instance, discuss how a retail company recognizes the cost of goods sold (COGS) in the same period as the associated sales. This not only complies with accounting standards but also provides a clear understanding of the direct costs incurred in generating sales revenue.

2. The Revenue Recognition Principle:

The Revenue Recognition Principle serves as a guiding light in the world of accounting, outlining when and how revenue should be recognized in financial statements. This principle is fundamental in providing a clear and accurate representation of a company's financial performance. Let's dive into the intricacies of the Revenue Recognition Principle and explore how you can effectively apply it to shine a light on earnings in your assignments.

Deciphering the Principle:

The Revenue Recognition Principle dictates that revenue should be recognized when it is earned, not necessarily when the payment is received. This emphasis on "earned" implies that the goods or services have been delivered, and the customer is obligated to pay. By aligning revenue recognition with the actual delivery or completion of services, financial statements reflect the true value generated by a business.

When tackling assignments related to revenue recognition, consider scenarios where companies deliver goods or services over time. This could include long-term contracts, subscription-based businesses, or projects with milestone payments. Discuss how applying the Revenue Recognition Principle ensures that revenue is recognized proportionately as the performance obligations are met.

For example, in a construction project, revenue recognition may be based on reaching specific project milestones rather than waiting until the project's completion. Clearly articulate how this principle enhances the accuracy and reliability of financial reporting by capturing revenue in sync with the delivery of value.

Impact on Financial Statements:

Highlight the significance of the Revenue Recognition Principle in shaping the income statement and balance sheet. In your assignments, delve into the interplay between recognizing revenue and reporting associated costs. Emphasize how adhering to this principle paints a more realistic picture of a company's profitability and financial health, influencing key financial metrics and ratios.

Discuss the cascading effect on metrics like the gross profit margin, which reflects the relationship between revenue and the cost of goods sold. By recognizing revenue when earned, companies provide stakeholders with a clearer understanding of their operational efficiency and profitability.

3. The Historical Cost Principle:

The Historical Cost Principle stands as a steadfast pillar in accounting, advocating for the recording of assets at their original cost. In the dynamic world of finance, understanding and applying this principle is crucial for presenting a reliable and objective measure of a company's financial position. Let's delve into the essence of the Historical Cost Principle and explore its significance, ensuring you can confidently navigate its application in your assignments.

Foundations of the Historical Cost Principle:

At its core, the Historical Cost Principle asserts that assets should be recorded on the balance sheet at their original cost when acquired. This original cost is not adjusted to market value, providing a stable and verifiable baseline for assessing a company's financial health. The principle aims to eliminate subjectivity and maintain consistency in financial reporting.

When addressing the Historical Cost Principle in your assignments, focus on scenarios where the application of this principle provides a clear advantage. Consider situations where market values might be fluctuating, and discuss how recording assets at historical cost offers a reliable measure, especially when compared to potentially volatile market valuations.

For instance, in the context of real estate, discuss the benefits of valuing property at its acquisition cost rather than attempting to adjust for market fluctuations. Emphasize the stability and objectivity that the Historical Cost Principle brings to the balance sheet, contributing to a more accurate assessment of a company's financial position.

4. The Conservatism Principle:

The Conservatism Principle, also known as the principle of prudence, is a fundamental concept in accounting that guides the cautious recognition of uncertainties and potential losses. In essence, it encourages accountants to err on the side of caution when faced with uncertainties in financial reporting.

Key Tenets of the Conservatism Principle:

The Conservatism Principle is rooted in the philosophy of anticipating potential losses and recognizing them promptly while being more circumspect about potential gains. This approach ensures that financial statements present a prudent and realistic view of a company's financial position.

Application in Financial Reporting:

In practice, the Conservatism Principle manifests when accountants are faced with situations where the outcome is uncertain. For example, if a company is involved in litigation, and the outcome is uncertain, the principle encourages the recognition of potential losses related to the litigation immediately. On the flip side, potential gains are only recognized when they are realized.

Practical Example:

Consider a scenario where a company sells goods on credit. There is a risk that some customers might default on their payments, leading to potential bad debts. The Conservatism Principle would guide the company to estimate and recognize a provision for bad debts, even before they materialize, to ensure a more conservative portrayal of the financial position.

5. The Consistency Principle:

The Consistency Principle is a foundational concept in accounting that emphasizes the importance of uniformity and stability in financial reporting. According to this principle, once an accounting method or principle has been chosen, it should be consistently applied over time, ensuring comparability and reliability in financial statements.

Conceptual Understanding:

At its core, the Consistency Principle is rooted in the idea that a company's financial statements should be prepared using consistent accounting methods and principles from one period to another. This consistency allows for meaningful comparisons both within a company's historical performance and across different entities within the same industry.

Imagine a scenario where a company adopts the straight-line depreciation method for its fixed assets in one fiscal year. According to the Consistency Principle, it should continue using the same method in subsequent years unless a compelling reason arises for a change. This steadfast adherence to chosen accounting methods provides a stable financial reporting framework.

6. The Materiality Principle:

The Materiality Principle is a fundamental concept in accounting that guides financial professionals in determining the importance and relevance of information. This principle recognizes that not all details are created equal, and only significant information that could influence the decision-making process of users should be included in financial statements.

Defining Materiality:

Materiality refers to the threshold at which information becomes relevant or significant enough to impact the judgment of users of financial statements. In essence, the Materiality Principle helps accountants distinguish between information that matters in the decision-making process and immaterial details that might not significantly affect the interpretation of financial statements.

When applying the Materiality Principle, accountants must assess the potential impact of omitting or misstating information. This assessment is context-dependent and may vary based on the size and nature of the item, industry norms, and the needs of the financial statement users.

For instance, in a multinational corporation, a minor error in recording office supplies expenses may be deemed immaterial, whereas the same error in reporting revenue recognition could have significant consequences. In assignments, students are often tasked with identifying material items and justifying their assessment based on the specific circumstances.

7. The Objectivity Principle:

The Objectivity Principle stands as a cornerstone in the field of accounting, underscoring the importance of recording only verifiable and factual information in financial statements. In essence, this principle emphasizes the need for neutrality, impartiality, and the exclusion of personal biases in the pursuit of presenting a true and accurate financial picture.

Key Tenets of the Objectivity Principle:

Verifiability: The information presented in financial statements should be supported by evidence that is available for verification. This ensures that the reported figures are not merely subjective estimates but are rooted in tangible and corroborated data.
Independence: Those involved in the financial reporting process, including accountants and auditors, must maintain independence and objectivity. This independence is crucial to prevent personal biases from influencing the recording and reporting of financial information.

Application in Accounting Practices:

In practical terms, the Objectivity Principle is evident in various facets of accounting, such as the valuation of assets, recognition of revenue, and assessment of financial transactions. For example, when determining the fair value of an asset, accountants must rely on observable market prices or other verifiable methods rather than subjective opinions.

In assignments, students are often tasked with analyzing scenarios where the Objectivity Principle is paramount. Highlighting cases where personal opinions or unverifiable information could potentially compromise the objectivity of financial reporting helps demonstrate a deep understanding of this principle.

8. The Consensus Principle:

The Consensus Principle, also known as the Agreement Principle, underscores the collaborative nature of decision-making in accounting. This principle emphasizes the importance of seeking agreement among knowledgeable and impartial parties when faced with uncertainties or ambiguities in financial reporting. Let's explore how the Consensus Principle shapes the accounting landscape and contributes to well-informed decision-making.

Foundations of Consensus:

At its core, the Consensus Principle acknowledges that accounting decisions may not always have a clear-cut answer. When faced with uncertainties, seeking the collective judgment of experts within the accounting profession fosters a more comprehensive and reliable resolution. This collaborative approach aims to minimize subjectivity and biases in decision-making.

Application in Accounting Scenarios:

The Consensus Principle is particularly relevant in situations where the application of accounting standards is ambiguous or open to interpretation. In assignments, students may encounter scenarios involving complex transactions, emerging industries, or evolving accounting standards. Discussing these situations through the lens of the Consensus Principle requires students to explore how different perspectives can contribute to a well-rounded and informed decision.

For example, when determining the appropriate accounting treatment for a unique financial instrument, students may consider consulting with industry experts, fellow accountants, or relevant standard-setting bodies to reach a consensus on the most appropriate approach.

9. The Relevance Principle:

The Relevance Principle is a guiding force in accounting, emphasizing the importance of providing information in financial statements that is pertinent and influential for decision-makers. This principle centers on the idea that financial information should be meaningful, timely, and capable of impacting the decisions of those who rely on it. Let's explore how the Relevance Principle shapes the landscape of financial reporting and contributes to informed decision-making.

Key Tenets of the Relevance Principle:

Predictive Value: Relevant information should aid users in forming expectations about the future. It should provide insights that assist in predicting the outcome of past, present, and future events, helping stakeholders make informed decisions.
Confirmatory Value: Information is relevant if it confirms or corrects previous expectations. It should be capable of validating or adjusting the assessments and predictions made by users based on existing information.
Materiality: The Relevance Principle is closely linked to the Materiality Principle, emphasizing that information should be significant enough to influence the decisions of users. It guides accountants in determining what information should be included in financial statements to ensure their relevance.

In practical terms, the Relevance Principle guides accountants in selecting and presenting information that is crucial for decision-making. When faced with choices about what to include in financial statements, accountants consider whether the information is relevant to the needs of users and whether it contributes to a comprehensive understanding of the entity's financial position.

In assignments, students may encounter scenarios where they need to analyze financial data and decide which information is relevant for specific stakeholders. Discussing the application of the Relevance Principle requires an exploration of how different types of information can influence decisions, ranging from revenue trends to future investment opportunities.

10. The Comparability Principle:

The Comparability Principle, a fundamental concept in accounting, underscores the importance of consistency and standardization in financial reporting. This principle guides accountants in adopting standardized practices to ensure that financial information is presented in a manner that facilitates meaningful comparisons. Let's delve into the essence of the Comparability Principle and explore its role in promoting a standardized and transparent financial landscape.

Defining Comparability:

At its core, the Comparability Principle advocates for the use of consistent accounting methods and standards over time and across entities. This ensures that financial statements can be compared not only within a company's historical performance but also across different companies, industries, and time periods.

Uniformity in Accounting Practices:

The application of the Comparability Principle involves standardizing accounting practices, including methods of measurement, recognition, and presentation. For instance, companies within the same industry are encouraged to use similar depreciation methods or inventory valuation techniques. This uniformity facilitates easier comparisons and allows users to draw meaningful insights from financial statements.

In assignments, students may encounter scenarios where they need to analyze financial data and discuss the importance of the Comparability Principle. Consider a case where two companies within the same industry adopt different methods for recognizing revenue. Discussing the potential challenges and implications of such divergence helps students showcase their understanding of the principle.

Highlighting how the Comparability Principle contributes to a level playing field for investors and other stakeholders enhances the depth of analysis. Discuss how standardized practices enable users to make informed decisions by comparing financial information without the distortion caused by inconsistent accounting methods.

Conclusion:

In conclusion, mastering these 10 essential accounting principles is not only crucial for excelling in your academic pursuits but also for building a solid foundation for your future career. As you navigate through your assignments, remember to apply the Matching Principle, Revenue Recognition Principle, Historical Cost Principle, Conservatism Principle, Consistency Principle, Materiality Principle, Objectivity Principle, Consensus Principle, Relevance Principle, and Comparability Principle. By doing so, you not only demonstrate your proficiency in accounting but also position yourself as a reliable and knowledgeable professional. So, when the time comes to do your accounting assignment, confidently apply these principles, and watch your success unfold.

Financial Accounting and Reporting Classroom Materials

Financial Accounting and Reporting is an important part of the accounting curriculum. The skills students learn in your classroom will not only prepare them for more advanced courses, but to one day succeed in a career. The below are supplemental curriculum resources that the AICPA Academics team have reviewed and think can be used in the classroom.

Award-Winning Curricula

The Academics team is proud to offer award-winning curricula designed to encourage faculty and expand the knowledge of accounting students. The curricula below is from the Accounting Professors Curriculum Resource tool and has been recognized for excellence with the Bea Sanders/AICPA Innovation and Teaching Award , the George Krull/Grant Thornton AAA Innovation in Junior and Senior-Level Teaching Award, or the Mark Chain/FSA Innovation in Graduate Teaching Award .

A Better Way to Teach Effective Interest Method Related Problems in Accounting This resource presents a simpler method of teach accounting problems involving the use of the effective interest method. The method stimulates student interest by focusing on the economics of the transaction and relating it to real-life examples.
Accounting in the Headlines: A News Blog for the Introductory Accounting Classroom This resource shares Wendy Tietz's "Accounting in the Headlines" blog in which she writes stories about real-life companies and events that can be used in the accounting classroom to illustrate introductory financial and managerial accounting concepts.
Accounting Challenge (ACE): Mobile-Gaming App for Learning Accounting Accounting Challenge is the first mobile-gaming app for teaching financial accounting. ACE aims to enhance learning of accounting outside the classroom by engaging students to play and learn accounting on the go.
A FASB Accounting Standards Codification Project for Introductory Financial Accounting This exercise is designed as a team project in which introductory accounting students act as a consultants to a client seeking guidance on issues surrounding a start-up venture. Students must access and cite the Codification as the basis for the materials they submit in fulfillment of the project requirements.
Attracting the Best and Brightest to Accounting: Establishing an Honors Accounting Course This resource presents one school's approach to attracting and recruiting the best and brightest students toward accounting by offering an honors accounting course.
Beyond Debits and Credits... Service Learning in Accounting This resource presents a service learning project implemented in two accounting courses to enhance student skills in communication and teamwork.
Business From the Idea to the Seasoned Offering: Accounting and Financial Statements Reflecting Business Activities This project takes accounting education from bookkeeping to holistic active business learning including how financial statements build to reflect the business.
Chocolate: Accounting as a First year Seminar This resource provides a thematic approach at combining first year seminars and accounting programs using student activities that are simultaneously engaging and assessable.
Creative Strategies for Teaching MBA Level Accounting This resource presents a new concept for teaching accounting to MBA level students. At its heart, accounting centers on measurement of historical transactions or the measurement of future opportunities. this course turns the focus from rules, to the tools leaders need to manage a complex organization.
Cultivating Deep Learning in the Principles of Accounting Classes through Philanthropy-Based Education This philanthropy project goes beyond service learning or volunteerism. Students make real decisions that have immediate impacts on their community. Students award funding to not-for-profit agencies based on a competitive proposal process.
Digital Storytelling for Engaged Student Learning This resource uses digital story telling, a movie, to enhance students' technical competence in accounting. The story uses 12 episodes to follow three young business graduates who started their own business and discover along the way the role of financial information in managing a business venture.
FASB Accounting Standards Codification: Student-Authored Research Exercises This resource is based on the notion that the best way to learn something is to teach it. Students in a financial accounting graduate class demonstrate their master of GAAP research skills by creating research assignments using the FASB Accounting Standards Codification.
Forming Groups in the Age of YouTube This resource uses a variation of speed dating as a means for forming groups in an introductory accounting class. By learning more about their classmates prior to self-selecting a group this method allows students to choose better groups.
Getting Started in the Throughbred Horse Business: A Review of Some Basic Accounting Principles This resource provides reinforcement of common accrual accounting concepts centered on the breeding and racing operations of a small thoroughbred horse business. This curriculum is appropriate to use after students have been exposed to fixed assets, inventory, profit and loss and cash flow reporting.
IFRS Immersion This resource provides instructions for teaching an IFRS course from the standpoint of foreign companies that have already dealt with the problems and issues associated with converting from local GAAP to international GAAP.
IFRS Projects Using Dual Reporting of IFRS and U.S. GAAP This resource illustrates integrating IFRS learning into financial accounting curricula by incorporating valuable contrasting information from the dual reporting.
Integrated Accounting Principles: A New Approach to Traditional Accounting Principles Courses This resource describes an integrated accounting principles course that combines traditional financial and managerial accounting courses into a single six hour course.
Introducing Freshmen Students in the Accounting/Finance Course to the Library This resource describes a series of online, interactive tutorials and quizzes to help students learn fundamental concepts and skills of company and industry related research.
Introduction to Financial Accounting Case Project: Arctic Blast Ice Cream Store This case provides an opportunity for students to apply accounting concepts to a simple business venture. The project lasts 4-6 weeks and covers three distinct phases of the management process: business decision making, performance and evaluation.
Let's Go to the Movies: Using Movies as an Ethics Assignment This project involves students watching a series of predetermined movies and noting the ethical dilemma. At the end of the semester each student must defend one of the movies as a nominee for "A Must See Ethics Movie" for accounting/business students.
Mini-responsibility Centers: A Strategy for Learning by Leading This resource explains the concept of using mini-responsibility centers (MRCs) to decentralize large financial, managerial and cost accounting courses. In return the students are more focused and engaged.
Modeling Uncertainty in C-V-P Assignments: Going Beyond the Basics! This resource provides an outline for using the Monte Carlo Simulation to offer graduate students an opportunity to rapidly come to insights about probabilistic model building and interpretation. The simulation combines quantitative skills and qualitative skills along with reports and presentations.
Northwind Data Query Exercise This project encourages students to consider the evolution of data sources for financial reporting and evaluate how to acquire and manipulate information in this emerging business reality; by actually practicing queries and exporting information to worksheets.
Reinventing Student Engagement and Collaboration within Introductory Accounting Courses This resource provides ideas for increasing engagement and collaboration in the introductory accounting class. Examples include student projects, flipped classroom applications and in-class problems.
Responsibilities and Choices: An Active Engagement Exercise for Introductory Accounting Courses This exercise provides students with an opportunity to perform a basic due diligence task, complete a relatively simple working paper to document their work and make a decision. The exercise has embedded moral temptation and ethical issues and examines ethical choices that students make in the presence of time pressure and reward structures that encourage aggressive performance.
TeachingIFRS.com This document provides information on TeachingIFRS.com which was created in response to the rapid growth of IFRS and lack of high quality and effective teaching resources. The site consolidates and provides links to numerous freely available IFRS pedagogical materials.
Testing Critical Thinking Skills in Accounting Principles This resource describes a method for testing critical thinking skills in an accounting principles course. Using this method, each testing period is divided into two parts. First, students complete an individual traditional test. The second part is a critical thinking exercise called "the challenge problem".
The Accounting Profession Post Sarbanes-Oxley: An Approach to Impart Knowledge About the Conceptual Framework and Attract Students to the Accounting Major This document provides the description of a program entitled "The Accounting Profession Post Sarbanes-Oxley". The program provides students with an opportunity to better understand important elements of the conceptual framework. It also provides an overview of the career opportunities in accounting.
The Accounting Tournament - March Madness in Financial Accounting This resource describes implementation of an end of year comprehensive review using brackets as a model. Students are randomly placed in the bracket and compete against each other for extra credit points.
The Amazing Accounting Race: An Introductory Accounting Semester Project This project engages students with an exciting internet race around the professional world of accounting. Students obtain clues to complete tasks, encounter detours, road blocks and fast forwards. The assignments utilize students' synthesis skills and computer application skills as they collect facts about accounting careers from the internet and assemble data in an organized format.
The College to Professional Experience This resource outlines a program that serves to better prepare students for the "real world" by changing the perception of education from "learning by doing" to "doing and making to learn with technology". The project aims to move beyond traditional models of education to leverage technology to facilitate new methods of delivery and understanding.
The Farming Game and the Introductory Financial Accounting Course: An Accounting Simulation The Farming Game enables students to develop many of the skill-based competencies needed by students entering the accounting profession, regardless of career path. The Game provides experiential learning of various accounting principles. It is a learning opportunity that offers students a degree of reality and a larger view of the system.
Understand FX Risk by Playing Monopoly This resource uses a short version of Monopoly to understand the FX risk impact on net income.
Back to the Future: Using Accounting History to Explore Professional Opportunities In this project students read an article about a period of time in accounting history and present their findings to the class in a video format. Students then tie what they have learned in the presentations to the field of accounting today as well as the future.
From Pacioli to Picasso: Using Art to Enhance Critical Thinking in Accounting Capstone Courses This resource outlines using name cards, picture drawings and classic artwork to help students enhance their critical thinking skills. The exercise sets the tone for a course that requires them to think about more than rules and regulations and instead delve into the "why" and "what could be."
Digging Deep: Using Forensic Analytics as a Context to Teach Microsoft Excel and Access This resource describes a graduate level case that focuses on the development of technology skills through the lens of forensic analysis.
Who Moved My Classroom? Community Linked Learning and Assessment This resource describes three exercises that expand learning beyond the classroom. The first exercise allows students to discover the linkage between classroom studies and what practitioners do in the "real world". The second allows students to apply the COSO model to internal controls. The third requires students to interpret financial statements for a friend.

Additional Materials

Here are additional materials we reviewed and think are useful to incorporate into the classroom.

IIRC Database of Research on Integrated Reporting The International Integrated Reporting Council (IIRC) launched the <IR> Academic Database, a searchable collection of more than 200 articles, books, chapters, dissertations, and other pieces of scholarly research on the advancement, adoption, and practice of integrated reporting.
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Financial Accounting

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Module 0: Personal Accounting

Why It Matters: Personal Accounting
Introduction to Financing Your Education
Financial Aid
Working While Studying
Other Sources of Income
Introduction to Financing the Present
Budgeting Personal Finances
Major Purchases
Introduction to Financing the Future
Retirement Planning
Putting It Together: Personal Accounting
Discussion: Winning the Lottery
Assignment: Creating a Budget

Module 1: The Role of Accounting in Business

Why It Matters: The Role of Accounting in Business
Introduction to Accounting Defined
What Is Accounting?
Why Accounting Matters
Introduction to Accounting Information
Users of Accounting Information
Financial vs Managerial Accounting
Government Reporting
Introduction to the Basic Accounting Equation
The Accounting Equation
Liabilities
Owner’s Equity
Introduction to Accounting in Business
Transactions and the Accounting Equation
Types of Business Activities
Financial Statements
Introduction to Challenges in Accounting
Ethics in Accounting
Significant Events in Accounting
Putting It Together: The Role of Accounting in Business
Discussion: The Crafty Coffee Crook
Assignment: Lopez Consulting

Module 2: Accounting Principles

Why It Matters: Accounting Principles
Introduction to Financial Accounting Standards in the United States
The Role of the FASB
Generally Accepted Accounting Principles
Introduction to Fundamental Concepts of US Accounting Standards
Monetary and Cost Considerations
Economic Assumptions
Full Disclosure
Other Guiding Principles
Introduction to Accrual Basis Accounting
The Accrual Basis and Cash Basis of Accounting
Foundational Rules of Accrual Basis Accounting
Introduction to International Financial Reporting Standards
International Accounting Standards
Convergence
Putting It Together: Accounting Principles
Discussion: SoftSheets
Assignment: Accounting Principles

Module 3: Recording Business Transactions

Why It Matters: Recording Business Transactions
Introduction to Double-Entry Bookkeeping
Rules of Debits and Credits
Introduction to Journals and Ledgers
Introduction to the Recording Process
Create Journal Entries
Post to the Ledger
Calculate Account Balances
Prepare a Trial Balance
Putting It Together: Recording Business Transactions
Discussion: Baker’s Breakfast Bars
Assignment: Recording Business Transactions

Module 4: Completing the Accounting Cycle

Why It Matters: Completing the Accounting Cycle
Introduction to the Adjusting Process
Adjusting Journal Entries
Types of Adjusting Journal Entries
Introduction to Creating Adjusting Journal Entries
Adjusting Deferred and Accrued Revenue
Adjusting Deferred and Accrued Expense Items
Adjusting for Errors
Introduction to Preparing an Adjusted Trial Balance
Posting Adjusted Journal Entries to the Ledger
Using the Worksheet
Introduction to Preparing Financial Statements
Income Statement
Statement of Owner's Equity
Balance Sheet
Statement of Cash Flows
Practice: Preparing Financial Statements
Introduction to Closing the Books
Closing Entries
Post-Closing Trial Balance
Reversing Entries
Putting It Together: Completing the Accounting Cycle
Discussion: Closing the Books in QuickBooks
Assignment: Completing the Accounting Cycle

Module 5: Accounting for Cash

Why It Matters: Accounting for Cash
Introduction to Establishing Internal Controls
Internal Controls
Cash Receipts
Cash Disbursements
Introduction to Accounting for Petty Cash
Voucher System
Journalizing Petty Cash Transactions
Practice: Journalizing Petty Cash Transactions
Introduction to Preparing a Bank Reconciliation
Reconciling Items
Bank Reconciliation
Reconciling Journal Entries
Practice: Preparing a Bank Reconciliation
Introduction to Accounting for Credit Card Transactions
Record Sales and Purchases by Credit Card
Internal Controls for Credit Card Transactions
Introduction to Financial Statement Presentation
Cash and Cash Equivalents
Putting It Together: Accounting for Cash
Discussion: Counter Culture Cafe
Assignment: Accounting for Cash

Module 6: Receivables and Revenue

Why It Matters: Receivables and Revenue
Introduction to Revenue Recognition
Recognizing Revenue under the Accrual Basis
Journalizing Revenue and Payments on Account
Introduction to Uncollectible Accounts
Direct Write-Off of Bad Accounts
Estimating Bad Debt Expense
Estimating Uncollectible Accounts
Practice: Estimating Bad Debt Expense and Uncollectible Accounts
Accounts Receivable Aging Analysis
Practice: Accounts Receivable Aging Analysis
Factoring Accounts Receivable
Introduction to Notes Receivable
Recognizing Notes Receivable
Accrued Interest Revenue
Collecting Payments on Notes Receivable
Practice: Notes Receivable
Introduction to Reporting Receivables on the Financial Statements
Financial Statement Presentation
Disclosures
Putting It Together: Receivables and Revenue
Discussion: Maximizing Revenue
Assignment: Manilow Aging Analysis

Module 7: Merchandising Operations

Why It Matters: Merchandising Operations
Introduction to Merchandising Business
Merchandisers versus Service Enterprises
Cost of Goods Sold
Gross Profit
Introduction to Periodic Inventory System
Periodic Inventory System Compared to Perpetual
Purchases under a Periodic System
Sales under a Periodic System
Practice: Periodic Inventory System
Cost of Goods Sold: Periodic System
Introduction to Perpetual Inventory System
Purchases under a Perpetual System
Sales under a Perpetual System
Practice: Purchases and Sales under a Perpetual System
Internal Controls over Inventory
Putting It Together: Merchandising Operations
Discussion: Inventory Controls
Assignment: Merchandising Operations

Module 8: Inventory Valuation Methods

Why It Matters: Inventory Valuation Methods
Introduction to Inventory Cost Flow Assumptions
Inventory Cost Methods
Specific Identification
Weighted Average
Practice: Weighted Average
Practice: FIFO
Practice: LIFO
Effects of Inventory Cost Methods
Introduction to Conservatism in Reporting Inventory
Lower of Cost versus Net Realizable Value
Lower of Cost or Net Realizable Value Applied
Adjusting Journal Entries for Net Realizable Value
Multi-Step Income Statement
Effects of Common Errors
Accounting Principles and Disclosures
Putting It Together: Inventory Valuation Methods
Discussion: LIFO, FIFO, Specific Identification, and Weighted Average
Assignment: Inventory Valuation Methods

Module 9: Property, Plant, and Equipment

Why It Matters: Property, Plant, and Equipment
Introduction to Plant Assets
Capitalization versus Expensing
Determining Total Cost
Journalize Purchases of Plant Assets
Introduction to Depreciation Expense
Define Depreciation
Straight-Line Method
Accelerated Methods
Units-of-Production Method
Journalize Depreciation
Practice: Depreciation Expense
Introduction to Journalizing Asset Disposal
Asset Retirement
Practice: Asset Sale
Asset Exchange
Introduction to Reporting PP&E
Classified Balance Sheet
Disclosures Related to Plant Assets
Putting It Together: Property, Plant, and Equipment
Discussion: Cooking the Books
Assignment: Property, Plant, and Equipment

Module 10: Other Assets

Why It Matters: Other Assets
Introduction to Natural Resources
Natural Resources and Depletion
Compute Depletion
Journalizing Adjusting Entries for Depletion
Practice: Natural Resources
Introduction to Intangible Assets
Goodwill, Patents, and Other Intangible Assets
Amortization
Journalizing Entries for Amortization
Practice: Intangible Assets
Introduction to Other Current and Noncurrent Assets
Short-Term Investments
Long-Term Investments
Other Current and Noncurrent Assets, Including Notes Receivable
Introduction to Reporting Other Assets
Reporting Natural Resources
Reporting Intangible Assets
Reporting Other Current and Noncurrent Assets
Putting it Together: Other Assets
Discussion: Other Assets
Assignment: Other Current and Noncurrent Assets

Module 11: Current Liabilities

Why It Matters: Current Liabilities
Introduction to Current Liabilities
Examples of Current Liabilities
Accounting for Current Liabilities
Introduction to Accounts Payable
Accounts Payable
Subsidiary Ledgers and Controls
Introduction to Payroll
Payroll Transactions
Payroll Journal Entries
Practice: Payroll Journal Entries
Introduction to Other Current Liabilities
Product Warranties
Practice: Accounting for Current Liabilities/Product Warranties
Contingent Liabilities
Practice: Contingent Liabilities
Introduction to Reporting Current Liabilities
Putting it Together: Current Liabilities
Discussion: Current Liabilities
Assignment: Calculating Payroll at Kipley Co

Module 12: Non-Current Liabilities

Why It Matters: Non-Current Liabilities
Introduction to Long-term Financing
Long-Term Financing Options
Entries Related to Notes Payable
Time Value of Money
Introduction to Bonds Payable
Types of Bonds
Issue Bonds
Bond Valuation
Amortizing Premiums and Discounts
Effective Interest Rate
Introduction to Leases
Finance and Operating Leases
Journal Entries
Introduction to Reporting Long-Term Liabilities
Putting it Together: Non-Current Liabilities
Discussion: Off-Balance Sheet Financing
Assignment: Non-Current Liabilities

Module 13: Accounting for Corporations

Why It Matters: Accounting for Corporations
Introduction to Corporations
Forming a Corporation
Characteristics of Corporations
Categories of Corporations
Corporate Benefits and Limitations
Introduction to Capital Stock Transactions
Issuing Stock
Common and Preferred Stock
Treasury Stock
Introduction to Distribution of Earnings
Stock Dividends
Stock Splits
Balance Sheet Presentation
Statement of Stockholders’ Equity
Putting It Together: Accounting for Corporations
Discussion: Home Depot
Assignment: Collins Mfg Stockholders’ Equity

Module 14: Statement of Cash Flows

Why it Matters: Statement of Cash Flows
Introduction to Statement of Cash Flows
Purpose of the Statement of Cash Flows
Elements of the Statement of Cash Flows
Practice: Elements of the Statement of Cash Flows
Direct and Indirect Methods Compared
Cash Flows from Operations (Direct Method)
Introduction to Indirect Method of Preparing a Statement of Cash Flows
Cash Flows from Operations (Indirect Method)
Cash Flows from Investing
Cash Flows From Financing
Introduction to Preparing a Statement of Cash Flows
Preparing a Statement of Cash Flows
Practice: Preparing a Statement of Cash Flows
Using a Worksheet (Indirect Method)
Non-Cash Activities and other Required Disclosures
Putting It Together: Statement of Cash Flows
Discussion: Facebook, Inc.
Assignment: Kachina Sports Company Cash Flows

Module 15: Financial Statement Analysis

Why It Matters: Financial Statement Analysis
Introduction to Objectives of Financial Statement Analysis
Financial Statement Analysis Defined
Sources of Information
Introduction to Liquidity Measures
Working Capital
Current Ratio
Quick Ratio/Acid-Test Ratio
Cash Turnover Ratio
Introduction to Operating Efficiency Measures
Inventory Turnover
Accounts Receivable Turnover
Asset Turnover
Introduction to Measures of Profitability
Return on Assets
Return on Equity
Gross and Net Profit
Earnings Per Share and Price-Earnings Ratio
Dividend Payout Ratio
Free Cash Flow
Introduction to Measures of Solvency
Debt to Equity Ratio
Debt to Total Assets Ratio
Times Interest Earned
Introduction to Comparative Analysis of Financial Statements
Horizontal Analysis
Vertical Analysis
Practice: Financial Statement Analysis
Putting it Together: Financial Statement Analysis
Discussion: Financial Statement Analysis
Assignment: Coca Cola FSA

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3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

If you want to start your own business, you need to maintain detailed and accurate records of business performance in order for you, your investors, and your lenders, to make informed decisions about the future of your company. Financial statements are created with this purpose in mind. A set of financial statements includes the income statement, statement of owner’s equity, balance sheet, and statement of cash flows. These statements are discussed in detail in Introduction to Financial Statements . This chapter explains the relationship between financial statements and several steps in the accounting process. We go into much more detail in The Adjustment Process and Completing the Accounting Cycle .

Accounting Principles, Assumptions, and Concepts

In Introduction to Financial Statements , you learned that the Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP) , for both public- and private-sector businesses in the United States.

As you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. If US accounting rules are followed, the accounting rules are called US GAAP. International accounting rules are called International Financial Reporting Standards (IFRS) . Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC) .

You also learned that the SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. As a result, financial statement users are more informed when making decisions. The SEC not only enforces the accounting rules but also delegates the process of setting standards for US GAAP to the FASB.

Some companies that operate on a global scale may be able to report their financial statements using IFRS. The SEC regulates the financial reporting of companies selling their shares in the United States, whether US GAAP or IFRS are used. The basics of accounting discussed in this chapter are the same under either set of guidelines.

Ethical Considerations

Auditing of publicly traded companies.

When a publicly traded company in the United States issues its financial statements, the financial statements have been audited by a Public Company Accounting Oversight Board (PCAOB) approved auditor. The PCAOB is the organization that sets the auditing standards, after approval by the SEC. It is important to remember that auditing is not the same as accounting. The role of the Auditor is to examine and provide assurance that financial statements are reasonably stated under the rules of appropriate accounting principles. The auditor conducts the audit under a set of standards known as Generally Accepted Auditing Standards. The accounting department of a company and its auditors are employees of two different companies. The auditors of a company are required to be employed by a different company so that there is independence.

The nonprofit Center for Audit Quality explains auditor independence: “Auditors’ independence from company management is essential for a successful audit because it enables them to approach the audit with the necessary professional skepticism.” 1 The center goes on to identify a key practice to protect independence by which an external auditor reports not to a company’s management, which could make it more difficult to maintain independence, but to a company’s audit committee. The audit committee oversees the auditors’ work and monitors disagreements between management and the auditor about financial reporting. Internal auditors of a company are not the auditors that provide an opinion on the financial statements of a company. According to the Center for Audit Quality, “By law, public companies’ annual financial statements are audited each year by independent auditors—accountants who examine the data for conformity with U.S. Generally Accepted Accounting Principles (GAAP).” 2 The opinion from the independent auditors regarding a publicly traded company is filed for public inspection, along with the financial statements of the publicly traded company.

The Conceptual Framework

The FASB uses a conceptual framework , which is a set of concepts that guide financial reporting. These concepts can help ensure information is comparable and reliable to stakeholders. Guidance may be given on how to report transactions, measurement requirements, and application on financial statements, among other things. 3

IFRS Connection

Gaap, ifrs, and the conceptual framework.

The procedural part of accounting—recording transactions right through to creating financial statements—is a universal process. Businesses all around the world carry out this process as part of their normal operations. In carrying out these steps, the timing and rate at which transactions are recorded and subsequently reported in the financial statements are determined by the accepted accounting principles used by the company.

As you learned in Role of Accounting in Society , US-based companies will apply US GAAP as created by the FASB, and most international companies will apply IFRS as created by the International Accounting Standards Board (IASB). As illustrated in this chapter, the starting point for either FASB or IASB in creating accounting standards, or principles, is the conceptual framework. Both FASB and IASB cover the same topics in their frameworks, and the two frameworks are similar. The conceptual framework helps in the standard-setting process by creating the foundation on which those standards should be based. It can also help companies figure out how to record transactions for which there may not currently be an applicable standard. Though there are many similarities between the conceptual framework under US GAAP and IFRS, these similar foundations result in different standards and/or different interpretations.

Once an accounting standard has been written for US GAAP, the FASB often offers clarification on how the standard should be applied. Businesses frequently ask for guidance for their particular industry. When the FASB creates accounting standards and any subsequent clarifications or guidance, it only has to consider the effects of those standards, clarifications, or guidance on US-based companies. This means that FASB has only one major legal system and government to consider. When offering interpretations or other guidance on application of standards, the FASB can utilize knowledge of the US-based legal and taxation systems to help guide their points of clarification and can even create interpretations for specific industries. This means that interpretation and guidance on US GAAP standards can often contain specific details and guidelines in order to help align the accounting process with legal matters and tax laws.

In applying their conceptual framework to create standards, the IASB must consider that their standards are being used in 120 or more different countries, each with its own legal and judicial systems. Therefore, it is much more difficult for the IASB to provide as much detailed guidance once the standard has been written, because what might work in one country from a taxation or legal standpoint might not be appropriate in a different country. This means that IFRS interpretations and guidance have fewer detailed components for specific industries as compared to US GAAP guidance.

The conceptual framework sets the basis for accounting standards set by rule-making bodies that govern how the financial statements are prepared. Here are a few of the principles, assumptions, and concepts that provide guidance in developing GAAP.

Revenue Recognition Principle

The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized.

There also does not have to be a correlation between when cash is collected and when revenue is recognized. A customer may not pay for the service on the day it was provided. Even though the customer has not yet paid cash, there is a reasonable expectation that the customer will pay in the future. Since the company has provided the service, it would recognize the revenue as earned, even though cash has yet to be collected.

For example, Lynn Sanders owns a small printing company, Printing Plus. She completed a print job for a customer on August 10. The customer did not pay cash for the service at that time and was billed for the service, paying at a later date. When should Lynn recognize the revenue, on August 10 or at the later payment date? Lynn should record revenue as earned on August 10. She provided the service to the customer, and there is a reasonable expectation that the customer will pay at the later date.

Expense Recognition (Matching) Principle

The expense recognition principle (also referred to as the matching principle ) states that we must match expenses with associated revenues in the period in which the revenues were earned. A mismatch in expenses and revenues could be an understated net income in one period with an overstated net income in another period. There would be no reliability in statements if expenses were recorded separately from the revenues generated.

For example, if Lynn earned printing revenue in April, then any associated expenses to the revenue generation (such as paying an employee) should be recorded on the same income statement. The employee worked for Lynn in April, helping her earn revenue in April, so Lynn must match the expense with the revenue by showing both on the April income statement.

Cost Principle

The cost principle , also known as the historical cost principle , states that virtually everything the company owns or controls ( assets ) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor. There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance.

The primary exceptions to this historical cost treatment, at this time, are financial instruments, such as stocks and bonds, which might be recorded at their fair market value. This is called mark-to-market accounting or fair value accounting and is more advanced than the general basic concepts underlying the introduction to basic accounting concepts; therefore, it is addressed in more advanced accounting courses.

Once an asset is recorded on the books, the value of that asset must remain at its historical cost, even if its value in the market changes. For example, Lynn Sanders purchases a piece of equipment for $40,000. She believes this is a bargain and perceives the value to be more at $60,000 in the current market. Even though Lynn feels the equipment is worth $60,000, she may only record the cost she paid for the equipment of $40,000.

Full Disclosure Principle

The full disclosure principle states that a business must report any business activities that could affect what is reported on the financial statements. These activities could be nonfinancial in nature or be supplemental details not readily available on the main financial statement. Some examples of this include any pending litigation, acquisition information, methods used to calculate certain figures, or stock options. These disclosures are usually recorded in footnotes on the statements, or in addenda to the statements.

Separate Entity Concept

The separate entity concept prescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally. This concept is called the separate entity concept because the business is considered an entity separate and apart from its owner(s).

For example, Lynn Sanders purchases two cars; one is used for personal use only, and the other is used for business use only. According to the separate entity concept, Lynn may record the purchase of the car used by the company in the company’s accounting records, but not the car for personal use.

Conservatism

This concept is important when valuing a transaction for which the dollar value cannot be as clearly determined, as when using the cost principle. Conservatism states that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. This would mean that any uncertain or estimated expenses/losses should be recorded, but uncertain or estimated revenues/gains should not. This understates net income, therefore reducing profit. This gives stakeholders a more reliable view of the company’s financial position and does not overstate income.

Monetary Measurement Concept

In order to record a transaction, we need a system of monetary measurement , or a monetary unit by which to value the transaction. In the United States, this monetary unit is the US dollar. Without a dollar amount, it would be impossible to record information in the financial records. It also would leave stakeholders unable to make financial decisions, because there is no comparability measurement between companies. This concept ignores any change in the purchasing power of the dollar due to inflation.

Going Concern Assumption

The going concern assumption assumes a business will continue to operate in the foreseeable future. A common time frame might be twelve months. However, one should presume the business is doing well enough to continue operations unless there is evidence to the contrary. For example, a business might have certain expenses that are paid off (or reduced) over several time periods. If the business will stay operational in the foreseeable future, the company can continue to recognize these long-term expenses over several time periods. Some red flags that a business may no longer be a going concern are defaults on loans or a sequence of losses.

Time Period Assumption

The time period assumption states that a company can present useful information in shorter time periods, such as years, quarters, or months. The information is broken into time frames to make comparisons and evaluations easier. The information will be timely and current and will give a meaningful picture of how the company is operating.

For example, a school year is broken down into semesters or quarters. After each semester or quarter, your grade point average (GPA) is updated with new information on your performance in classes you completed. This gives you timely grading information with which to make decisions about your schooling.

A potential or existing investor wants timely i nformation by which to measure the performance of the company, and to help decide whether to invest. Because of the time period assumption, we need to be sure to recognize revenues and expenses in the proper period. This might mean allocating costs over more than one accounting or reporting period.

The use of the principles, assumptions, and concepts in relation to the preparation of financial statements is better understood when looking at the full accounting cycle and its relation to the detailed process required to record business activities ( Figure 3.2 ).

Concepts In Practice

Tax cuts and jobs act.

In 2017, the US government enacted the Tax Cuts and Jobs Act. As a result, financial stakeholders needed to resolve several issues surrounding the standards from GAAP principles and the FASB. The issues were as follows: “Current Generally Accepted Accounting Principles (GAAP) requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates,” and “implementation issues related to the Tax Cuts and Jobs Act and income tax reporting.” 4

In response, the FASB issued updated guidance on both issues. You can explore these revised guidelines at the FASB website (https://www.fasb.org/taxcutsjobsact#section_1).

The Accounting Equation

Introduction to Financial Statements briefly discussed the accounting equation, which is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources. The accounting equation is expressed as follows:

Recall that the accounting equation can be thought of from a “sources and claims” perspective; that is, the assets (items owned by the organization) were obtained by incurring liabilities or were provided by owners. Stated differently, everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations).

In our example in Why It Matters , we used an individual owner, Mark Summers, for the Supreme Cleaners discussion to simplify our example. Individual owners are sole proprietors in legal terms. This distinction becomes significant in such areas as legal liability and tax compliance. For sole proprietors, the owner’s interest is labeled “owner’s equity.”

In Introduction to Financial Statements , we addressed the owner’s value in the firm as capital or owner’s equity . This assumed that the business is a sole proprietorship. However, for the rest of the text we switch the structure of the business to a corporation, and instead of owner’s equity, we begin using stockholder’s equity , which includes account titles such as common stock and retained earnings to represent the owners’ interests. The primary reason for this distinction is that the typical company can have several to thousands of owners, and the financial statements for corporations require a greater amount of complexity.

As you also learned in Introduction to Financial Statements , the accounting equation represents the balance sheet and shows the relationship between assets, liabilities, and owners’ equity (for sole proprietorships/individuals) or common stock (for companies).

You may recall from mathematics courses that an equation must always be in balance. Therefore, we must ensure that the two sides of the accounting equation are always equal. We explore the components of the accounting equation in more detail shortly. First, we need to examine several underlying concepts that form the foundation for the accounting equation: the double-entry accounting system, debits and credits, and the “normal” balance for each account that is part of a formal accounting system.

Double-Entry Bookkeeping

The basic components of even the simplest accounting system are accounts and a general ledger . An account is a record showing increases and decreases to assets, liabilities, and equity—the basic components found in the accounting equation. As you know from Introduction to Financial Statements , each of these categories, in turn, includes many individual accounts, all of which a company maintains in its general ledger. A general ledger is a comprehensive listing of all of a company’s accounts with their individual balances.

Accounting is based on what we call a double-entry accounting system , which requires the following:

Each time we record a transaction, we must record a change in at least two different accounts. Having two or more accounts change will allow us to keep the accounting equation in balance.
Not only will at least two accounts change, but there must also be at least one debit and one credit side impacted.
The sum of the debits must equal the sum of the credits for each transaction.

In order for companies to record the myriad of transactions they have each year, there is a need for a simple but detailed system. Journals are useful tools to meet this need.

Debits and Credits

Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as a T-account . The concept of the T-account was briefly mentioned in Introduction to Financial Statements and will be used later in this chapter to analyze transactions. A T-account is called a “T-account” because it looks like a “T,” as you can see with the T-account shown here.

A debit records financial information on the left side of each account. A credit records financial information on the right side of an account. One side of each account will increase and the other side will decrease. The ending account balance is found by calculating the difference between debits and credits for each account. You will often see the terms debit and credit represented in shorthand, written as DR or dr and CR or cr , respectively. Depending on the account type, the sides that increase and decrease may vary. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation . You will learn more about the expanded accounting equation and use it to analyze transactions in Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions .

As we can see from this expanded accounting equation, Assets accounts increase on the debit side and decrease on the credit side. This is also true of Dividends and Expenses accounts. Liabilities increase on the credit side and decrease on the debit side. This is also true of Common Stock and Revenues accounts. This becomes easier to understand as you become familiar with the normal balance of an account.

Normal Balance of an Account

The normal balance is the expected balance each account type maintains, which is the side that increases. As assets and expenses increase on the debit side, their normal balance is a debit. Dividends paid to shareholders also have a normal balance that is a debit entry. Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” balance is a credit. Table 3.1 shows the normal balances and increases for each account type.

When an account produces a balance that is contrary to what the expected normal balance of that account is, this account has an abnormal balance . Let’s consider the following example to better understand abnormal balances.

Let’s say there were a credit of $4,000 and a debit of $6,000 in the Accounts Payable account. Since Accounts Payable increases on the credit side, one would expect a normal balance on the credit side. However, the difference between the two figures in this case would be a debit balance of $2,000, which is an abnormal balance. This situation could possibly occur with an overpayment to a supplier or an error in recording.

We define an asset to be a resource that a company owns that has an economic value. We also know that the employment activities performed by an employee of a company are considered an expense, in this case a salary expense. In baseball, and other sports around the world, players’ contracts are consistently categorized as assets that lose value over time (they are amortized).

For example, the Texas Rangers list “Player rights contracts and signing bonuses-net” as an asset on its balance sheet. They decrease this asset’s value over time through a process called amortization . For tax purposes, players’ contracts are treated akin to office equipment even though expenses for player salaries and bonuses have already been recorded. This can be a point of contention for some who argue that an owner does not assume the lost value of a player’s contract, the player does. 5

1 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
2 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
3 Financial Accounting Standards Board. “The Conceptual Framework.” http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774
4 Financial Accounting Standards Board (FASB). “Accounting for the Tax Cuts and Jobs Act.” https://www.fasb.org/taxcutsjobsact#section_1
5 Tommy Craggs. “MLB Confidential, Part 3: Texas Rangers.” Deadspin. August 24, 2010. https://deadspin.com/5619951/mlb-confidential-part-3-texas-rangers

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Accounting Concepts

What Does Accounting Concepts Mean?

In India, there are several rules which need to be followed while walking or driving on the road as it enables the smooth flow of traffic. Similarly, there are accounting rules that an accountant should follow while recording business transactions or recording accounts. They may be termed as accounting concepts. Hence, it can be said that:

“The term accounting concepts refer to basic rules, assumptions, and principles which act as a primary standard for recording business transactions and maintaining books of accounts”.

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What are the Objectives of the Accounting Concept?

The primary aim of accounting is to maintain uniformity and regularity in the preparation of accounting statements.

Accounting concepts act as an underlying principle that helps accountants in the preparation and maintenance of business records.

It aims to understand the business rules and regulations that are required to be followed by all types of business entities, and hence simplifying the detailed and comparable financial information.

What are the Different Accounting Concepts?

Following are the different accounting concepts that are widely used all around the world and hence are termed as universally accepted accounting rules. The different accounting concepts are:

Business Entity Concept

This concept assumes that the organization and business owners are two independent entities. Hence, the business translation and personal transaction of its owner are different. For example, when the business owner invests his money in the business, it is recorded as a liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as a business expense. Thus, the accounting transactions are recorded in the books of accounts from the organization's point of view and not the person owning the business.

Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and machinery for Rs. 10,000 and Rs 2000 remained in hand. These are the assets of the business and not of the business owner. According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. a liability of the business towards the owner of the business.

Now suppose, he takes away Rs. 5000 cash or goods for the same worth for his domestic purposes. This withdrawal of cash/goods by the owner from the business is his private expense and not the business expense. It is termed as Drawings.

Therefore, the business entity concept states that the business and the business owner are two separate/distinct persons. Accordingly, any expenses incurred by the owner for himself or his family from business will be considered as expenses and it will be represented as drawings.

Accrual Concept

The term accrual means something is due, especially an amount of money that is yet to be paid or received at the end of the accounting period. It implies that revenue is realized at the time of sale through cash or not whereas expenses are recognized when they become payable whether cash is paid or not. Therefore, both the transactions are recorded in the accounting period in which they relate.

In the accounting system, the accrual concept tells that the business revenue is realized at the time goods and services are sold irrespective of the fact when cash is received for the same. For example, On March 5, 2021, the firm sold goods for Rs 55000, and the payment was not received until April 5, 2021, the amount was due and payable to the firm on the date goods and services were sold i.e. March 5, 2021. It must be included in the revenue for the year ending March 31, 2021.

Similarly, expenses are recognized at the time services are provided, irrespective of the fact that cash paid for these services are made. For example, if the firm received goods costing Rs.20000 on March 9, 2021, but the payment is made on April 7, 2021, the accrual concept requires that expenses must be recorded for the year ending March 31, 2021, although no payment has been made until this date though the service has been received and the person to whom the payment should have been made is represented as a creditor of business firm.

In brief, the accrual concept states that revenue is recognized when realized and expenses are recognized when they become due and payable irrespective of the cash receipt or cash payment.

Accounting Cost Concept

The accounting cost concept states all the business assets should be written down in the book of accounts at the price assets are purchased, including the cost of acquisition, and installation. The assets are not recorded at their market price. It implies that the fixed assets like plant and machinery, building, furniture, etc are recorded at their purchase price. For example, a machine was purchased by ABC Limited for Rs.10,00,000, for manufacturing bottles. An amount of Rs.2,000 was spent on transporting the machine to the factory site. Also, Rs.2000 was additionally spent on its installation. Hence, the total amount at which the machine will be recorded in the books of accounts would be the total of all these items i.e. Rs.10, 040, 00. This cost is also termed as historical cost.

Dual Aspect

The dual aspect is the basic principle of accounting. It provides the basis for recording business transactions in the books of accounts. This concept assumes that every transaction recorded in the books of accountants is based on dual concepts. This implies that the transaction that is recorded affects two accounts on their respective opposite sides. Hence, the transaction should be recorded at dual places. It implies that both aspects of the transaction should be recorded in the books of account. For example, goods purchased in exchange for cash have two aspects such as paying cash and receiving goods. Therefore, both the aspects should be registered in the books of accounts. The duality of the transaction is commonly expressed in the terms of the following equation given below:

Assets = Liabilities + Capital

The dual concept implies that every transaction has a similar effect on assets and liabilities in such a way that the value of total assets is always equal to the value of total liabilities.

Going Concepts

The Going concept in accounting states that a business activities will be carried by any firm for an unlimited duration This simply means that every business has continuity of life. Hence, it will not be dissolved shortly. This is an important assumption of accounting as it provides a base for representing the asset value in the balance sheet.

For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its life span is 10 years. According to the Going concept, every year some amount of assets purchased by the business will be represented as an expense and the balance amount will be shown as an asset in the books of accounts. Thus, if an amount is incurred on an item that will be used in business for several years ahead, it will not be proper to charge the amount from the revenues of that particular year in which the item was purchased Only a part of the purchase value is shown as an expense in the year of purchase and the remaining balance is shown as an asset in the balance sheet.

Money Measurement Concept

The money measurement concept assumes that the business transactions are made in terms of money i.e. in the currency of a country. In India, such transactions are made in terms of the rupee. Hence, as per the money measurement concept, transactions that can be expressed in terms of money should be recorded in books of accounts. For example, the sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are expressed in terms of money, hence these transactions can be recorded in the books of accounts.

Accounting Period Concepts

Accounting period concepts state that all the transactions recorded in the books of account should be based on the assumption that profit on these transactions is to be ascertained for a specific period. Hence this concept says that the balance sheet and profit and loss account of a business should be prepared at regular intervals. This is important for different purposes like calculation of profit and loss, tax calculation, ascertaining financial position, etc. Also, this concept assumes that business indefinite life is divided into two parts. These parts are termed accounting periods. It can be one month, three months, six months, etc. Usually, one year is considered as one accounting period which may be a calendar year or financial year.

The year that begins on January 1 and ends on January 31 is termed as calendar year whereas the year that begins on April 1 and ends on March 31 is termed as financial year.

Realization Concept

The term realization concept states that revenue earned from any business transaction should be included in the accounting records only when it is realized. The term realization implies the creation of a legal right to receive money. Hence, it should be noted that selling goods is considered as realization whereas receiving order is not considered as realization.

In other words, the revenue concept states that revenue is realized when cash is received or the right to receive cash on the sale of goods or services or both have been created.

Matching Concepts

The Matching concept states that revenue and expenses incurred to earn the revenue must belong to the same accounting period. Hence, once revenue is realized, the next step is to assign the relevant accounting period. For example, if you pay a commission to a salesperson for the sale that you record in March. The commission should also be recorded in the same month.

The matching concept implies that all the revenue earned during an accounting year whether received or not during that year or all the expenses incurred whether paid or not during that year should be considered while determining the profit and loss of the business for that year. This enables the investors or shareholders to know the exact profit and loss of the business.

What are Accounting Conventions?

Accounting conventions are certain restrictions for the business transactions that are complicated and are unclear. Although accounting conventions are not generally or legally binding, these generally accepted principles maintain consistency in financial statements. While standardized financial reporting processes, the accounting conventions consider comparison, full disclosure of transaction, relevance, and application in financial statements.

Four important types of accounting conventions are:

Conservatism: It tells the accountants to err on the side of caution when providing the estimates for the assets and liabilities, which means that when there are two values of a transaction available, then the always lower one should be referred to.

Consistency: A company is forced to apply the similar accounting principles across the different accounting cycles. Once this chooses a method it is urged to stick with it in the future also, unless it finds a good reason to perform it in another way. In the absence of these accounting conventions, the ability of investors to compare and assess how the company performs becomes more challenging.

Full Disclosure: Information that is considered potentially significant and relevant is to be completely disclosed, regardless of whether it is detrimental to the company.

Materiality: Similar to full disclosure, this convention also bound organizations to put down their cards on the table, meaning they need to totally disclose all the material facts about the company. The aim behind this materiality convention is that any information that could influence the person’s decision by considering the financial statement must be included.

Accounting Principles

Accounting principles are a set of guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while presenting or recording financial transactions in the books of account. This enables companies to present a true and fair view of the financial statements.

Here is the list of the top 6 accounting principles that companies follow quite often:

Accrual Principle

Consistency Principle

Conservatism Principle

Going Concern Principle

Matching Principle

Full Disclosure Principle

FAQs on Accounting Concepts

1. What is an Accounting System?

An accounting system is a set of accounting processes, integrated procedures, and controls. The primary motive of the accounting system is to keep up the records of business transactions, compile those transactions into an aggregated form, and draw up a report that can be used by decision authorities to audit, evaluate, and enhance the business operations. There are two types of accounting systems namely single entry system and a double-entry system.

2. What are Expenses?

An expense is the cost of operations that a company incurs to generate its revenue. A popular saying goes, “it costs money to make money.” Expenses include payments to the suppliers, employee wages, factory leases, and equipment or asset depreciation. Examples of Expenses are - Cost of goods sold, Sales commissions expense, Delivery expense, rent expense, Advertising expense, etc.

3. What are Accounting Standards?

Accounting standard refers to the set of rules, guidelines, and principles framed by the regulatory body or the government that act as a framework for accounting policies and practices. In the United States, the Generally Accepted Accounting Principle, also known as GAAP, is an accounting standard that must be followed while presenting and preparing financial statements. Generally,accounting standards are established to ensure transparency of accounting professionals and consistency in accounting principles followed by organizations. All countries have their own accounting standards framed by the regulatory body or the government. However, these standards may vary from one country to another.

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Answer Key Chapter 1
Why It Matters; 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements; 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions; 3.3 Define and Describe the Initial Steps in the Accounting Cycle; 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business ...
Preface
Why It Matters; 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements; 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions; 3.3 Define and Describe the Initial Steps in the Accounting Cycle; 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business ...
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Accounting Principles Explained: How They Work, GAAP, IFRS
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A Financial Statement Analysis
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3.1 Describe Principles, Assumptions, and Concepts of Accounting and
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Accounting Principles: A Business Perspective

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Table of Contents

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What Are Accounting Principles?

What Are the Basic Accounting Principles?

The Bottom Line

Accounting Principles Explained: How They Work, GAAP, IFRS

Key Takeaways

The Purpose of Accounting Principles

Comparability

Generally Accepted Accounting Principles (GAAP)

International Financial Reporting Standards (IFRS)

Who sets accounting principles and standards?

How does IFRS differ from GAAP?

When were accounting principles first set forth?

What are some critiques of accounting principles?

Mastering the Numbers: 10 Essential Accounting Principles Every Student Should Know

1. The Matching Principle:

Understanding the Essence:

Application in Assignments:

Real-World Examples:

2. The Revenue Recognition Principle:

Deciphering the Principle:

Impact on Financial Statements:

3. The Historical Cost Principle:

Foundations of the Historical Cost Principle:

4. The Conservatism Principle:

Key Tenets of the Conservatism Principle:

Application in Financial Reporting:

Practical Example:

5. The Consistency Principle:

Conceptual Understanding:

6. The Materiality Principle:

Defining Materiality:

7. The Objectivity Principle:

Key Tenets of the Objectivity Principle:

Application in Accounting Practices:

8. The Consensus Principle:

Foundations of Consensus:

Application in Accounting Scenarios:

9. The Relevance Principle:

Key Tenets of the Relevance Principle:

10. The Comparability Principle:

Defining Comparability:

Uniformity in Accounting Practices:

Conclusion:

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Financial Accounting and Reporting Classroom Materials

Award-Winning Curricula

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About AICPA

Financial Accounting

Table of Contents

Faculty Resources

Course Resources

Module 0: Personal Accounting

Module 1: The Role of Accounting in Business

Module 2: Accounting Principles

Module 3: Recording Business Transactions

Module 4: Completing the Accounting Cycle

Module 5: Accounting for Cash

Module 6: Receivables and Revenue

Module 7: Merchandising Operations

Module 8: Inventory Valuation Methods

Module 9: Property, Plant, and Equipment

Module 10: Other Assets

Module 11: Current Liabilities

Module 12: Non-Current Liabilities

Module 13: Accounting for Corporations

Module 14: Statement of Cash Flows

Module 15: Financial Statement Analysis

Lumen Learning

3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

Accounting Principles, Assumptions, and Concepts

Ethical Considerations

The Conceptual Framework

IFRS Connection