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Accounting Principles.
NSAHO, C. MARO
ADCS -1 AC 311: 2008/2009 INTRODUCTORY ACCOUNTING NOTES
Introduction to Accounting Principles
Accounting Principles.
There are general rules and concepts that govern the field of accounting. These general rules—referred to as basic accounting principles and guidelines—form the groundwork on which more detailed, complicated, and legalistic accounting rules are based. For example, the Financial Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.
The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices.
If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company's stock is publicly traded, federal law requires the company's financial statements be audited by independent public accountants. Both the company's management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.
Basic Accounting Principles and Guidelines
Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The table below lists the ten main accounting principles and guidelines together with a highly condensed explanation of each.
Basic Accounting Principle
What It Means in Relationship to a Financial Statement
1. Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
2. Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2008 transaction.
3. Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2008, or the 5 weeks ended May 1, 2008. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2008, the amount is known; but for the income statement for the three months ended March 31, 2008, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ending December 31, 2008 the month ending December 31, 2008 the three months ending December 31, 2008 or the year ended December 31, 2008.
4. Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser.
5. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements.
6. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
7. Matching Principle
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2007 revenues as a bonus on January 15, 2008, the company should report the bonus as an expense in 2007 and the amount unpaid at December 31, 2007 as a liability. (The expense is occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.
(To learn more about adjusting entries go to Explanation of Adjusting Entries and Drills for Adjusting Entries.)
8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt.
9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. A professional judgment is needed to decide whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.
Matching Concept
ACCOUNTING TERMS
THE CONSERVATISM CONCEPT
REVENUE AND EXPENSE RECOGNITION
FURTHER READING:
The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Accordingly, under the matching concept the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. It follows, therefore, that when expenses in a period are matched with the revenues generated for the same period, the result is the net income or loss for that period.
ACCOUNTING TERMS
While in everyday vernacular, the terms "cost," "expenditure," and "expense" are used almost interchangeably; in discussing accounting principles, these terms have distinctly different meanings. A cost is the amount of money, or other resources, used for a specific purpose. When a cost is incurred, it is associated with expenditure; expenditures can either result in the decrease of an asset, such as cash, or the increase of a liability, such as accounts payable. Thus, expenditures result in either assets or expenses. If the expenditure will benefit future periods, such as the purchase of office equipment, it is an asset. If it will benefit the current period, such as the purchase of supplies needed to fill immediate manufacturing needs, it is an expense of that period. Logically, then, it follows that an expense is a cost item that is specifically applicable to the current accounting period used during that period to earn revenue.
THE CONSERVATISM CONCEPT
Oftentimes, when deciding which revenues and expenses to match in a given accounting period, accountants have a difficult time recognizing which revenues and expenses are certain for that period. Like many people, accountants and other business professionals tend to be overly optimistic concerning the revenues that their companies generate but tend to be more realistic concerning the associated expenses. Thus, certain accounting principles have been developed to offset the tendency toward optimism. These principles recognize that increases in reported net income require stronger proof than do increases in expenses. Therefore, when deciding which expenses and revenues to acknowledge during a given accounting period, accountants are supposed to apply the conservatism concept. This concept has two conditions associated with it—firms can recognize expenses as soon as they are reasonably possible, and firms can recognize revenues as soon as they are reasonably certain.
Usually, a company applies the matching concept by being reasonably certain which items will generate revenue and matching them with any possible expenses for those items. To illustrate, if a company produces an item costing $100 that it later sells for $150, the company must decide the accounting period in which it is reasonably certain to receive the $150. When this is decided, the company must match the $100 cost with the $150 revenue as an expense, resulting in $50 income from sales. Interestingly, not all companies take these steps in the same order; sometimes expenses are first identified and later revenues are matched to them.
REVENUE AND EXPENSE RECOGNITION
The best matching of revenues and expenses occurs under the accrual basis of accounting. Under the accrual basis, revenue (as well as expenses, and other changes in assets, liabilities, and equity) is generally recognized in the period in which the economic event takes place, usually at the point of sale—not when the cash actually changes hands. Revenue recognition occurs at this time because the earnings process is complete and there is evidence supporting the sale price. Earnings, however, can be identified at other times, such as during an item's production, at the end of an item's production but prior to its sale, or when the money is collected, as with payments made on installments. Costs are recognized as expenses in a particular period if (1) there is a direct association between costs and revenues for the period or (2) the costs cannot be assigned to the generation of revenues of any period in the future.
The recognition of revenues and expenses can become more complicated, however, because companies often spend money or assume liabilities for non-monetary assets affecting more than one accounting period. Examples of transactions affecting more than one period are: (1) supplies purchased in a prior accounting period but used for several later periods; (2) insurance premiums paid that cover more than one period; (3) buildings and equipment; and (4) expenses—such as salaries—paid after a service has been rendered. Initially, these expenses are recorded at their original amounts, which represent the future benefit that the company anticipates receiving from these items. As they are used, the related costs must be matched against the revenues earned for the particular period. For example, for equipment and buildings, accountants gradually expense the costs of these assets over their estimated service life, a concept known as depreciation.
In accounting, adjusting entries are completed at the end of the accounting period to update the accounts for internal business transactions. Adjusting entries are commonly used to effect the matching of revenues and expenses. For example, the amount of materials used during a particular accounting period would be recorded by an adjusting entry at the end of each period. Expenditures made in the current period for assets not yet used would be recorded as assets and included in the current period's balance sheet, not recorded as expenses in the current period. As the assets are used, the related costs would be matched against revenues for that period by making an adjusting entry at the end of that period. If a company fails to make these adjustments at the proper time, the net income and assets of the company could be dramatically overstated.
As businesses have gotten more complex because of globalization, creative sales, and customer financing techniques, the proper period in which to recognize revenue has become less clear. Because, under the matching concept, the recognition of revenue triggers the recognition of the related expenses, this can have serious effects on a company's financial statements.
As a result, in recent years, there has been a dramatic increase in the number of companies restating prior years' earnings. In most instances, this has been prompted by the discovery that the original timing of the recognition of revenues and, therefore, the related expenses (the matching concept!) had been in error.
[Kathryn Snavely,
FURTH
References:
Anthony, Robert N., and James S. Reece. Accounting: Text and Cases. 8th ed. Homewood, IL: Irwin, 1989.
Diamond, Michael A., Eric G. Flamholtz, and Diana Troik Flamholtz. Financial Accounting 2nd ed. Boston: PWS-Kent, 1990.
Eskew, Robert K., and Daniel L. Jensen. Financial Accounting. 4th ed. New York: McGraw-Hill, 1992.
Meigs, Robert F., et al. Accounting: The Basis for Business Decisions. 11th ed. Boston: Irwin/McGraw-Hill, 1999.
Solomon, Lanny M., Larry M. Walther, and Richard J. Vargo. Financial Accounting. 3rd ed. New
What should be the entry when goods are purchased at a discount?
If you purchase $1000 of goods having a trade discount of 20%, you can debit Purchases (periodic system) or Inventory (perpetual system) for $800 and Accounts Payable for $800. This is consistent with the cost principle which means the cash or cash equivalent amount.
If the invoice allows a 1% discount for paying within 10 days, you can record the 1% discount when you make payment within the allotted time. The entry for paying within 10 days would be: debit Accounts Payable $800, credit Cash for $792, and credit Purchase Discounts $8 (or Inventory $8 if perpetual).
If you are certain to always pay vendor invoices within their discount periods, you could initially record the above invoice at $792 (instead of $800). Debit Purchases or Inventory for $792 and credit Accounts Payable $792. When paying the invoice within the discount period, the entry would be a debit to Accounts Payable for $792 and a credit to Cash for $792. If you fail to pay the invoice within the discount period, the payment will have to be $800 and will be recorded with a debit to Accounts Payable $792, a debit to Purchase Discounts Lost $8, and a credit to Cash for $800. Purchase Discounts Lost is an income statement account.
The Prudence Concept
Accountants are a cautious lot and where alternative accounting procedures or valuations are possible, the most pessimistic one is normally chosen. This is the prudence concept: that is, giving the most cautious representation of the financial position.
So, if you have unsold goods at the end of your financial year, in your balance sheet, they will be valued at their purchase cost (say, £100 each) rather than their sale price of £150. To value them at their sale price of £150, would mean that you had anticipated making a profit of £50 before you had actually sold them.
Also, for example, if a loss is foreseen, it should be taken into account immediately: If a business purchases stock for £1,200 but then because of a sudden slump in the market, it can only be sold for £900, then the stock should be valued at £900 in the accounts, (therefore recognising the £300 immediately.
The prudence concept basically means not counting your chickens before they’re hatched.
ADCS -1 AC 311: 2008/2009 INTRODUCTORY ACCOUNTING NOTES
Introduction to Accounting Principles
Accounting Principles.
There are general rules and concepts that govern the field of accounting. These general rules—referred to as basic accounting principles and guidelines—form the groundwork on which more detailed, complicated, and legalistic accounting rules are based. For example, the Financial Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.
The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices.
If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company's stock is publicly traded, federal law requires the company's financial statements be audited by independent public accountants. Both the company's management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.
Basic Accounting Principles and Guidelines
Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The table below lists the ten main accounting principles and guidelines together with a highly condensed explanation of each.
Basic Accounting Principle
What It Means in Relationship to a Financial Statement
1. Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
2. Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2008 transaction.
3. Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2008, or the 5 weeks ended May 1, 2008. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2008, the amount is known; but for the income statement for the three months ended March 31, 2008, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ending December 31, 2008 the month ending December 31, 2008 the three months ending December 31, 2008 or the year ended December 31, 2008.
4. Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser.
5. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements.
6. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
7. Matching Principle
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2007 revenues as a bonus on January 15, 2008, the company should report the bonus as an expense in 2007 and the amount unpaid at December 31, 2007 as a liability. (The expense is occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run.
(To learn more about adjusting entries go to Explanation of Adjusting Entries and Drills for Adjusting Entries.)
8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt.
9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. A professional judgment is needed to decide whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.
Matching Concept
ACCOUNTING TERMS
THE CONSERVATISM CONCEPT
REVENUE AND EXPENSE RECOGNITION
FURTHER READING:
The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Accordingly, under the matching concept the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. It follows, therefore, that when expenses in a period are matched with the revenues generated for the same period, the result is the net income or loss for that period.
ACCOUNTING TERMS
While in everyday vernacular, the terms "cost," "expenditure," and "expense" are used almost interchangeably; in discussing accounting principles, these terms have distinctly different meanings. A cost is the amount of money, or other resources, used for a specific purpose. When a cost is incurred, it is associated with expenditure; expenditures can either result in the decrease of an asset, such as cash, or the increase of a liability, such as accounts payable. Thus, expenditures result in either assets or expenses. If the expenditure will benefit future periods, such as the purchase of office equipment, it is an asset. If it will benefit the current period, such as the purchase of supplies needed to fill immediate manufacturing needs, it is an expense of that period. Logically, then, it follows that an expense is a cost item that is specifically applicable to the current accounting period used during that period to earn revenue.
THE CONSERVATISM CONCEPT
Oftentimes, when deciding which revenues and expenses to match in a given accounting period, accountants have a difficult time recognizing which revenues and expenses are certain for that period. Like many people, accountants and other business professionals tend to be overly optimistic concerning the revenues that their companies generate but tend to be more realistic concerning the associated expenses. Thus, certain accounting principles have been developed to offset the tendency toward optimism. These principles recognize that increases in reported net income require stronger proof than do increases in expenses. Therefore, when deciding which expenses and revenues to acknowledge during a given accounting period, accountants are supposed to apply the conservatism concept. This concept has two conditions associated with it—firms can recognize expenses as soon as they are reasonably possible, and firms can recognize revenues as soon as they are reasonably certain.
Usually, a company applies the matching concept by being reasonably certain which items will generate revenue and matching them with any possible expenses for those items. To illustrate, if a company produces an item costing $100 that it later sells for $150, the company must decide the accounting period in which it is reasonably certain to receive the $150. When this is decided, the company must match the $100 cost with the $150 revenue as an expense, resulting in $50 income from sales. Interestingly, not all companies take these steps in the same order; sometimes expenses are first identified and later revenues are matched to them.
REVENUE AND EXPENSE RECOGNITION
The best matching of revenues and expenses occurs under the accrual basis of accounting. Under the accrual basis, revenue (as well as expenses, and other changes in assets, liabilities, and equity) is generally recognized in the period in which the economic event takes place, usually at the point of sale—not when the cash actually changes hands. Revenue recognition occurs at this time because the earnings process is complete and there is evidence supporting the sale price. Earnings, however, can be identified at other times, such as during an item's production, at the end of an item's production but prior to its sale, or when the money is collected, as with payments made on installments. Costs are recognized as expenses in a particular period if (1) there is a direct association between costs and revenues for the period or (2) the costs cannot be assigned to the generation of revenues of any period in the future.
The recognition of revenues and expenses can become more complicated, however, because companies often spend money or assume liabilities for non-monetary assets affecting more than one accounting period. Examples of transactions affecting more than one period are: (1) supplies purchased in a prior accounting period but used for several later periods; (2) insurance premiums paid that cover more than one period; (3) buildings and equipment; and (4) expenses—such as salaries—paid after a service has been rendered. Initially, these expenses are recorded at their original amounts, which represent the future benefit that the company anticipates receiving from these items. As they are used, the related costs must be matched against the revenues earned for the particular period. For example, for equipment and buildings, accountants gradually expense the costs of these assets over their estimated service life, a concept known as depreciation.
In accounting, adjusting entries are completed at the end of the accounting period to update the accounts for internal business transactions. Adjusting entries are commonly used to effect the matching of revenues and expenses. For example, the amount of materials used during a particular accounting period would be recorded by an adjusting entry at the end of each period. Expenditures made in the current period for assets not yet used would be recorded as assets and included in the current period's balance sheet, not recorded as expenses in the current period. As the assets are used, the related costs would be matched against revenues for that period by making an adjusting entry at the end of that period. If a company fails to make these adjustments at the proper time, the net income and assets of the company could be dramatically overstated.
As businesses have gotten more complex because of globalization, creative sales, and customer financing techniques, the proper period in which to recognize revenue has become less clear. Because, under the matching concept, the recognition of revenue triggers the recognition of the related expenses, this can have serious effects on a company's financial statements.
As a result, in recent years, there has been a dramatic increase in the number of companies restating prior years' earnings. In most instances, this has been prompted by the discovery that the original timing of the recognition of revenues and, therefore, the related expenses (the matching concept!) had been in error.
[Kathryn Snavely,
FURTH
References:
Anthony, Robert N., and James S. Reece. Accounting: Text and Cases. 8th ed. Homewood, IL: Irwin, 1989.
Diamond, Michael A., Eric G. Flamholtz, and Diana Troik Flamholtz. Financial Accounting 2nd ed. Boston: PWS-Kent, 1990.
Eskew, Robert K., and Daniel L. Jensen. Financial Accounting. 4th ed. New York: McGraw-Hill, 1992.
Meigs, Robert F., et al. Accounting: The Basis for Business Decisions. 11th ed. Boston: Irwin/McGraw-Hill, 1999.
Solomon, Lanny M., Larry M. Walther, and Richard J. Vargo. Financial Accounting. 3rd ed. New
What should be the entry when goods are purchased at a discount?
If you purchase $1000 of goods having a trade discount of 20%, you can debit Purchases (periodic system) or Inventory (perpetual system) for $800 and Accounts Payable for $800. This is consistent with the cost principle which means the cash or cash equivalent amount.
If the invoice allows a 1% discount for paying within 10 days, you can record the 1% discount when you make payment within the allotted time. The entry for paying within 10 days would be: debit Accounts Payable $800, credit Cash for $792, and credit Purchase Discounts $8 (or Inventory $8 if perpetual).
If you are certain to always pay vendor invoices within their discount periods, you could initially record the above invoice at $792 (instead of $800). Debit Purchases or Inventory for $792 and credit Accounts Payable $792. When paying the invoice within the discount period, the entry would be a debit to Accounts Payable for $792 and a credit to Cash for $792. If you fail to pay the invoice within the discount period, the payment will have to be $800 and will be recorded with a debit to Accounts Payable $792, a debit to Purchase Discounts Lost $8, and a credit to Cash for $800. Purchase Discounts Lost is an income statement account.
The Prudence Concept
Accountants are a cautious lot and where alternative accounting procedures or valuations are possible, the most pessimistic one is normally chosen. This is the prudence concept: that is, giving the most cautious representation of the financial position.
So, if you have unsold goods at the end of your financial year, in your balance sheet, they will be valued at their purchase cost (say, £100 each) rather than their sale price of £150. To value them at their sale price of £150, would mean that you had anticipated making a profit of £50 before you had actually sold them.
Also, for example, if a loss is foreseen, it should be taken into account immediately: If a business purchases stock for £1,200 but then because of a sudden slump in the market, it can only be sold for £900, then the stock should be valued at £900 in the accounts, (therefore recognising the £300 immediately.
The prudence concept basically means not counting your chickens before they’re hatched.
Thursday, June 12, 2008
MMES:Chachu ya uboreshaji elimu ya ufundi
Wanafunzi wa shule za sekondari wakiwa katika midahalo yenye lengo la kupanua uelewa wao
MPANGO wa Maendeleo ya Elimu ya Sekondari nchini (MMES) uliolenga kila kata nchini kuwa na shule ya sekondari, umefanikiwa kwa kiasi kikubwa. Umewezesha wanafunzi wengi kupata nafasi za kujiunga na masomo hayo.
Kufanikiwa huko, kunaleta matumaini kuwa katika kipindi cha miaka michache ijayo, nchi itakuwa na wasomi wengi waliohitimu elimu ya sekondari, ukilinganisha na miaka mingi iliyopita, kabla ya mpango huo haujaanzishwa. Hakuna ubishi kuwa hayo ni mafanikio makubwa ya kujivunia.
Wananchi wanatakiwa kupongezwa, kwa kujitolea kwa hali na mali kuchangia ujenzi wa shule hizo hadi kufikia mafanikio yaliyopo sasa. Jitihada zao kwa kushirikiana na Serikali, zinatuhakikishia kuwa taifa la baadaye tunalolijenga sasa, litakuwa na wasomi wengi wenye mwelekeo mzuri wa kupambana na mazingira yao na kujiletea maendeleo kwa haraka.
Pamoja na mafanikio hayo, kuna jambo ambalo mara nyingi huwa natamani kulizungumzia na kwa kupitia njia hii. Nina imani kuwa ujumbe wangu, utafika kwa Rais Jakaya Kikwete na Wizara ya Elimu na Mafunzo ya Ufundi Stadi.
Jambo hilo sio jingine, bali ni uimarishwaji wa elimu ya ufundi nchini. Kwangu mimi naamini kuwa elimu ya ufundi, ndio injini muhimu ya kuleta maendeleo ya haraka, kuliko kutegemea elimu ambayo inamjenga mtu kuajiriwa pekee.
Elimu hiyo ya ufundi ni muhimu zaidi, ikizingatiwa kuwa nchi nyingi ambazo zimepata maendeleo ya haraka, ziliwekeza katika elimu hiyo. Hatua hiyo ilisaidia kuzalisha wataalamu wengi, ambao kwa kutumia ujuzi na ubunifu wao, waliweza kuzalisha bidhaa ndogo ndogo, ambazo zinaendana na mahitaji husika.
Nchi kama China kwa kiwango kikubwa imewekeza katika ufundi huo. Sasa nchi hiyo ni mzalishaji mkubwa wa bidhaa ndogo ndogo, ambazo zinauzwa kwa wingi katika bara la Afrika na dunia kwa ujumla.
Hivyo, kuna kila sababu kuhakikisha kuwa Serikali kupitia Wizara ya Elimu inaweka mikakati ya kuboresha elimu ya ufundi nchini, kwa kujenga vyuo vya ufundi katika kila Tarafa nchini, vitakavyofundisha wahitimu wa elimu ya sekondari ili waweze kujiajiri wenyewe.
Kama kila kata nchini kwa sasa imeweza kuwa na sekondari zaidi ya mbili na zingine sekondari hadi tatu, kwa nini tushindwe kujenga chuo kimoja cha ufundi katika kila Tarafa ili visaidie kufundisha watoto wetu mara wanapomaliza elimu ya sekondari?
Hofu yangu kubwa ni kuwa wanafunzi wengi wanaomaliza kidato cha nne, hawapati nafasi ya kujiunga na kidato cha tano, hivyo kuwafanya wabaki mitaani. Hali hiyo inasababisha elimu hiyo kukosa thamani.
Lakini kwa kujenga vyuo hivyo, tutakuwa tunawahakikishia watoto wetu kuwa mara wanapomaliza elimu ya sekondari na kushindwa kuendelea na kidato cha tano, watajiunga na masomo ya ufundi moja kwa moja.
Hiyo itasaidia uchumi wa nchi kukua kwa haraka, tofauti na sasa, kwani wahitimu hao wataweza kupata stadi za kuyamudu mazingira yao na kuzalisha mali kulingana na maeneo waliyopo, badala ya kutegemea ajira, ambazo kwa sasa zimekuwa haba.
Katika kutekeleza hilo, yawezekana kutokea kwa upungufu wa wataalamu wa kufundisha katika vyuo hivyo. Lakini, najua serikali ina nchi marafiki ambazo zimepiga hatua kubwa katika teknolojia, hivyo inaweza kuomba wataalamu watakaofundisha kwenye vyuo hivyo.
Tusiogope gharama ya kupata wataalamu kutoka nchi nyingine, kwani nina imani kuwa baada ya miaka mitano au zaidi, nchi itakuwa na wataalamu wenye uwezo wa kubuni na kutengeneza vitu mbalimbali, ikiwa ni pamoja na kufundisha wanafunzi katika vyuo hivyo. Kwa kuwa tumefanikiwa kutekeleza MMES, basi sasa ni vema serikali ianzishe mpango wa kujenga vyuo vya ufundi katika kila tarafa nchini.
Author:Hudson Kazonta
Daily News; Thursday,June 12, 2008 @00:05
MPANGO wa Maendeleo ya Elimu ya Sekondari nchini (MMES) uliolenga kila kata nchini kuwa na shule ya sekondari, umefanikiwa kwa kiasi kikubwa. Umewezesha wanafunzi wengi kupata nafasi za kujiunga na masomo hayo.
Kufanikiwa huko, kunaleta matumaini kuwa katika kipindi cha miaka michache ijayo, nchi itakuwa na wasomi wengi waliohitimu elimu ya sekondari, ukilinganisha na miaka mingi iliyopita, kabla ya mpango huo haujaanzishwa. Hakuna ubishi kuwa hayo ni mafanikio makubwa ya kujivunia.
Wananchi wanatakiwa kupongezwa, kwa kujitolea kwa hali na mali kuchangia ujenzi wa shule hizo hadi kufikia mafanikio yaliyopo sasa. Jitihada zao kwa kushirikiana na Serikali, zinatuhakikishia kuwa taifa la baadaye tunalolijenga sasa, litakuwa na wasomi wengi wenye mwelekeo mzuri wa kupambana na mazingira yao na kujiletea maendeleo kwa haraka.
Pamoja na mafanikio hayo, kuna jambo ambalo mara nyingi huwa natamani kulizungumzia na kwa kupitia njia hii. Nina imani kuwa ujumbe wangu, utafika kwa Rais Jakaya Kikwete na Wizara ya Elimu na Mafunzo ya Ufundi Stadi.
Jambo hilo sio jingine, bali ni uimarishwaji wa elimu ya ufundi nchini. Kwangu mimi naamini kuwa elimu ya ufundi, ndio injini muhimu ya kuleta maendeleo ya haraka, kuliko kutegemea elimu ambayo inamjenga mtu kuajiriwa pekee.
Elimu hiyo ya ufundi ni muhimu zaidi, ikizingatiwa kuwa nchi nyingi ambazo zimepata maendeleo ya haraka, ziliwekeza katika elimu hiyo. Hatua hiyo ilisaidia kuzalisha wataalamu wengi, ambao kwa kutumia ujuzi na ubunifu wao, waliweza kuzalisha bidhaa ndogo ndogo, ambazo zinaendana na mahitaji husika.
Nchi kama China kwa kiwango kikubwa imewekeza katika ufundi huo. Sasa nchi hiyo ni mzalishaji mkubwa wa bidhaa ndogo ndogo, ambazo zinauzwa kwa wingi katika bara la Afrika na dunia kwa ujumla.
Hivyo, kuna kila sababu kuhakikisha kuwa Serikali kupitia Wizara ya Elimu inaweka mikakati ya kuboresha elimu ya ufundi nchini, kwa kujenga vyuo vya ufundi katika kila Tarafa nchini, vitakavyofundisha wahitimu wa elimu ya sekondari ili waweze kujiajiri wenyewe.
Kama kila kata nchini kwa sasa imeweza kuwa na sekondari zaidi ya mbili na zingine sekondari hadi tatu, kwa nini tushindwe kujenga chuo kimoja cha ufundi katika kila Tarafa ili visaidie kufundisha watoto wetu mara wanapomaliza elimu ya sekondari?
Hofu yangu kubwa ni kuwa wanafunzi wengi wanaomaliza kidato cha nne, hawapati nafasi ya kujiunga na kidato cha tano, hivyo kuwafanya wabaki mitaani. Hali hiyo inasababisha elimu hiyo kukosa thamani.
Lakini kwa kujenga vyuo hivyo, tutakuwa tunawahakikishia watoto wetu kuwa mara wanapomaliza elimu ya sekondari na kushindwa kuendelea na kidato cha tano, watajiunga na masomo ya ufundi moja kwa moja.
Hiyo itasaidia uchumi wa nchi kukua kwa haraka, tofauti na sasa, kwani wahitimu hao wataweza kupata stadi za kuyamudu mazingira yao na kuzalisha mali kulingana na maeneo waliyopo, badala ya kutegemea ajira, ambazo kwa sasa zimekuwa haba.
Katika kutekeleza hilo, yawezekana kutokea kwa upungufu wa wataalamu wa kufundisha katika vyuo hivyo. Lakini, najua serikali ina nchi marafiki ambazo zimepiga hatua kubwa katika teknolojia, hivyo inaweza kuomba wataalamu watakaofundisha kwenye vyuo hivyo.
Tusiogope gharama ya kupata wataalamu kutoka nchi nyingine, kwani nina imani kuwa baada ya miaka mitano au zaidi, nchi itakuwa na wataalamu wenye uwezo wa kubuni na kutengeneza vitu mbalimbali, ikiwa ni pamoja na kufundisha wanafunzi katika vyuo hivyo. Kwa kuwa tumefanikiwa kutekeleza MMES, basi sasa ni vema serikali ianzishe mpango wa kujenga vyuo vya ufundi katika kila tarafa nchini.
Author:Hudson Kazonta
Daily News; Thursday,June 12, 2008 @00:05
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