Accounting Basics

Role

The Role of Accounting is to create an information system that provides reports to users about the economic activities and condition of business.

Goals

  1. Identify Internal and External Users
    • Executives, Managers, Employees, Customers, Regulators, Creditors, Investors, Sponsors, Service Provider, Competitor
  2. Assess information needs
    • Managerial or Financial Accounting
  3. Design the accounting information system to meet user’s needs
  4. Record economic data about business activities and events
  5. Prepare accounting reports for users

Important Concepts

Business Entity Concept means to view the business as an entity separate from the other stakeholders. Recording the activities of the business and it’s transactions with it’s stakeholders. The forms of the business include proprietorship, partnership, corporation or a Limitied Liability company whether it was a manufacturer, merchandiser or service provider.

Cost Concept is where in accounting records are initially recorded at their cost or purchase price. Amounts recorded must be based on objective evidence, and economic data must be recorded in money and units.

Accounting Equation describes the fundamental relationship between the business owned resources’, creditor’s rights and owner’s rights.

When an economic event or condition directly impacts a business’ financial condition and the related parts of the accounting equation is a business transaction. Purchase of a resource, such as land impacts the resources of a business, reduces cash, adds an asset to the business, but a change in the credit score will not be a business transaction, as it would impact forcasts not the already recorded Business Transactions.

Financial Statements are the reports prepared respectively for users providing information regarding recorded and summarized transactions. Expenses incurred during a period should match the generated revenue. The primary statements include the Income, Retained Earnings, Balance Sheet, and Statement of Cash Flows. Income statements provide a summary of revenue and expenses for a specified period of time. Retained Earnings is a summary of changes in retained earnings during a period. The Balance sheet is a list of assets, liabilities, and stockholders’ equity as of a specific date, normally last day of month or year. A statement of cash flows is a summary of cash receipts and payments for a specific period.

Ethics / Goal

The tasks of taking economic activity, investigating the accounting of financial activity, to produce useful information to inform good decisions towards a prosperous society is a tough challenge. Accounting in the new decade will be vital in recording, reporting and driving improvements in Environmental, Social, Governance needs. It will be the job of accountants to assure non-financial information to restore consumer confidence and assure financial and non-financial information. Accounting is becoming more important into the future with the rise of necessity for data analysis, and sustainability reporting.

Fraud Spotlight

  • Computer Associates International who fraudulently inflated their financial results by recording fiscal quarter revenue even though such agreements had not been finalized. Sometime prior their was an issue with pre-merger actions.
  • Enron inflated financial results
  • HealthSouth overstated performance by $4 billion in false entries in income statement and balance sheet accounts.
  • Qwest Communications falsely recognized false receipts along with insider training convictions.
  • Xerox Corporation recognized $3 billion in revenue prior to when it should have been recorded.

Relevant Events

2008 Mortgage Investment Crisis was a combination of consumers not well educated on their ability to buy a home, mortgage salesman not reviewing borrowers for ability to pay off loans, Lenders bundling these loans to sell to banks without adequate review, securitizing mortgages, and removal of bank regulations. The next dominant investment focus came from the derivatives on the matured real estate market of 2008 and went into the developing Asian market, where some American investment companies also found initially some companies reporting more business than was conducted. When the Asian developing markets investment focus matured, is when the current continued technology company focus formed.

WeWork was a real estate company that was erroneously valued as a technology company. An alternate data company that was desked within a WeWork office space, found public data that showed WeWork’s turn rate did not match the company’s marketing claiming “growth”. WeWork used it’s Community Adjusted Earnings Before Interest, Tax, Depreciation, Amortization (EBITDA) which allowed manipulation of the formal EBITDA measurement that removed rent, design, marketing, fees and debt. This information came to light in it’s Initial Public Offering that discouraged further investment when it was needed, and their hopes of profitability.

The Panama Papers is when large amounts of data from Panamanian Law firm Mossack and Fonseca was made available to journalists and exposed a global corruption scandal. Public figures and transactions of money around the world were exposed. The data is important for giving larger perspective to the Offshore tax havens, tax avoidance, improvements for Environmental, Social, Governance considerations as well as Abusive use of Corporate Registrants.

Cryptocurrencies are ever more popular and in the end of the third quarter in 2021; included in a bill House of Representatives 3684 is the first legislation defining as a security, and reporting requirements thereof. Supporters of the technology applaud its strengths as an asset with an accounting system of equal power to all users and it’s distributed ledger. Some concerns include security, scale and energy costs.

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