ACCOUNTING HOMEWORK *Transfer to notebook 1.

Accounting - the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. (Merriam Webster) Accounting - The systematic recording, reporting, and analysis of financial transactions of a business. (http://www.investorwords.com/48/accounting.html) 2. It is often referred to as the language of business because accounting transactions underlie the process of business activity. A business owner can know more about the finances of his own business and his competitors. It is a means of communication between a business firm and different parties interested in its financial activities. Accounting is used when business transactions are done and these transactions often involve people in them. A person cannot engage in business without involving and affecting other people. It involves many parties and these parties need to know the financial affairs of the business enterprise. Accounting equips a business with quantitative information in finance and economic entities that is helpful in making economic decisions as well. 3. The users of financial accounting are divided into two, which are internal and external. Under internal is the owner and management. For external, the potential investors, creditors, taxing authorities, government regulation agencies, nonprofit organizations and other users. 4. These information influences business decisions by providing sufficient data that would enable you to make adjustments and upcoming cash flow crunches. Thus, he would know what strategies he would have to put in in order for his business to prosper. Accounting is a useful tool to maintain orderliness in the business as well. Competent leaders will be produces because they know what is going on in their business/company. To further explain, I will list now how it helps each of the users and how accounting information helps them. Owners - They are basically the ones providing the capital needed for the business. By knowing the financial reports, the owner would be able to effectively manage and monitor the business. Management The management can use the accounting information to set goals for organization and to evaluate if theyve done enough to meet those expectations. In the future, they can also make the corrections necessary. Potential investors They use the financial reports in what income they have to expect if they choose to invest in the business. Creditors They determine the borrowers ability to meet scheduled payments. Taxing authorities Since they are the ones who levy taxes, the accounting

information helps them on how much tax they must impose. Government regulation agencies Most of the organization have to go through government regulation. They base their regulatory activity in part on accounting information it receives from firms. Nonprofit organizations Even though theyre non-profit, they share the use the accounting information the same way as profitable organizations do. Other users The general public may just be as curious in finding out how much income theyve earned thus accounting information serves of great help to them. 5. The three types of business organizations according to ownership are single/sole proprietorship, partnership and corporation. For single/sole, coming from the name itself, there is only one person involved in the investment. Next is partnership. Partnership is when two or more people agree to operate a business under some conditions in which they have to work on. Lastly, theres the corporation wherein there is one single body consisting of many people. They basically act as one but they each have their own rights and duties authorized by the law. 6. There are three types of activity that can be performed by business organizations, which are service, trading, and manufacturing. Service provides intangible products or products with no physical form. They offer professional skills, expertise, advice and the like. Some examples are schools, banks, accounting firms and law firms. Another type of business trading wherein they buy products as a wholesale price then sells them again at a retail price. This type of business is otherwise known as buy and sell. They gain profit by selling products at higher cost than their purchase cost. Lastly, there is the manufacturing business. Manufacturing is when they buy products with the intention of using them as raw materials in making new products. Thus, there is a transformation from the products they originally bought. The manufactured goods will then be sold to the customers. 7. I understand that the GAAP are a set of rules that govern how accountants measure, process, and communicate financial information. They are basically the ground rules of accounting. In a consciously changing business environment, these basic accounting concepts are what makes a consistent system of financial reporting. 8. 1) They help increase the confidence of financial statement users that the financial statements are representationally faithful. 2) They provide companies and accountants who prepare financial statements with guidance on how to account for and report economic activities

9. These concepts are called time period, revenue realization, accrual, matching, objectivity/reliability, cost, going concern, conservatism, consistency, materiality and disclosure. 10. Time Period Concept It is an assumption that implies that it is needed to measure accounting incomes for periods of time less than the life of a firm and that measurement will not be precise but will be timely thus useful. In choosing one year, a business can either pick calendar or fiscal year. Revenue Realization Concept Provides that income is recognized when earned regardless whether cash is received. There are 2 conditions that should be met; The earning process is essentially complete and an exchange must have taken place. Accrual Concept It requires that the income be recorded when earned regardless whether cash is received. An expense should also be recognized when incurred whether or not the payment is made. To apply this concept, there is such thing called accrual accounting to be applied. It involves techniques developed by accountants to apply both the accrual and matching concepts. Matching Concept This states that all expenses incurred to generate revenues must be recorded in the same period that the income are recorded properly to accurately determine net income or net loss of the period. Objectivity or Reliability Concept This concept requires that all transactions must be evidenced by business documents free from personal biases and independent experts can verify reports. Cost Concept This principle assumes that assets are acquired in business transactions conducted at arms length transactions. While for non cash transactions conducted at arms length, the cost concept states that market value of resources given up in the transaction provides reliable evidence for the valuation of the item acquired. Going Concern Concept - In the absence of information to the contrary, this concept assumes that the business is to continue its operations indefinitely. This means that the business will stay in operation for a period of time sufficient to carry out contemplated operations, contracts, and commitments. Conservatism Concept This is a powerful influence in valuing assets and measuring net income. When there are uncertainties, the accountant usually leans to the safer side, choosing a method that would give the business a less favorable financial condition and lowers the net income as well. Consistency Concept Once a method is used, it must not be changed from year to

year to allow compatibility between years and businesses. Materiality Concept It refers to the relative importance of an item or event. An item/event is considered material if knowledge of it would influence the decision of prudent users of financial statements. Disclosure Concept All relevant and material events affecting the financial condition/position of a business and the results of its operations must be communicated to users of financial statements. We must remember that the purpose of accounting is to provide information that is useful to decision-makers. So, naturally, if there is accounting information not included in the primary financial statements that would benefit users, that information should be provided to.