1.
Chartered Professional Accountant
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Partial implementation, has occurred in Ontario. Chartered Professional Accountant is borrowed from a similar but aborted Australian merger attempt in 1998 and it has been registered as an EU Community trademark by the Institute of Chartered Accountants in England and Wales. However, applications to register CPA as such were either withdrawn or refused, registration as a Canadian trademark was originally sought by the Ordre des comptables agréés du Québec in September 2010, but the application lapsed. It was subsequently secured by the Institute of Chartered Accountants of Ontario in August 2011, several attempts were made to merge the CGAs and CMAs during the 1960s, as well as of all three bodies during the 1970s. A subsequent merger attempt between chartered accountants and certified management accountants occurred in 2004, being promoted by their leaders but failing to secure adequate membership support. In 2011, all three main bodies agreed to work towards a merger that would see a new organization with 180,000 professional members and 10,000 candidates and this new accounting body would be one of the largest in the world. The concept of unification has received significant support from business stakeholders, the merger process, while introduced nationally, is proceeding at different stages provincially. Alberta has opted to allow all those with legacy designations to use them in conjunction with CPA during the first 10 years from July 1,2015, the unification initiative was the fifth such move since 1973, in which Quebecs accounting bodies sought to merge. On March 28,2012, a bill was tabled in the National Assembly of Quebec to create the Ordre des comptables professionnels agréés du Québec and it subsequently received Royal Assent on May 16,2012, and went into force on the same date. Among the more notable provisions of the Act, Section 4 reserves the practice of public accountancy to CPAs that hold public accountancy permits issued by the Ordre. Section 7 provides that CPAs that hold public accountancy permits must use the term Auditor immediately after the designation of Chartered Professional Accountant or its initials, as in CPA Auditor. Section 13 prohibits the use of the phrases expert-comptable, professional accountant, for those who hold public accountancy permits, Section 63 provides that the corresponding combination will be CPA Auditor, CA, CPA Auditor, CGA or CPA Auditor, CMA. The implementation of the designation in Ontario has followed a route, On May 15,2012. This was said to be possible as CPA became a protected designation within the control of the Institute following the 1960s merger with the certified public accountants. But is currently based upon trademark registration, on November 16,2012, CMA Ontario announced that it intended to reenter discussions, but only after ICAO had undertaken the creation of CPA Ontario. On November 27,2012, CGA Ontario announced that it still favoured integration, a proposal was introduced to the members in May, with subsequent approval by members from both organizations in June 2013. In June 2013, the ICAO adopted the name of Chartered Professional Accountants of Ontario. On October 24,2013, CGA Ontario returned to unification discussions, effective April 1,2014, CMA Ontario members officially became associate members of CPA Ontario, thus entitled to use the CPA designation
2.
Accountant
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In many jurisdictions, professional accounting bodies maintain standards of practice and evaluations for professionals. Such professionals are granted certain responsibilities by statute, such as the ability to certify an organizations financial statements, non-qualified accountants may be employed by a qualified accountant, or may work independently without statutory privileges and obligations. The Big Four auditors are the largest employers of accountants worldwide, however, most accountants are employed in commerce, industry and the public sector. The Institute of Chartered Accountants of Scotland received its Royal Charter in 1854 and is the worlds first professional body of accountants, a Chartered Management Accountant must be a member of the Chartered Institute of Management Accountants. A Chartered Public Finance Accountant must be a member of the Chartered Institute of Public Finance, an International Accountant is a member of the Association of International Accountants. An Incorporated Financial Accountant is a member of the Institute of Financial Accountants, a Public Accountant may be a member of the Institute of Public Accountants. Registered Qualified Accountant is a member of Accountants Institute, excepting the Association of Certified Public Accountants, each of the above bodies admits members only after passing examinations and undergoing a period of relevant work experience. Once admitted, members are expected to comply with ethical guidelines, the ICAEW, ICAS, ICAI, ACCA and AAPA are five Recognised Supervisory Bodies RSB in the UK. It is illegal for any individual or firm that is not a Statutory Auditor to perform a company audit, the ICAEW, ICAS, ICAI, ACCA, AIA and CIPFA are six Recognised qualifying bodies statutory RQB in the UK. A member of one them may become a Statutory Auditor in accordance with the Companies Act. All six RQBs are listed under EU mutual recognition directives to practise in 27 EU member states, further restrictions apply to accountants who carry out insolvency work. In addition to the bodies above, technical qualifications are offered by the Association of Accounting Technicians, ACCA and AIA, other international bodies such as ACCA and Institute of Chartered Accountants in England and Wales enjoy recognition for the purposes of supporting their members in their careers. For instance, ACCA has achieved recognition by the Tax Practitioner Board, as Tax and BAS agents, Chartered accountancy is governed in Bangladesh by the Institute of Chartered Accountants of Bangladesh. And The Institute of Cost and Management Accountants of Bangladesh offers management accountant studies in Bangladesh, up to 2013, there were three nationally recognized accounting designations in Canada, Chartered Accountant, Certified General Accountant, and Certified Management Accountants. The national CA and CGA bodies were created by Acts of Parliament in 1902 and 1913 respectively, cGA-Canada integrated with CPA Canada on October 1,2014, completing the unification of Canada’s accounting profession at the national level. All recognized national and provincial accounting bodies in Canada have now unified under the CPA banner, the Canadian CPA designation is held by more than 200,000 members in Canada and around the world. Chartered accountancy is offered in India by the Institute of Chartered Accountants of India and this Institute was established in 1949 under the Chartered Accountants Act,1949 for the regulation of the profession of Chartered Accountants in India. The ICAI set up the Accountancy Museum of India in 2009 and it is currently located at ICAIs office in Noida
3.
United States
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Forty-eight of the fifty states and the federal district are contiguous and located in North America between Canada and Mexico. The state of Alaska is in the northwest corner of North America, bordered by Canada to the east, the state of Hawaii is an archipelago in the mid-Pacific Ocean. The U. S. territories are scattered about the Pacific Ocean, the geography, climate and wildlife of the country are extremely diverse. At 3.8 million square miles and with over 324 million people, the United States is the worlds third- or fourth-largest country by area, third-largest by land area. It is one of the worlds most ethnically diverse and multicultural nations, paleo-Indians migrated from Asia to the North American mainland at least 15,000 years ago. European colonization began in the 16th century, the United States emerged from 13 British colonies along the East Coast. Numerous disputes between Great Britain and the following the Seven Years War led to the American Revolution. On July 4,1776, during the course of the American Revolutionary War, the war ended in 1783 with recognition of the independence of the United States by Great Britain, representing the first successful war of independence against a European power. The current constitution was adopted in 1788, after the Articles of Confederation, the first ten amendments, collectively named the Bill of Rights, were ratified in 1791 and designed to guarantee many fundamental civil liberties. During the second half of the 19th century, the American Civil War led to the end of slavery in the country. By the end of century, the United States extended into the Pacific Ocean. The Spanish–American War and World War I confirmed the status as a global military power. The end of the Cold War and the dissolution of the Soviet Union in 1991 left the United States as the sole superpower. The U. S. is a member of the United Nations, World Bank, International Monetary Fund, Organization of American States. The United States is a developed country, with the worlds largest economy by nominal GDP. It ranks highly in several measures of performance, including average wage, human development, per capita GDP. While the U. S. economy is considered post-industrial, characterized by the dominance of services and knowledge economy, the United States is a prominent political and cultural force internationally, and a leader in scientific research and technological innovations. In 1507, the German cartographer Martin Waldseemüller produced a map on which he named the lands of the Western Hemisphere America after the Italian explorer and cartographer Amerigo Vespucci
4.
Accounting
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Accounting or accountancy is the measurement, processing and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494, practitioners of accounting are known as accountants. The terms accounting and financial reporting are often used as synonyms, Accounting can be divided into several fields including financial accounting, management accounting, external auditing, and tax accounting. Accounting information systems are designed to support accounting functions and related activities, Accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are audited by accounting firms, and are prepared in accordance with generally accepted accounting principles. GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board in the United States, as of 2012, all major economies have plans to converge towards or adopt the International Financial Reporting Standards. The history of accounting is thousands of old and can be traced to ancient civilizations. By the time of the Emperor Augustus, the Roman government had access to detailed financial information, double-entry bookkeeping developed in medieval Europe, and accounting split into financial accounting and management accounting with the development of joint-stock companies. The first work on a double-entry bookkeeping system was published in Italy, both the words accounting and accountancy were in use in Great Britain by the mid-1800s, and are derived from the words accompting and accountantship used in the 18th century. In Middle English the verb to account had the form accounten, which was derived from the Old French word aconter, which is in turn related to the Vulgar Latin word computare, meaning to reckon. The base of computare is putare, which meant to prune, to purify, to correct an account, hence, to count or calculate. The word accountant is derived from the French word compter, which is derived from the Italian. Accountancy refers to the occupation or profession of an accountant, particularly in British English, Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems. Financial accounting focuses on the reporting of a financial information to external users of the information, such as investors. It calculates and records business transactions and prepares financial statements for the users in accordance with generally accepted accounting principles. GAAP, in turn, arises from the agreement between accounting theory and practice, and change over time to meet the needs of decision-makers. This branch of accounting is also studied as part of the exams for qualifying as an actuary. It is interesting to note that two professionals, accountants and actuaries, have created a culture of being archrivals
5.
Historical cost
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In accounting under the traditional historical cost paradigm, historical cost is the original nominal monetary value of an economic item. Historical cost is based on the measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, the balance sheet value of the item may therefore differ from the real value. While historical cost is criticised for its inaccuracy, it remains in use in most accounting systems during low, various corrections to historical cost are used, many of which require the use of management judgment and may be difficult to verify. Depreciation affects the value of an asset on the balance sheet. The historical cost will equal the value if there has been no change recorded in the value of the asset since acquisition. Improvements may be added to the cost basis of an asset, Historical cost does not generally reflect current market valuation. Under the historical cost basis of accounting, assets and liabilities are recorded at their values when first acquired and they are not then generally restated for changes in values. Costs recorded in the Income Statement are based on the historical cost of items sold or used, rather than their replacement costs. For example, – a company acquires an asset in year 1 for $100, the asset is held at the end of year 1, when its market value is $120. At the end year 1 the asset is recorded in the sheet at cost of $100. No account is taken of the increase in value from $100 to $120 in year 1, in year 2 the company records a sale of $115. The cost of sales is $100, being the historical cost of the asset and this gives rise to a gain of $15 which is wholly recognized in year 2. It is standard under the historical cost basis to write down the value of inventory to a lower cost and these can include site preparation, delivery and handling costs, installation, assembly, testing, professional fees and the costs of employees directly involved in these activities. In IFRS, cost also includes the initial estimate of the costs of dismantling and removing the item, Cost may include the cost of borrowing to finance construction if this policy is consistently adopted. Cost is then subject to depreciation with to write off the cost of the asset over its useful life down to the recoverable amount. Certain financial instruments may be recorded at historical cost, any initial premium or discount is amortized into interest over time, and so the resulting value is often described as amortized cost. Monetary items such as cash balances, receivables and payables which are denominated in foreign currency are reported using the exchange rate under IFRS
6.
Management accounting
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One simple definition of management accounting is the provision of financial and non-financial decision-making information to managers. Performance management—developing the practice of business decision-making and managing the performance of the organization, risk management—contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization. The Institute of Certified Management Accountants, Management accountants therefore are seen as the value-creators amongst the accountants. They are more concerned with looking and taking decisions that will affect the future of the organization, than in the historical recording. In 2014 CIMA created the Global Management Accounting Principles, the result of research from across 20 countries in five continents, the principles aim to guide best practice in the discipline. Focus, Financial accounting focuses on the company as a whole, Management accounting provides detailed and disagregated information about products, individual activities, divisions, plants, operations and tasks. Traditional approaches limit themselves by defining cost behavior only in terms of production or sales volume, in 1993, the Accounting Education Change Commission Statement Number 4 calls for faculty members to expand their knowledge about the actual practice of accounting in the workplace. Variance analysis is an approach to the comparison of the actual and budgeted costs of the raw materials. Other approach that can be viewed as innovative to the U. S. is the German approach, one of the more innovative accounting practices available today is resource consumption accounting. Consistent with other roles in corporations, management accountants have a dual reporting relationship. A function of management accounting in such organizations is to work closely with the IT department to provide IT cost transparency, given the above, one view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance. Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management, A Field Study Perspective. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, the term Grenzplankostenrechnung, often referred to as GPK, has best been translated as either marginal planned cost accounting or flexible analytic cost planning and accounting. GPK is published in cost accounting textbooks, notably Flexible Plankostenrechnung und Deckungsbeitragsrechnung, in the mid- to late-1990s several books were written about accounting in the lean enterprise. The term lean accounting was coined during that period and these books contest that traditional accounting methods are better suited for mass production and do not support or measure good business practices in just-in-time manufacturing and services. The movement reached a point during the 2005 Lean Accounting Summit in Dearborn, Michigan. 320 individuals attended and discussed the advantages of a new approach to accounting in the lean enterprise,520 individuals attended the 2nd annual conference in 2006 and it has varied between 250 and 600 attendees since that time
7.
Tax accounting in the United States
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U. S. tax accounting refers to accounting for tax purposes in the United States. The Internal Revenue Code governs the application of tax accounting, section 446 sets the basic rules for tax accounting. Tax accounting under section 446 emphasizes consistency for a tax accounting method with references to the financial accounting to determine the proper method. So the taxpayer must choose a tax accounting method using their financial accounting method as a reference point, proper accounting methods are found in section 446 to which permits cash, accrual, and other methods approved by the IRS including combinations. If the taxpayer engages in more than one then it may use a different method for each business according to section 446. If the taxpayer wants to change their tax accounting method, section 446 requires the taxpayer to acquire the consent of the Secretary of the Treasury, there are two kinds of changes, one where you must receive a letter of approval from the Secretary of the Treasury. Another type of change comes from a series of more routine changes each of which is an automatic change, to get the automatic change the taxpayer must fill out a form and return it to the Secretary of the Treasury. The taxpayer can adopt another method if the files a tax return using that method for two consecutive years. If the taxpayer wants to return to the method the taxpayer must ask for permission from the Secretary following the 446 procedure. If the taxpayer fails to request a change of method of accounting then according to section 446 the taxpayer does so at their own peril by exposure to penalties. In many other countries, the profit for tax purposes is the accounting profit defined by GAAP, in other words, GAAP determines the taxable profits except where a tax rule determines otherwise. Such adjustments typically include depreciation and expenses which for policy reasons are not deductible for tax purposes, such as entertaining costs, but the U. S. is not the only jurisdiction in which there is a wide divergence between tax and financial accounting. Ifferences between tax and commercial accounting rules arise where the tax instrument is employed to pursue economic, social and cultural purposes, write Ault, Accounting Financial accounting Accounting period All-events test Corporate tax in the United States CPA Magazine
8.
Audit
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It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a phenomenon in the corporate and the public sector that academics started identifying an Audit Society. Any subject matter may be audited, Audits provide third party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the information relating to a legal person. Other areas which are commonly audited include, secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation. As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of management, control. The word audit is derived from a Latin word audire which means to hear, an information technology audit, or information systems audit, is an examination of the management controls within an Information technology infrastructure. These reviews may be performed in conjunction with a financial statement audit, internal audit, due to strong incentives to misstate financial information, auditing has become a legal requirement for many entities who have the power to exploit financial information for personal gain. Traditionally, audits were mainly associated with gaining information about financial systems, financial audits are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a systems internal control. As a result of this, a party can express an opinion of the person / organisation / system in question. The opinion given on financial statements will depends on the evidence obtained. Due to constraints, an audit seeks to provide reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits, but recently, the argument that auditing should go beyond just true and fair is gaining momentum. And the US Public Company Accounting Oversight Board has come out with a release on the same. Cost accounting is a process for verifying the cost of manufacturing or producing of any article, on the basis of measuring the use of material. In simple words, the term, cost audit means a systematic and accurate verification of the cost accounts and records, in most nations, an audit must adhere to generally accepted standards established by governing bodies. There are also new types of integrated auditing becoming available that use unified compliance material and this is a very new but necessary approach in some sectors to ensure that all the necessary governance requirements can be met without duplicating effort from both audit and audit hosting resources. The purpose of an assessment is to something or calculate a value for it
9.
Cost accounting
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Cost accounting is a process of collecting, recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action & control of costs. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency, Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations, instead, information must be relevant for a particular environment. Cost accounting information is used in financial accounting information. As a result, there is variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization. All types of businesses, whether service, manufacturing or trading, Cost accounting has long been used to help managers understand the costs of running a business. In the early age, most of the costs incurred by a business were what modern accountants call variable costs because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, over time, these fixed costs have become more important to managers. In the early century, these costs were of little importance to most businesses. Managers must understand fixed costs in order to make decisions about products, for example, A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components, therefore, total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldnt sell below that price without losing money on each coach, any price above $300 became a contribution to the fixed costs of the company. Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account, Cost Accounting aims at computing cost of production/service in a scientific manner and facilitate cost control and cost reduction. Financial accounting reports the results and position of business to government, creditors, investors, Cost Accounting is an internal reporting system for an organization’s own management for decision making. In financial accounting, cost classification is based on type of transactions, e. g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization. Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and it aims at computing ‘true and fair’ view of the cost of production/services offered by the firm
10.
Forensic accounting
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Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. The work performed and reports issued will often provide answers to the how, where, what, why, Forensic means suitable for use in a court of law, and it is to that standard and potential outcome that forensic accountants generally have to work. Forensic accountants, also referred to as forensic auditors or investigative auditors, all of the larger accounting firms, as well as many medium-sized and boutique firms and various police and government agencies have specialist forensic accounting departments. Financial forensic engagements may fall into several categories, Forensic accountants often assist in professional negligence claims where they are assessing and commenting on the work of other professionals. Forensic accountants are also engaged in marital and family law of analyzing lifestyle for spousal support purposes, determining income available for child support, engagements relating to criminal matters typically arise in the aftermath of fraud. They frequently involve the assessment of accounting systems and accounts presentation—in essence assessing if the numbers reflect reality, some forensic accountants specialize in forensic analytics which is the procurement and analysis of electronic data to reconstruct, detect, or otherwise support a claim of financial fraud. The main steps in forensic analytics are data collection, data preparation, data analysis, for example, forensic analytics may be used to review an employees purchasing card activity to assess whether any of the purchases were diverted or divertible for personal use. In the United Kingdom, relevant legislation is contained in the Proceeds of Crime Act 2002, in India there is a separate breed of forensic accountants called Certified Forensic Accounting Professionals. Forensic accountants may be involved in litigation support and investigative accounting. The American Board of Forensic Accounting was established in 1993, for more information please visit http, //abfa. us/ For effective learning, professionals will need expert training in the practices of forensic accounting. The American Board of Forensic Accounting offers the Forensic Accounting Review, http, //abfa. us/far/ The CRFAC is a valuable credential and covers the broad base of forensic accounting knowledge. Http, //abfa. us/resources/ The American Board of Forensic Accounting offers many programs, FACB plays several roles and one the roles is standardization of the examination and certification of forensic auditors globally. All certification is renewed on an annual basis, apart from practitioners certification, FACB is an oversight body which accredits prospective member organization before admission as part of quality checks. Persons with the FACB credential can practice as forensic auditors on a global scale, large accounting firms often have a forensic accounting department. Forensic accounting and fraud investigation methodologies are different than internal auditing, thus forensic accounting services and practice should be handled by forensic accounting experts, not by internal auditing experts. That is necessary if the fraud comes to trial, the jury will be made up of ordinary laypersons. On the other hand, internal auditors move on checklists that may not surface the evidence that the jury or regulatory bodies look for, the fieldwork may carry out legal risks if internal auditing checklists are employed instead asking to a forensic accountant and may result serious consultant malpractice risks
11.
Financial accounting
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Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business. This involves the preparation of financial statements available for public consumption, stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes. Financial accountancy is governed by local and international accounting standards. Generally Accepted Accounting Principles is the framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that follow in recording and summarizing. IFRS are issued by the International Accounting Standards Board, with IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organizations. Financial accounting and financial reporting are often used as synonyms, according to the European Accounting Association, Capital maintenance is a competing objective of financial reporting. When producing financial statements, they must comply to the following, Relevance and it must be possible for accounting information to influence decisions. Unless this characteristic is present, there is no point in cluttering statements, materiality, information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Reliability, accounting must be free from significant error or bias and it should be easily relied upon by managers. Often information that is highly relevant isn’t very reliable, and vice versa, understandability, accounting reports should be expressed as clearly as possible and should be understood by those to whom the information is relevant. Comparability can be ensured by applying the same accounting policies over time, the statement of cash flows considers the inputs and outputs in concrete cash within a stated period. During that same month, Ellen borrowed $20 from Tom, at the end of the month, Ellen bought a pair of shoes for $7. Theyd originally bought the tables for $25 each, and sold them at a price of $50 per table, the first table was paid out in cash however the second one was bought in credit terms. WikiTables cash flow statement for the month of June looks like this, Cash inflow and they didnt receive cash for the second table. Cash outflow, $50 - How much theyd originally bought the 2 tables for, opening balance, $0 Closing balance, $50 – $25 + $0 = $25–25=$0 - Indeed, the cash flow for the month of June for WikiTables amounts to $0 and not $50. Important, the cash flow statement only considers the exchange of actual cash, in the case of service organizations, they are called as profit & loss a/c as income statement. The right and left sides are equal in dollar amount
12.
Fund accounting
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Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. It therefore emphasizing accountability rather than profitability and is used by Nonprofit organizations, investment accounting, however, is a different system, unrelated to government and nonprofit fund accounting. Nonprofit organizations and government agencies have special requirements to show, in statements and reports, how money is spent. Unlike profit oriented businesses, which use a set of self-balancing accounts, nonprofits can have more than one general ledger. Fund accounting distinguishes between two classes of fund. Those funds that have a use, that can be spent for any purposes by the organisation. The reason for the restriction can be for a number of different reasons, examples include legal requirements, where the moneys can only be lawfully used for a specific purpose, or a restriction imposed by the donor or provider. These donor/provider restrictions are usually communicated in writing and may be found in the terms of an agreement, government grant and this also provides an audit trail that all moneys have been spent for their intended purpose and thereby released from the restriction. An example may be a school system in the United States. Each of these programs has its own unique reporting requirements, so the system needs a method to separately identify the related revenues and expenditures. This is done by establishing separate funds, each with its own chart of accounts, Nonprofit organizations will use a minimum of two categories, restricted and unrestricted funds. However, as the organisation grows larger they may find they have to increase the number depending on restrictions and reporting requirements by donors and fund providers. Designated fund - assets which has assigned to a specific purpose by the organisations governing board but are still unrestricted as the board can cancel the desired use. Trading funds - many large non-profit organisations now have shops and other outlets where they raise funds from selling goods, the profits from these are then used for the purpose of the organisations. Plant fund Some organisations hold there non-current assets and related liabilities, is a fund from the current assets. These may include charitable gift annuities or life income funds, agency or Custodian funds are held to account for resources before they are disbursed according to the donors instructions. The organisation has little or no discretion over the use of these resources, current funds – restricted use current assets subject to restrictions assigned by donors or grantors. Like Profit making organisations, nonprofits and governments will produce Consolidated Financial Statements, if the organisation is small it may use a cash basis accounting but larger ones generally use accrual basis accounting for their funds
13.
Social accounting
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Social accounting is the process of communicating the social and environmental effects of organizations economic actions to particular interest groups within society and to society at large. Social Accounting can also be used in conjunction with Community-Based Monitoring, Social accounting emphasises the notion of corporate accountability. It is an important step in helping companies independently develop CSR programs which are shown to be more effective than government mandated CSR. Social accounting is used as an umbrella term to describe a broad field of research. The use of more terms to express a specific interest is thus not uncommon. Environmental accounting may e. g. specifically refer to the research or practice of accounting for an impact on the natural environment. Sustainability accounting is used to express the measuring and the quantitative analysis of social. National accounting is a usage in concentrating on the nation as the aggregable unit of analysis. It points to the fact that influence their external environment through their actions. Social accounting is in this closely related to the economic concept of externality. Social accounting offers an account of significant economic entities. It has the potential to expose the tension between pursuing economic profit and the pursuit of social and environmental objectives, the purpose of social accounting can be approached from two different angles, namely for management control purposes or accountability purposes. Social accounting for accountability purposes is designed to support and facilitate the pursuit of societys objectives and these objectives can be manifold but can typically be described in terms of social and environmental desirability and sustainability. In order to make informed choices on these objectives, the flow of information in society in general, society is seen to profit from implementing a social and environmental approach to accounting in a number of ways, e. g. Social accounting for the purpose of management control is designed to support, because social accounting is concerned with substantial self-reporting on a systemic level, individual reports are often referred to as social audits. Organizations are seen to benefit from implementing social accounting practices in a number of ways, the management control view thus focuses on the individual organization. Critics of this point out that the benign nature of companies is assumed. Here, responsibility, and accountability, is left in the hands of the organization concerned
14.
Tax accounting
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U. S. tax accounting refers to accounting for tax purposes in the United States. The Internal Revenue Code governs the application of tax accounting, section 446 sets the basic rules for tax accounting. Tax accounting under section 446 emphasizes consistency for a tax accounting method with references to the financial accounting to determine the proper method. So the taxpayer must choose a tax accounting method using their financial accounting method as a reference point, proper accounting methods are found in section 446 to which permits cash, accrual, and other methods approved by the IRS including combinations. If the taxpayer engages in more than one then it may use a different method for each business according to section 446. If the taxpayer wants to change their tax accounting method, section 446 requires the taxpayer to acquire the consent of the Secretary of the Treasury, there are two kinds of changes, one where you must receive a letter of approval from the Secretary of the Treasury. Another type of change comes from a series of more routine changes each of which is an automatic change, to get the automatic change the taxpayer must fill out a form and return it to the Secretary of the Treasury. The taxpayer can adopt another method if the files a tax return using that method for two consecutive years. If the taxpayer wants to return to the method the taxpayer must ask for permission from the Secretary following the 446 procedure. If the taxpayer fails to request a change of method of accounting then according to section 446 the taxpayer does so at their own peril by exposure to penalties. In many other countries, the profit for tax purposes is the accounting profit defined by GAAP, in other words, GAAP determines the taxable profits except where a tax rule determines otherwise. Such adjustments typically include depreciation and expenses which for policy reasons are not deductible for tax purposes, such as entertaining costs, but the U. S. is not the only jurisdiction in which there is a wide divergence between tax and financial accounting. Ifferences between tax and commercial accounting rules arise where the tax instrument is employed to pursue economic, social and cultural purposes, write Ault, Accounting Financial accounting Accounting period All-events test Corporate tax in the United States CPA Magazine
15.
Accounting period
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An accounting period, in bookkeeping, is the period with reference to which accounting books of any entity are prepared. It is the period for books are balanced and the financial statements are prepared. Generally, the period consists of 12 months. However the beginning of the accounting period differs according to the jurisdiction, for example, one entity may follow the regular calendar year, i. e. January to December as the accounting year, while another entity may follow April to March as the accounting period. The International Financial Reporting Standards allow a period of 52 weeks as an accounting period instead of a proper year and this method is known as the 4-4-5 calendar in British and Commonwealth usage and the 52–53-week fiscal year in the United States. In the United States the method is permitted by generally accepted accounting principles, in some of the ERP tools there are more than 12 accounting periods in a financial year. Accounting is an art of recording classifying and summarising the financial positions of the company and it is done by the accountant. The 52–53-week fiscal year is used by companies that desire that their fiscal year always end on the day of the week. Any day of the week may be used, and Saturday and Sunday are common because the business may more easily be closed for counting inventory and other end-of-year accounting activities. There are two methods in use, Under this method the companys fiscal year is defined as the final Saturday in the year end month. For example, if the year end month is August. At that point it resets to the end of the month, in this example the fiscal years ending in 2008,2013, and 2019 have 53 weeks. Under this method the companys fiscal year is defined as the Saturday that falls closest to the last day of the year end month. For example, if the year end month is August. At that point the first Saturday in the following month becomes the date closest to the end of August and it resets to that date, in this example the fiscal years ending in 2011 and 2016 have 53 weeks. The 52–53 week method is permitted by generally accepted accounting principles in the United States, as well as the International Financial Reporting Standards
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Fair value
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In accounting and in most Schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. Under US GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date. This is used for assets whose carrying value is based on mark-to-market valuations, for assets carried at historical cost, one example of where fair value is an issue is a college kitchen with a cost of $2 million which was built five years ago. If the owners wanted to put a fair value measurement on the kitchen it would be an estimate because there is no active market for such items or items similar to this one. If XYZ purchased a similar two-acre tract of land in 2005 for $2 million, even if the two pieces of land were virtually identical, ABC would report an asset with one-half the value of XYZ’s land, historical cost is unable to identify that the two items are similar. This problem is compounded when numerous assets and liabilities are reported at historical cost, if, however, ABC and XYZ reported financial information using fair-value accounting, then both would report an asset of $2 million. The fair-value balance sheet provides information for investors who are interested in the current value of assets and liabilities, behavioral finance asserts that the market price often diverges from fair value because of various, common cognitive biases among buyers or sellers. It requires the assessment of the price that is fair between two specific parties taking into account the respective advantages or disadvantages that each will gain from the transaction, although Market Value may meet these criteria, this is not necessarily always the case. In other words Special Value may be generated, Market Value requires this element of Special Value to be disregarded, but it forms part of the assessment of Fair Value. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No,157, Fair Value Measurements in September 2006 to provide guidance about how entities should determine fair value estimations for financial reporting purposes. FAS157 broadly applies to financial and nonfinancial assets and liabilities measured at fair value under other authoritative accounting pronouncements, however, application to nonfinancial assets and liabilities was deferred until 2009. The goal of this framework is to eliminate the inconsistencies between balance sheet numbers and income statement numbers and this is sometimes referred to as exit value. In the futures market, fair value is the price for a futures contract. This is equal to the price after taking into account compounded interest over a certain period of time. On the other side of the sheet the fair value of a liability is the amount at which that liability could be incurred or settled in a current transaction. Topic 820 emphasizes the use of inputs in estimating the fair value for an asset or liability. Quoted prices, credit data, yield curve, etc. are examples of market inputs described by Topic 820, Topic 820 emphasizes that assumptions used to estimate fair value should be from the perspective of an unrelated market participant. This necessitates identification of the market in which the asset or liability trades, if more than one market is available, Topic 820 requires the use of the most advantageous market
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Matching principle
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In accrual accounting, the matching principle states that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, if no cause-and-effect relationship exists, costs are recognized as expenses in the accounting period they expired, i. e. when have been used up or consumed. Prepaid expenses are not recognized as expenses, but as assets until one of the conditions is met resulting in a recognition as expenses. Lastly, if no connection with revenues can be established, costs are recognized immediately as expenses, Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses, they are considered assets because they will provide probable future benefits. As a prepaid expense is used, an entry is made to update the value of the asset. In the case of prepaid rent, for instance, the cost of rent for the period would be deducted from the Prepaid Rent account, the matching principle allows for a more objective analysis of profitability. Deferred expense, Expense is recognized after cash is paid out, accrued expenses is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision. Accrued expense allows one to match costs of products with the proceeds from their sales prior to paying out such costs. Deferred expense allows one to match costs of products paid out, depreciation matches the cost of purchasing fixed assets with revenues generated by them by spreading such costs over their expected life. Period costs, such as salaries or selling expenses, are immediately recognized as expenses also when employees are paid in the next period. Unpaid period costs are accrued expenses to avoid such costs to offset period revenues that would result in a fictitious profit. An example is a commission earned at the moment of sale by a representative who is compensated at the end of the following week. A Deferred expense is a used to costs paid out. Depreciation is used to distribute the cost of the asset over its life span according to the matching principle. So, the cost of the machine is offset against the sales in that year and this matches costs to sales and therefore gives a more accurate representation of the business, but results in a temporary discrepancy between profit/loss and the cash position of the business. Accrual Comparison of cash and accrual methods of accounting Deferrals in accrual accounting FIFO and LIFO accounting, different ways of matching stock to sales Revenue recognition
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Revenue recognition
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The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, in cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold. Deferred revenue, Revenue is recognized after cash is received, Revenue realized during an accounting period is included in the income. Performance occurs when the seller has done most or all of what it is supposed to do to be entitled for the payment, a company has sold the good and the customer walks out of the store with no warranty on the product. The seller has completed its performance since the buyer now owns good and also all the risks, the third criterion is referred to as Collectability. The seller must have an expectation of being paid. An allowance account must be created if the seller is not fully assured to receive the payment, the fourth and fifth criteria are referred to as Measurability. Due to Matching Principle, the seller must be able to match expenses to the revenues they helped in earning. Therefore, the amount of Revenues and Expenses should both be reasonably measurable Received advances are not recognized as revenues, but as liabilities, until the conditions and are met, Revenues are realized when cash or claims to cash are received in exchange for goods or services. Revenues are realizable when assets received in exchange are readily convertible to cash or claim to cash. Revenues are earned when such goods/services are transferred/rendered, both such payment assurance and final delivery completion, are required for revenue recognition. Recognition of revenue from four types of transactions, Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery, Revenues from rendering services are recognized when services are completed and billed. Revenue from permission to use companys assets is recognized as time passes or as assets are used, Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place. For example, a company receives an annual license fee paid out by a customer upfront on the January 1. However the companys fiscal year ends on May 31, so, the company using accrual accounting adds only five months worth of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income on the sheet for that year. Advances are not considered to be a sufficient evidence of sale, advances are considered a deferred income and are recorded as liabilities until the whole price is paid and the delivery made
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Asset
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In financial accounting, an asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value, simply stated, assets represent value of ownership that can be converted into cash. The balance sheet of a firm records the value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business, one can classify assets into two major asset classes, tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets, current assets include inventory, while fixed assets include such items as buildings and equipment. Intangible assets are resources and rights that have a value to the firm because they give the firm some kind of advantage in the marketplace. Examples of intangible assets include goodwill, copyrights, trademarks, patents and computer programs, an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. One of the most widely accepted accounting definitions of asset is the one used by the International Accounting Standards Board, employees are not considered assets like machinery is, even though they can generate future economic benefits. This is because an entity does not have sufficient control over its employees to satisfy the Frameworks definition of an asset, similarly, in economics an asset is any form in which wealth can be held. The accounting equation is the structure of the balance sheet. It relates assets, liabilities, and owners equity, Assets = Liabilities + Capital Liabilities = Assets − Capital Equity = Assets − Liabilities Assets are listed on the balance sheet. On a companys balance sheet certain divisions are required by generally accepted accounting principles, Assets can be divided into e. g. current assets and fixed assets, often with further subdivisions such as cash, receivables and inventory. Assets are formally controlled and managed within larger organizations via the use of asset tracking tools and these monitor the purchasing, upgrading, servicing, licensing, disposal etc. of both physical and non-physical assets. Current assets are cash and other assets expected to be converted to cash or consumed either in a year or in the operating cycle and these assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets, Cash and cash equivalents – it is the most liquid asset, which includes currency, deposit accounts, short-term investments – include securities bought and held for sale in the near future to generate income on short-term price differences. Receivables – usually reported as net of allowance for non-collectable accounts, inventory – trading these assets is a normal business of a company. The inventory value reported on the sheet is usually the historical cost or fair market value. This is known as the lower of cost or market rule, prepaid expenses – these are expenses paid in cash and recorded as assets before they are used or consumed
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Cash
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In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and finance, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately. Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets, the English word cash is derived from the Kannada / Tamil / Malayalam / Telugu word kaasu meaning money. In Southern India the word kaasu/kasa is still used today to refer to money, later traders of Persian, Arab and European origins, who started trading with the Southern India princely states, used the modified version of the word. This form along with this meaning entered into Latin giving rise to such as capsa “money box” and case eventually passing into Middle French as caisse meaning “money in hand, coin. ”To cash. In a separate development, Venetian merchants started using paper bills, similar marked silver bars were in use in lands where the Venetian merchants had established representative offices. The Byzantine empire and several states in the Balkan area and Kievan Rus also used marked silver bars for large payments and its counterpart in gold was the Venetian ducat. Coin types would compete for markets, by conquering foreign markets, the issuing rulers would enjoy extra income from seigniorage. Successful coin types of high nobility would be copied by lower nobility for seigniorage, imitations were usually of a lower weight, undermining the popularity of the original. Colonial powers also sought to take market share from Spain by issuing trade coin equivalents of silver Spanish coins. In the early part of the 17th century, English East India Company coins were minted in England, in England over time the word ‘Cash’ was adopted from Sanskrit कर्ष karsa, a weight of gold or silver but akin to Old Persian
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Cost of goods sold
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Cost of goods sold refers to the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of several formulas, including identification, first-in first-out. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition, costs of goods made by the business include material, labor, and allocated overhead. The costs of goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value. Many businesses sell goods that they have bought or produced, when the goods are bought or produced, the costs associated with such goods are capitalized as part of inventory of goods. These costs are treated as an expense in the period the business income from sale of the goods. Determining costs requires keeping records of goods or materials purchased and any discounts on such purchase, in addition, if the goods are modified, the business must determine the costs incurred in modifying the goods. Such modification costs include labor, supplies or additional material, supervision, quality control, Principles for determining costs may be easily stated, but application in practice is often difficult due to a variety of considerations in the allocation of costs. Cost of goods sold may also reflect adjustments, among the potential adjustments are decline in value of the goods, obsolescence, damage, etc. When multiple goods are bought or made, it may be necessary to identify which costs relate to particular goods sold. This may be using an identification convention, such as specific identification of the goods, first-in-first-out. Alternative systems may be used in countries, such as last-in-first-out, gross profit method, retail method. Cost of goods sold may be the same or different for accounting and tax purposes, certain expenses are included in COGS. Expenses that are included in COGS cannot be deducted again as a business expense, depreciation Inventories have a significant effect on profits. A business that makes or buys goods to sell must keep track of inventories of goods under all accounting, Fred buys auto parts and resells them. In 2008, Fred buys $100 worth of parts and he sells parts for $80 that he bought for $30, and has $70 worth of parts left. In 2009, he sells the remainder of the parts for $180, if he keeps track of inventory, his profit in 2008 is $50, and his profit in 2009 is $110, or $160 in total. If he deducted all the costs in 2008, he would have a loss of $20 in 2008, the total is the same, but the timing is much different
22.
Depreciation
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Businesses depreciate long-term assets for both tax and accounting purposes. The former affects the balance sheet of a business or entity, generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. This expense is recognized by businesses for financial reporting and tax purposes, methods of computing depreciation, and the periods over which assets are depreciated, may vary between asset types within the same business and may vary for tax purposes. These may be specified by law or accounting standards, which may vary by country, there are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service, for example, a depreciation expense of 100 per year for five years may be recognized for an asset costing 500. In determining the profits from an activity, the receipts from the activity must be reduced by appropriate costs, one such cost is the cost of assets used but not immediately consumed in the activity. Depreciation is any method of allocating such net cost to those periods in which the organization is expected to benefit from use of the asset, the asset is referred to as a depreciable asset. Depreciation is technically a method of allocation, not valuation, even though it determines the value placed on the asset in the balance sheet, any business or income producing activity using tangible assets may incur costs related to those assets. If an asset is expected to produce a benefit in future periods, the business then records depreciation expense in its financial reporting as the current periods allocation of such costs. This is usually done in a rational and systematic manner, Cost generally is the amount paid for the asset, including all costs related to acquisition. In some countries or for some purposes, salvage value may be ignored, the rules of some countries specify lives and methods to be used for particular types of assets. However, in most countries the life is based on experience. When a depreciable asset is sold, the business recognizes gain or loss based on net basis of the asset and this net basis is cost less depreciation. Accounting rules also require that an impairment charge or expense be recognized if the value of assets declines unexpectedly, such charges are usually nonrecurring, and may relate to any type of asset. Many companies consider write-offs of some of their assets because some property, plant. Accountants reduce the assets carrying amount by its fair value, for example, if a company continues to incur losses because prices of a particular product or service are higher than the operating costs, companies consider write-offs of the particular asset. These write-offs are referred to as impairments, there are events and changes in circumstances might lead to impairment. Some examples are, Large amount of decrease in value of an asset
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Equity (finance)
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In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owed. Equity can be negative if liabilities exceeds assets, shareholders equity represents the equity of a company as divided among shareholders of common or preferred stock. Negative shareholders equity is often referred to as a shareholders deficit, alternatively, equity can also refer to the capital stock of a corporation. The value of the stock depends on the future economic prospects. For a company in liquidation proceedings, the equity is that which remains after all liabilities have been paid, when starting a business, the owners fund the business to finance various operations. Throughout the businesss existence, the equity of the business will be the difference between its assets and debt liabilities, this is the accounting equation, when a business liquidates during bankruptcy, the proceeds from the assets are used to reimburse creditors. The creditors are ranked by priority, with secured creditors being paid first, other creditors being paid next, owners equity is this remaining or residual claim against assets, which is paid only after all other creditors are paid. In such cases where even creditors could not get money to pay their bills. In financial accounting, owners equity consists of the net assets of an entity, net assets is the difference between the total assets and total liabilities. Equity appears on the sheet, one of the four primary financial statements. The assets of an entity can be tangible and intangible items. Intangible assets include such as brand names, copyrights or goodwill. Tangible assets include land, equipment, and cash, issue of new equity in which the firm obtains new capital increases the total shareholders equity. Share repurchases, in which a firm returns money to investors, reducing on the side its financial assets. For practical purposes, share repurchasing is similar to a dividend payment, rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares outstanding. Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income, sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value. When the owners are shareholders, the interest can be called shareholders equity, the remains the same. If all shareholders are in one and the class, they share equally in ownership equity from all perspectives
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Expense
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For the row about members expenses in the UK Parliament which started about May 2009, see United Kingdom Parliamentary expenses scandal. In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, for a tenant, rent is an expense. For students or parents, tuition is an expense, buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is paid or remitted, usually in exchange for something of value, something that seems to cost a great deal is expensive. Something that seems to cost little is inexpensive, expenses of the table are expenses of dining, refreshments, a feast, etc. In accounting, expense has a specific meaning. It is an outflow of cash or other assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller, technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the equation, expenses reduce owners equity. The International Accounting Standards Board defines expenses as, in double-entry bookkeeping, expenses are recorded as a debit to an expense account and a credit to either an asset account or a liability account, which are balance sheet accounts. An expense decreases assets or increases liabilities, typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of an asset such as a building or equipment is not an expense. In a cash flow statement, expenditures are divided into operating, investing, operational expense – salary for employees. These latter types of expenditures are reported as expenses when they are depreciated by businesses that use accrual-basis accounting, the most common interpretation of whether an expense is of capital or income variety depends upon its term. Viewing an expense as a purchase helps alleviate this distinction, if, soon after the purchase, that which was expenses holds no value then it is usually identified as an expense. If it retains value soon and long after the purchase, it will be viewed as capital with life that should be amortized/depreciated and retained on the balance sheet. For tax purposes, the Internal Revenue Code permits the deduction of expenses in the For tax payable year in which those expenses are paid or incurred. This is in contrast to capital expenditures that are paid or incurred to acquire an asset, expenses are costs that do not acquire, improve, or prolong the life of an asset
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Goodwill (accounting)
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Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable, goodwill also does not include contractual or other legal rights regardless of whether those are transferable or separable from the entity or other rights and obligations. Examples of identifiable assets that are not goodwill include a brand name, customer relationships, artistic intangible assets. The goodwill amounts to the excess of the purchase consideration over the value of the assets. It is classified as an asset on the balance sheet. Under US GAAP and IFRS, goodwill is never amortized, instead, management is responsible for valuing goodwill every year and to determine if an impairment is required. If the fair market value goes below historical cost, an impairment must be recorded to bring it down to its market value. However, an increase in the market value would not be accounted for in the financial statements. Private companies in the United States, however, may elect to amortize goodwill over a period of ten years or less under an alternative from the Private Company Council of the FASB. The value of goodwill typically arises in an acquisition when one company is purchased by another company, the amount the acquiring company pays for the target company over the target’s book value usually accounts for the value of the target’s goodwill. If the acquiring company pays less than the book value, it gains “negative goodwill. Goodwill is difficult to price, but it does make a more valuable. For example, a company like Coca-Cola, would have a lot of goodwill, a competitor, would have far less goodwill, or even negative goodwill. Because the components that make up goodwill have subjective values, there is a risk that a company could overvalue goodwill in an acquisition. This overvaluation would be bad news for shareholders of the acquiring company, in fact, this happened in the AOL-Time Warner merger of 2001. In order to calculate goodwill, the market value of identifiable assets. For instance, if company A acquired 100% of company B, but paid more than the net value of company B. In order to calculate goodwill, it is necessary to have a list of all of company Bs assets and liabilities at fair market value
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Liability (financial accounting)
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Liabilities in financial accounting need not be legally enforceable, but can be based on equitable obligations or constructive obligations. An equitable obligation is a duty based on ethical or moral considerations, a constructive obligation is an obligation that is implied by a set of circumstances in a particular situation, as opposed to a contractually based obligation. The accounting equation relates assets, liabilities, and owners equity, probably the most accepted accounting definition of liability is the one used by the International Accounting Standards Board. The following is a quotation from IFRS Framework, Regulations as to the recognition of liabilities are different all over the world, examples of types of liabilities include, money owing on a loan, money owing on a mortgage, or an IOU. Liabilities are debts and obligations of the business they represent as creditors claim on business assets and they usually include payables such as wages, accounts, taxes, and accounts payable, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year, short-term obligations. Long-term liabilities — these liabilities are reasonably expected not to be liquidated within a year and they usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties. Liabilities of uncertain value or timing are called provisions, when a company deposits cash with a bank, the bank records a liability on its balance sheet, representing the obligation to repay the depositor, usually on demand. Simultaneously, in accordance with the principle, the bank records the cash, itself. The company, on the hand, upon depositing the cash with the bank, records a decrease in its cash. A debit either increases an asset or decreases a liability, a credit either decreases an asset or increases a liability, according to the principle of double-entry, every financial transaction corresponds to both a debit and a credit. When cash is deposited in a bank, the bank is said to debit its cash account, on the asset side, in this case, the bank is debiting an asset and crediting a liability, which means that both increase. When cash is withdrawn from a bank, the opposite happens, in this case, the bank is crediting an asset and debiting a liability, which means that both decrease
27.
Profit (accounting)
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Profit, in accounting, is an income distributed to the owner in a profitable market production process. Profit is a measure of profitability which is the major interest in income formation process of market production. There are several measures in common use. Income formation in market production is always a balance between income generation and income distribution, the income generated is always distributed to the stakeholders of production as economic value within the review period. The profit is the share of income formation the owner is able to keep to himself in the distribution process. Profit is one of the sources of economic well-being because it means incomes and opportunities to develop production. The words income, profit and earnings are substitutes in this context, Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being, in production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of commodities and increasing incomes from growing, all of them produce commodities which have value and contribute to well-being of individuals. The satisfaction of needs originates from the use of the commodities which are produced, the need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Economic well-being also increases due to the growth of incomes that are gained from the growing, market production is the only one production form which creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production, thus market production has a double role in creating well-being, i. e. the role of producing developing commodities and the role of creating income. Because of this role, market production is the “primus motor” of economic well-being. In principle there are two main activities in an economy, production and consumption, similarly there are two kinds of actors, producers and consumers. Well-being is made possible by efficient production and by the interaction between producers and consumers, in the interaction, consumers can be identified in two roles both of which generate well-being. Consumers can be both customers of the producers and suppliers to the producers, stakeholders of production are persons, groups or organizations with an interest in a producing company. Economic well-being originates in efficient production and it is distributed through the interaction between the company’s stakeholders, the stakeholders of companies are economic actors which have an economic interest in a company. Based on the similarities of their interests, stakeholders can be classified into three groups in order to differentiate their interests and mutual relations, the three groups are as follows, Customers Suppliers Producers
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Revenue
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In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover, some companies receive revenue from interest, royalties, or other fees. Revenue may refer to income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in Last year. Profits or net income generally imply total revenue minus total expenses in a given period, in accounting, revenue is often referred to as the top line due to its position on the income statement at the very top. This is to be contrasted with the line which denotes net income. For non-profit organizations, annual revenue may be referred to as gross receipts, in general usage, revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received from selling goods or services over a period of time, tax revenue is income that a government receives from taxpayers. In more formal usage, revenue is a calculation or estimation of periodic income based on a standard accounting practice or the rules established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, corporations that offer shares for sale to the public are usually required by law to report revenue based on generally accepted accounting principles or International Financial Reporting Standards. In a double-entry bookkeeping system, revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement, Revenue account names describe the type of revenue, such as Repair service revenue, Rent revenue earned or Sales. Money income from activities that are ordinary for a corporation, company, partnership. For some businesses, such as manufacturing and/or grocery, most revenue is from the sale of goods, service businesses such as law firms and barber shops receive most of their revenue from rendering services. Lending businesses such as car rentals and banks receive most of their revenue from fees, Revenues from a businesss primary activities are reported as sales, sales revenue or net sales. This includes product returns and discounts for early payment of invoices, most businesses also have revenue that is incidental to the businesss primary activities, such as interest earned on deposits in a demand account. This is included in revenue but not included in net sales, Sales revenue does not include sales tax collected by the business. Other revenue is revenue from peripheral operations, for example, a company that manufactures and sells automobiles would record the revenue from the sale of an automobile as regular revenue. The combination of all the revenue generating systems of a business is called its revenue model, Revenue is a crucial part of financial statement analysis. The company’s performance is measured to the extent to which its asset inflows compare with its asset outflows, net income is the result of this equation, but revenue typically enjoys equal attention during a standard earnings call
29.
Convergence of accounting standards
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The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally. Convergence in some form has been taking place for several decades, criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong. Convergence is taking place in countries, with over 100 countries having made public commitments supporting convergence towards the International Financial Reporting Standards. Efforts towards convergence include projects that aim to improve the respective accounting standards, in the United Kingdom, the IFRS was adopted beginning 2005, and, as of 2011, public companies are required to use the IFRS for their consolidated accounts. Other companies are allowed to use the IFRS, but most have chosen not to do so. Companies deemed small under the UK Companies Act are allowed to use the Financial Reporting Standard for Smaller Entities. Short-term projects towards convergence between US GAAP and the IFRS involve the amendment of one of the standards to better align them with the other boards. Some short-term projects and the actions taken are listed below. Segment reporting, a new standard, IFRS8 Segment Reporting, was issued in 2006, fair value option, US GAAP was amended to include the fair value option in 2007. Joint ventures, IFRS11 Joint Arrangements was issued in 2011, income tax, A joint exposure draft was published in 2009. An update to the memorandum of understanding in 2008 introduced long-term convergence projects, derecognition, both boards issued amendments to their accounting standards. Fair value measurement, FASB Statement No.257 and IFRS13 were issued in 2011, Financial instruments with the characteristics of equity, a joint discussion paper was released. Revenue recognition, the boards issued joint proposals in 2010, motivations for convergence include the belief that it will result in increased comparability between financial statements, which will benefit a variety of stakeholders. The goal of and various proposed steps to achieve convergence of accounting standards has been criticised by various individuals, other criticisms center around the nature of the converged standards. For example, some critics are concerned that convergence will increase the use of fair value accounting, other critics have also respectively cited shortcomings with rules-based and principles-based standards as reasons. The idea of convergence has roots in the 1950s, and was a response to economic integration. Before the 1990s, convergence took the form of harmonization, the reduction of differences between the accounting standards used internationally. In 1996, the National Securities Markets Improvement Act became law, work towards the goals were reviewed in 2008, and a progress report published that also set out subsequent steps for each convergence topic
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International Financial Reporting Standards
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International Financial Reporting Standards are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are important for companies that have dealings in several countries. They are progressively replacing the different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable, IAS29 and IFRIC7 are authorized in terms of the units of constant purchasing power paradigm. IFRS began as an attempt to harmonize accounting across the European Union, however, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC are still within use today and go by the name International Accounting Standards, IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee. On 1 April 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards, during its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards. The IASB has continued to develop standards calling the new standards International Financial Reporting Standards, in making that judgement, IAS8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. Financial statements are a representation of the financial positions and financial performance of an entity. Financial statements also show the results of the stewardship of the resources entrusted to it. Going concern, Financial statements are present on a going concern basis unless management either intends to liquidate the entity or to trading, or has no realistic alternative. Materiality and aggregation, Every material class of items has to be presented separately. Items that are of a nature or function shall be presented separately unless they are immaterial. Offsetting, Offsetting is generally forbidden in IFRS, however certain standards require offsetting when specific conditions are satisfied. Frequency of reporting, IFRS requires that at least annually a set of financial statements is presented. However listed companies generally also publish interim financial statements for which the presentation is in accordance with IAS34 Interim Financing Reporting, comparative information, IFRS requires entities to present comparative information in respect of the preceding period for all amounts reported in the current periods financial statements. In addition comparative information shall also be provided for narrative and descriptive information if it is relevant to understanding the current periods financial statements and this for example occurred with the adoption of the revised standard IAS19 or when the new consolidation standards IFRS 10-11-12 were adopted. e. Equity, Nominal equity is the residual interest in the nominal assets of the entity after deducting all its liabilities in nominal value
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International Standards on Auditing
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International Standards on Auditing are professional standards for the performance of financial audit of financial information. These standards are issued by International Federation of Accountants through the International Auditing, according to Olung M ISA guides the auditor to add value to the assignment hence building confidence of investors. The United Nations Board of Auditors has adopted the ISAs although this Board is composed of three Supreme Audit Institutions chairmen, usually using the INTOSAI Auditing Standards, List of the Standards List of the Standards at ifac. org Institution for public sector audit standards
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Management accounting principles
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Another term often used for management accounting principles for these purposes is managerial costing principles. The two management accounting principles are, Principle of Causality and, Principle of Analogy and these two principles serve the management accounting community and its customers – the management of businesses. The above principles are incorporated into the Managerial Costing Conceptual Framework along with concepts and constraints to help govern the management accounting practice, the framework ends decades of confusion surrounding management accounting approaches, tools and techniques and their capabilities. Without foundational principles, managers and accounting professionals have no consistent footing on which to challenge or evaluate new theories of methods for managerial costing, some management accounting methods are designed primarily to serve and comply with financial accountancy guidelines. The importance of having distinct and separate principles exclusively for Management Accounting has received support, prior to 1929 no group – public or private – was issuing or responsible for any accounting standards. S. Note, Since April 1,2001 the International Accounting Standards Board has been working on developing new international financial reporting standards. S. One of the foundations of a set of Financial Accounting Standards is the creation of a Conceptual Framework that defines the principles upon which the standards will be based, most major national and international accounting standards have developed conceptual frameworks to support their work on setting standards. In contrast, management accounting principles have been overlooked from both a conceptual and a point of view and, for the most part, overshadowed by financial accounting standards. Generally accepted accounting principles applies strictly to financial accounting because it was either the guidance they had at the time. This greatly compromises the management accounting practice and the ability of management accountants to provide managers with relevant decision support, yet, several innovative thinkers, shown in the Timeline below, saw value in management accounting having its own distinct set of principles. Over the last century it is more and more evident that management accounting principles be viewed as indispensable to the evaluation and improvement of MA methods, the management accounting practice was originally discussed in a series of articles published in The Engineering Magazine. As was typical of early management accounting practice after the industrial revolution, church discussed practices that conveyed the management accounting principles of causality and analogy but never formally defined them. The content of this series was reprinted in The History of Accounting Journal in 1976, studies in the Economics of Overhead Costs. Management Accounting theory developed and was embedded in his cost allocation discussion, Clark stressed the need to consider causes and he was also the first to delineate operational cost concepts from decision cost concepts having introduced the concept of avoidability. 1936 to 1954 – Committee on Cost Accounting Concepts and Standards, operating under the direction of the American Accounting Association, CACS had determined to develop accounting principles and standards for all fields of accounting. The principles accepted would not need to be restrictive, except in the sense that any proper practice restricts departure from it and they should deal more with fundamental methods of expressing accounting facts than with the extent of disclosures in published statements. And … the cost accountant could be effective the further his basic data were from the general ledger. Cost Accounting Principles for External Reporting, A Conceptual Framework, a body of concepts, principles, and practices has evolved over the years, gradually becoming what might be referred to as generally accepted cost accounting principles
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Financial statement
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Financial statements is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a manner and in a form easy to understand. A profit and loss statement provides information on the operation of the enterprise and these include sales and the various expenses incurred during the stated period. A Statement of changes in equity, also known as equity statement or statement of retained earnings, a cash flow statement reports on a companys cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements may be complex and may include a set of footnotes to the financial statements and management discussion. The notes typically describe each item on the sheet, income statement. Notes to financial statements are considered a part of the financial statements. Financial statements should be understandable, relevant, reliable and comparable, reported assets, liabilities, equity, income and expenses are directly related to an organizations financial position. Financial statements may be used by users for different purposes, Owners and managers require financial statements to make important business decisions that affect its continued operations, Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are used as part of managements annual report to the stockholders. Prospective investors make use of statements to assess the viability of investing in a business. Financial analyses are used by investors and are prepared by professionals. Financial institutions use them to decide whether to grant a company with fresh working capital or extend debt securities to finance expansion, the rules for the recording, measurement and presentation of government financial statements may be different from those required for business and even for non-profit organizations. They may use either of two accounting methods, accrual accounting, or cost accounting, or a combination of the two, a complete set of chart of accounts is also used that is substantially different from the chart of a profit-oriented business. Personal financial statements may be required from persons applying for a loan or financial aid. Typically, a financial statement consists of a single form for reporting personally held assets and liabilities, or personal sources of income and expenses. The form to be filled out is determined by the organization supplying the loan or aid, although laws differ from country to country, an audit of the financial statements of a public company is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms, results of the audit are summarized in an audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy
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Balance sheet
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Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a companys financial condition, of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business calendar year. A standard company balance sheet has two sides, assets, on the left and financing, which itself has two parts, liabilities and ownership equity, on the right, the main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities, another way to look at the balance sheet equation is that total assets equals liabilities plus owners equity. Looking at the equation in this way shows how assets were financed, balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections balancing. A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, however, many businesses are not paid immediately, they build up inventories of goods and they acquire buildings and equipment. In other words, businesses have assets and so they cannot, even if they want to, often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words, businesses also have liabilities, a balance sheet summarizes an organization or individuals assets, equity and liabilities at a specific point in time. Two forms of balance sheet exist and they are the report form and the account form. Individuals and small businesses tend to have simple balance sheets, larger businesses tend to have more complex balance sheets, and these are presented in the organizations annual report. Large businesses also may prepare balance sheets for segments of their businesses, a balance sheet is often presented alongside one for a different point in time for comparison. Securities and real values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between a total assets and total liabilities. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet, the small businesss equity is the difference between total assets and total liabilities. Guidelines for balance sheets of public entities are given by the International Accounting Standards Board. The standard used by companies in the USA adhere to U. S, balance sheet account names and usage depend on the organizations country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses, if applicable to the business, summary values for the following items should be included in the balance sheet, Assets are all the things the business owns. This will include property, tools, vehicles, furniture, machinery, bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool
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