Liberty ACCT 211 Financial Principles Entire Class

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Acct 211 Liberty University: The Three Areas of Accounting and How They Affect Your Business

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Acct 211 liberty university

The practice of acct 211 liberty university involves gathering and analyzing financial information for a business or other organization. The principle of financial accounting is the process of compiling financial statements for an organization that describe its financial condition, as well as documenting its transactions and balance sheet. A variety of accounting principles are used in the creation of these documents. Accountants primarily use two methods to record financial transactions: the cash method and the accrual method. The cash method is used when a company receives payment for goods or services within 30 days of the invoice date. The accrual method is used when payment will be received later than 30 days after the invoice date. Using one method or another impacts how an accountant records transactions and affects which accounting standards must be met.

Double-Entry Accounting

Double-entry accounting has been around since the 1300s, but it is also the method used today. This method is necessary because a company’s revenues are not always equal to its expenses. When a company incurs expenses that exceed its revenues, the company must record a debit to its accounts payable account. While revenues exceed expenses, the company credits the accounts receivable account. This system allows for the calculation of net income by subtracting expenses from revenues. Double-entry accounting makes it possible for accountants to record transactions in precise detail. This method requires that for every transaction, two ledgers be updated.

Receivables and Payable

Receivables are money that customers owe a company for goods or services that have already been provided. For example, a landscaping company charges customers a small fee to come out and give a written estimate on how much it would cost to landscape their property. The company’s employees then deliver the estimate to the customer and provide them with an itemized list of what will be done and what the price will be. A landscaping company then has a couple of options for how to record that transaction in their accounting system. The company can initially record the transaction as a sale, then expect the customer to pay upfront. Or, the company can record the transaction as a receivable, or an IOU. Accountants initially record the transaction as a sale, then record the sales amount again as a receivable when the customer pays. When the customer later pays the landscaping company, it creates a debit to the accounts receivable account and a credit to the cash account. This method works best when the customer pays close to the time that the landscaping company provided the service. If it takes a month for a customer to pay the landscaping company, an accountant can use the accrual method to account for it.

Consolidation and Mergers

A company that acquires another company records the purchase in its books as an asset acquisition. For example, a corporation purchases another company that produces widgets. Because the corporation paid cash for the company, it records the purchase of the widgets in its books as a cash transaction. Consolidation occurs when a parent company owns a significant portion of a subsidiary company. The parent company can record the investment in the subsidiary company as an asset. If a subsidiary corporation purchases another company, it records the purchase as an asset acquisition in its books as well. A parent company or subsidiary company can merge with another company as well. A merger occurs when a company purchases another company and combines the operations of both organizations. The company purchasing another company records the purchase as an asset acquisition in its books.

Asset Recognition and Measurement

Accountants use their knowledge of their organization’s cash flow to determine when an asset is ready to be recognized. This process involves the creation of a balance sheet that documents the amount of cash and the number of assets a company has. An accountant can then use the amount of cash the company has to pay for the asset. An asset’s value is usually recorded at the time of purchase. In certain cases, though, an asset’s value can be re-evaluated. An asset’s value can also be based on its usefulness to a company, which is known as its “intrinsic value.” The amount of time a company owns an asset is called an asset’s useful life.

Earnings Per Share

A company’s board of directors and accountants must understand the number of assets on a company’s balance sheet. A company’s assets include property, such as buildings and machinery, and intangible assets, such as patents, trademarks, and copyrights. When calculating earnings per share, accountants take the net income of a company and divide it by the number of shares outstanding. The net income is the amount of income a company has after all expenses are deducted from its revenue. A company’s earnings per share are an indication of how much money owners receive for the stock they own. The earnings per share of a company can fluctuate from one year to the next.

Financial Statements

Financial statements are documents that include a company’s balance sheet, income statement, and cash flow statement. Financial statements can be found online for public companies and are often required as part of an annual audit. Private companies also use annual audits to review their financial statements. The balance sheet shows the number of a company’s assets, such as cash and inventory, and liabilities, such as the amount of money a company owes its creditors. The income statement shows the amount of money a company makes during a specific period. The cash flow statement shows where a company’s money is coming from and going.

Conclusion

Accounting principles and practices have evolved since the 1300s, and they continue to evolve today. New technologies have changed the way businesses record their financial transactions. Accountants are responsible for managing their company’s finances and making sure financial statements are accurate. Accounting professionals must be knowledgeable about their industry and government regulations. They must also understand their organization’s financial situation so they know when it’s appropriate to record a transaction in their books as an asset or a liability.

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