Report

“ENGLISCH 3. ABSCHNITT”

Accounting Standards and
Principles in the United States

WS 1998/99

by

Philipp Kaufmann

Contents

1 What is accounting?  ... 3

2 Users of Accounting Information: Decision Makers ... 4

3 The Development of Accounting  ... 7

4 The Accounting Profession ... 8
4.1 The Work of Accountants 9
4.2. Specialised Accounting Services 10
4.3 Accounting Organizations and Designations 12

5 Accounting Standards in the United States  ... 14
5.1 Objective of Financial Reporting 16
5.2 Underlying Concepts 16

6 Accounting Principles  ... 20
6.1 Generally 20
6.2 Constraints on accounting 33

7 Accounting Standards throughout the world ... 36

8 Sources  ... 39
8.1 English Books 39
8.2 German Books 39

This report, which was written for the course “English III“, is intended to provide an overview of accounting and especially accounting principles and accounting standards in the United States. I worked out the main components and circumstances of accounting, e.g. “what is accounting“ and “who are the users“. This report does not cover the topics bookkeeping and cost accounting.

1 What is accounting?

Accounting is the system that measures business activities, processes that information into reports, and communicates the results to decision makers. For this reason it is called “the language of business“. The better you understand the language, the better you can manage the financial aspects of living. Personal financial planning, education expenses, loans, car payments, income taxes, and investments are based on the information system that we call accounting – also important for the environment (illustration below). A key product of an accounting information system is that financial statements allow people to make informed business decisions. Financial statements are the documents that report an individual′s or an organization′s business in monetary amounts.

2 Users of Accounting Information: Decision Makers

Decision makers need information. The more important the decision, the greater the need for accurate information. Virtually all businesses and most individuals keep accounting records to aid in making decisions. Some of the material in this report describes business situations, but the principles of accounting apply to the financial affairs of other organizations and individuals as well. The following sections discuss some of the people and groups who use accounting information.

Individuals
Everyone uses accounting information in day-to-day affairs to manage bank accounts, to evaluate job prospects, to make investments, and to decide whether to rent or to buy a house.

Businesses
Managers of businesses use accounting information to set goals for their organizations, to evaluate progress toward those goals, and to take corrective action if necessary. Decisions based on accounting information may include which building to purchase, how much merchandise inventory to keep on hand, and how much cash to borrow.

Investors and creditors
Investors provide the money a business needs to begin operations. To decide whether to help start a new venture, potential investors evaluate what income they can expect on their investment. This means analyzing the financial statements of the new business. Those people who do invest monitor the progress of the business by analyzing the company’s financial statements. They also keep up with developments in the business press – for example: The Wall Street Journal , Business Week, Forbes, and Fortune. Before making a loan, banks determine the borrower′s ability to meet scheduled payments. This evaluation includes a projection of future operations, which is based on accounting information.

Government regulatory agencies
Most organizations face government regulation. For example, the Securities and Exchange Commission (SEC), a federal agency, requires businesses to disclose certain financial information to the investing public. Like many government agencies, the SEC bases its regulations in part on the accounting information it receives from firms.

Taxing authorities
Local, state and federal governments levy taxes on individuals and businesses. The amount of the tax is figured using accounting information. Businesses determine their sales tax from accounting records that show how much they have sold. Individuals and businesses compute income tax from their recorded earnings – a lot to do for the agencies (see illustration next page).

Non-profit organizations
Non-profit organizations – such as churches, hospitals, government agencies, and colleges, which operate for purposes other than profit – use accounting information in much the same way that profit-oriented businesses do. Both profit organizations and non-profit organizations deal with budgets, payrolls, rent payments, and the like-all from the accounting system.

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