Accounting Standards and Principles in the US

  WS 1998 /99 English  2

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

  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  

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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.

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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

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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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Other users

Employees and labor unions make wage demands based on their employer's reported income. Consumer groups and the general public are also interested in the amount of income businesses earn. And newspapers report „improved profit pictures“ of companies as the nation emerges from economic recession. Such news, based on accounting information, is related to our standard of living. Users of accounting information are a diverse population, but they may be categorized as external users or internal users. This distinction allows us to classify accounting into two fields - financial accounting and management accounting.

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Financial accounting provides information to people outside the firm. Creditors and stockholders, for example, are not part of the day-to-day management of the company. Likewise, government agencies, such as the SEC, and the general public are external users of a firms accounting information. Management accounting generates confidential information for internal decision makers, such as top executives, department heads, and hospital ad-ministrators.

3 The Development of Accounting

Accounting has a long history. Some scholars claim that writing arose in order to record accounting information. Account records date back to the ancient civilizations of China, Babylon, Greece, and Egypt. The rulers of these civilizations used accounting to keep track of the costs of labor and materials used in building structures such as the great pyramids. The need for accounting has existed as long as there has been business activity.

In the nineteenth century, the growth of corporations spurred the development of accounting. Corporation owners - the stockholders - were no longer the managers of their business. Managers had to create accounting systems to report to the owners how well their business was doing. Because managers want their performance to look good, society needs a way to ensure that business information is reliable. In the United States, the Financial Accounting Standards Board (FASB) determines how accounting is practiced. The FASB works with the Security And Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA), the largest professional organization of accountants. Certified public

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accountants, or CPAs, are licensed accountants who serve the general public rather than one particular company.

4 The Accounting Profession

In this section I will discuss the different people and organizations who deal with accounting. Accounting is big business - it involves international companies, thousands of employees and institutions with influence and power. Very important from the beginning is the book-keeper who is responsible for the correct recording of

the receipts and with whom everything begins.