Accounting Standards and Principles in the US

Contents

1 What is accounting?

2 Users of Accounting Information: Decision Makers

3 The Development of Accounting

4 The Accounting Profession
4.1 The Work of Accountants Specialised Accounting Services
4.3 Accounting Organizations and Designations

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

6 Accounting Principles
6.1 Generally
6.2 Constraints on accounting

7 Accounting Standards throughout the world

8 Sources
8.1 English Books
8.2 German Books

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.

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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 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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illustration A lot of work for the agencies.

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.

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 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.

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4.1 The Work of Accountants

Positions in the field of accounting may be divided into several areas. Two general classifications are private accounting and public accounting. Private accountants work for a single business, such as a local department store, the McDonald's restaurant chain, or the Eastman Kodak Company. Charitable organi-zations, educational institutions, and government agencies also employ private accountants. The chief accounting officer usually has the title of controller, treasurer, or chief financial officer. Whatever the title, this person usually carries the status of a vice-president.

Public accountants are those who serve the general public and collect professional fees for their work, much as doctors and lawyers do. Their work includes auditing, income tax planning and preparation, and management consulting. Public accountants are a small fraction (about 10 percent) of all accountants. Those public accountants who have met certain professional requirements are designated as certified public accountants (CPAs).

Some public accountants pool their talents and work together within a single firm. Most public accounting firms are called CPA firms because most of their professional employees are CPAs. CPA firms vary greatly in size. Some are small businesses, and others are large partnerships. The largest CPA firms are world-wide partnerships with more than 2,000 partners. The six largest U.S. accounting firms are: Arthur Anderson & Co., Coopers & Lybrand, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, Price Waterhouse.

Although these firms employ only about 12 percent of the 350,000 CPAs in the United States, they audit the financial statements of approximately 85 percent of the 2,600 largest corporations. These employees are so specialized and “fanatic” that this is a own “religion” or at least a very special and complex area with their own language, law and behavior. For example: In Germany, Switzerland and Austria most paper is published in the field of accounting (!). (See illustration below)

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4.2 Specialized Accounting Services

Because accounting affects people in many different fields, public accounting and private accounting include specialized services.

Public Accounting

Auditing is one of the accounting profession's most significant services to the public. An audit is the independent examination that ensures the reliability of the reports that management submits to investors, creditors, and others outside the business. In carrying out an audit, CPAs from outside a business examine the business's financial statements. lf the CPAs believe that these documents are a fair presentation of the business’s operations, the CPAs give a professional opinion stating that the firms financial statements are in accordance with generally accepted accounting principles, which is the standard. Why is the audit so important? Creditors considering loans want assurance that the facts and figures the borrower submits are reliable. Stockholders, who have invested in the company, need to know that the financial picture management shows them is complete. Government agencies need accurate information from businesses.

Tax accounting has two aims: complying with the tax laws and minimizing the taxes to be paid. Because federal income tax rates range as high as 39.6 percent for individuals and 35 percent for corporations, reducing income tax is an important management consideration. Tax work by accountants consists of preparing tax returns and planning business transactions to minimize taxes. CPAs advise individuals on what type of investments to make and on how to structure their transactions.

Management consulting is the catchall term that describes the wide scope of advice CPAs provide to help managers run a business. As CPAs conduct audits, they look deep into a business’s operations. With the insight they gain, they often make suggestions for improvements in the business’s management structure and accounting systems. Management consulting is the fastest-growing service provided by accountants.

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