An Introduction to Accounting Processes and Financial Statements in Today

An Introduction to Accounting Processes and Financial Statements in Today

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1 Running head: ACCOUNTING PROCESSES AND FINANCIAL STATEMENTS An Introduction to Accounting Processes and Financial Statements in Today’s Business Environment Trident University International (TUI) ACC501, Module 1, Case Study An Introduction to Accounting Processes and Financial Statements in Today’s Business Environment In today’s business environment, it is ever increasingly more important to keep accurate financial records. In order to compete in the global market place, businesses must keep track of every penny earned and every dollar spent. As the economy becomes more and more unreliable and unpredictable, businesses must keep accurate financial statements in order to compete in their respective markets. Accurate financial statements and records also allow management and business executives to make smart and effective business decisions. When managers, supervisors, and executives have all the required information they can make business decisions that directly impact the business and lead to either business success or failure. In order to further discuss accounting processes and financial statements, it is necessary to define and describe some of the terms that will be discussed. Businesses must prepare their
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2 ACCOUNTING PROCESSES AND FINANCIAL STATEMENTS financial statements under a set of principles or guidelines. In the United States, these accounting principles are called Generally Accepted Accounting Principles (GAAP). GAAP are a detailed accumulation of specific and relevant rules and regulations generated by a series of authoritative private sector bodies. The Financial Accounting Standards Board (FASB) is the current body that establishes these financial rules. Other countries use a set of rules or standards called the International Accounting Standards (IAS) which are issued by the International Accounting Standards Board (IASB). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. A contra-asset account is an asset account where the balance will be either a credit balance or a zero balance. This is because a debit balance in a contra-asset account will violate the cost principle. Since a credit balance in an asset account is contrary to the normal or expected debit balance the account is referred to as a contra-asset account. The most common contra-asset account is Accumulated Depreciation. Accumulated Depreciation is associated with property, plant and equipment and it is credited when Depreciation Expense is recorded. Recording the credits in the Accumulated Depreciation means that the cost of the property, plant and equipment will continue to be reported. Reporting the accumulated depreciation separately allows the readers of the balance sheet to see how much of the cost has been depreciated and how much has not yet been depreciated. Another contra-asset account is Allowance for Doubtful Accounts. This
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