Accounting information is recorded with one main objective and this is to be able to prepare reliable and complete financial statements.
Now others will be able to see for themselves how an organization is in fact operating. For instance, they’ll be able to see at a glance what their income and expenses are like.
The statements are in short a summary of a company’s financial position and allow internal and external people alike to judge a company and make informed decisions.
Financial statements portray the status of how a company is operating on a specific date or how it’s doing over a period of time. Either way, GAAP (General Accepted Accounting Principles) requires the preparation of the Balance Sheet, Income Statement, and the Statement of Cash flows.
1. Balance Sheet- Also known as the statement of financial position summarizes an entity’s balances when it comes to assets, liabilities, and ownership equity as of a given time such as the end of its fiscal year.
2. Income Statement- Also known as profit and loss Statement (P&L), statement of operations, or statement of earnings reflects an entity’s revenue and expenses over a specified period of time such as a month or a quarter.
3. Statement of Cash Flows- Also known as the cash flow statement or funds flow statement reflects how changes in the balance sheet and income statement influence cash and cash equivalents. It in fact reveals the movement of cash through an entity over a particular period.
I found this pretty cool video covering definitions for a few important accounting words that everyone should be familiar with. In fact, this might be very basic for some, but it is a good video to revisit accounting basics.
Additionally, the video shows some good examples and shares practice exercises at the end with the viewers. Below are the terms discussed straight from the video:
-Balance sheet: The balance sheet shows the value of everything the company owns (its assets) as well as everything that it owes (its liabilities).
-Asset: An asset is anything owned by a company that can be converted into cash or used to generate income.
Tangible Asset: Assets that have a physical existence, such as cash, equipment, and property.
Intangible Assets:An asset that is not physical in nature, such as a patent.
-Liability: A liability is a financial obligation or debt held by a company. Common Types of liabilities include accounts payable, bank loans, and outstanding taxes.
Short-term liabilities are usually those that must be paid within one year.
Long-term liabilities are repayable after more than a year.
-Profit: The amount of money earned in a given period (usually a year) after deducting all expenses.
Profit Margin: The percentage of income a company retains after all costs are deducted.
-Loss: A negative profit. If a single transaction costs more than it earns, the company is said to make a loss or take a loss. If a company’s profit for an entire year is negative, it is said to make a loss or run at a loss.
-Profit and Loss Statement: One type of accounting report that companies publish on a regular basis.
-Debt: Money owed by a company to another company or individual. Most corporate debt is in the form of loans from banks, or bonds that have been sold to investors.
-Gross: A sum that does not include any deductions.
Gross Income: The total amount of money earned by selling a company’s products can be described as gross income or gross revenue. To gross can also be used as a verb meaning “to earn gross income.”
-Net: A net figure is a sum that includes all deductions. The amount of money earned through a company’s sales, after subtracting all costs, can be described as net income or profit. To net can also be used as a verb meaning “to earn net income.”
-Pretax: The adjective pretax means before payment of tax. Accountants normally show pretax profit or pretax income on one line of a company’s financial statement, and show profit after tax on a separate line.
Learning accounting or becoming familiar with it, is rather important in order for you to understand effectively the financial operations of any company. That is why Accounting is referred by many as “the language of business.”
The information provided by accountants can be broken down by three main categories (Operating Information, Financial Accounting Information, and Managerial Accounting Information).
1. Operating information
This type of accounting deals with the daily ins and outs of a business’ operations. For instance, tracking sales and inventory, accounts payable and receivable. It overall provides the general foundation for the other types of accounting information.
2. Financial Accounting Information
This type of information is communicated by means of financial statements. These statements are then used and evaluated by a company’s creditors, shareholders, and management to help them make decisions that involve the organization or its operation.
For instance, a creditor might want to know if a company is solvent enough to pay its debt before lending them money.
Similarly, an investor might like to know if the company is being effectively managed and profitable in order to evaluate the risk involved prior to investing.
Last but not least, a manger might need to analyze and evaluate financial information to determine present and future financial performance. This financial performance evaluation might help management determine the areas of weaknesses and strengths of an organization.
3. Managerial Accounting Information
This type of information is analyzed and reviewed by management to help them make specific key decisions. Planning, implementation, and control are the three main management functions that revolve around this type of accounting data.
For instance, management prepares budgets, analyzes various cost options, and implements and modifies their plan as they deem reasonable for better results.
If you are interested in a partnership venture of any type, you might be considering a General Partnership, Joint Venture, Limited Partnership, or a Limited Liability Partnership.
A General Partnership takes place when two or more persons join forces to carry on as co-owners a business for profit.
Each state adopts its own model act to govern this entity structure. However, the original Uniform Partnership Act (UPA) was promulgated in 1916 and now most states have adopted revised versions which are sometimes referred to as a whole the “Revised Uniform Partnership Act” (RUPA).
A Joint Venture involves an association of two or more persons in a single business enterprise. Unlike with a General Partnership where the business relationship can be ongoing for years to come, with a Joint Venture, the association is centered on a specific goal which in some cases carries a specified narrower timeframe.
Due to the similarities between the joint ventures and the general partnerships, depending on the jurisdiction, these types of entities are governed by either the UPA or RUPA.
A limited Partnership is a partnership with at least one general partner and at least one limited partner. This structure differentiates from the general partnership due to the fact that its limited partners benefit from limited liability.
Most states recognize the “Revised Uniform Limited Partnership Act (RULPA) as the governing power for Limited Partnership.
A Limited Liability Partnership carries greater protection from liability than you’ll find in the general or limited partnership. With this type of entity structure depending on the jurisdiction, the limited liability is embraced by some or all partners.
Thanks for the 1996 RUPA amendment, the Limited Liability Partnership is now included under its umbrella of governing law.
In future articles, we’ll discuss in more depth each of the above business structures. However, for now, I’ll leave you with the mentioned basic definitions for you to think overnight.
In my previous post I discussed that the two main characteristics of a General Partnership are unlimited liability and pass-through taxation. But what I didn’t do was explain what they are in detail. I figured, the subject could be painful enough for some to make the post too wordy for you all.
Unlimited liability for partners is mainly that, the partners are liable for the firm’s debt after the firm’s assets are depleted. In other words, if an employee of a partnership suffers damages and sues the partnership, he would be able to go after the partners’ assets after the partnership itself has ran out of its funds. In this case, the employee could proceed to recover the judgment settlement of what’s owed to him from the individual partners themselves.
Pass-through taxation is an element of a General Partnership because partners aggregated together make the entity work and therefore, there is no separate existence of its own similar to that experienced by corporations. Although, the partnership files an informational return, in reality it pays no taxes. The tax burden in this case would be passed on to its individual partners based on their allocated income whether this income is distributed or not.
RUPA however views the partnership separate from its partners (without affecting pass-through taxation) for most purposes. RUPA takes this approach for the partnership to continue to exist even if partners decide to come and go.
Accounting information is recorded with one main objective and this is to be able to prepare reliable and complete financial statements.
