Instructions

1. Open the accounting software program by clicking on the corresponding icon.

2. Click on the “inventory report” section of the software program. Fill in the dates, prices and description of your inventory by following the directions included in the program. Catalog your products and services alphabetically within the program so that you can retrieve specific information quickly, as needed.

3. Use the inventory report feature in the accounting software program to track prices, profits and transactions that affect the value of current stock. Use the inventory report tools to track the status and current count of inventory, and to view, modify, save or print individual transaction details. Export the inventory report data for stock received to a website or email using the “export file” option within the accounting program.

Tips & Warnings

There are three primary methods used to evaluate stock: by average cost; by first in first out (FIFO); and by last in first out (LIFO), according to The Food and Agriculture Organization of the United Nations (FAO). The average cost method values stock by dividing the total cost of production by the quantity of inventory. The FIFO method is based on the using the oldest stock first, such as in the perishable food business; and the LIFO method is used when the latest stock purchased is the first to be sold, such as grocery bulk-bins in which the stock that was added last is used first.

Accounting for stock presents a challenge because unused stock at the year end are reported as current assets, and stock used is reported as expenses.

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Purpose

The main purpose of a financial accounting system is to provide managers, investors and other interested parties with timely information that can be used to make sound business decisions. Most firms purchase accounting programs to speed up accounting tasks, minimizing errors in the process. No more pencils and pads — a computerized accounting system is very efficient, with the ability to compile reports in speeds impossible with the manual method. No more waiting for days to get reports – computerized systems compile statements and reports with a push of a button.

Nature

A financial accounting system follows the same rules and principles as the manual accounting method – the only change is related to the mechanics of the process. The nature of both manual and computerized systems is the same – both gather information and compile it into useful reports. The difference is that using software, certain processes are automatically performed, such as posting journal entries in the general ledger and creating reports. The idea is to increase efficiency, while maintaining a central control over financial activities.

Financial Reports

At the heart of every financial accounting system is the ability to compile useful reports. Most systems not only offer standard reports, such as the income statement and balance sheet, but also allow for industry-specific statements and summaries. For example, reports on inventory costs and levels would be common requirements for retail and manufacturing businesses. Some firms purchase separate reporting programs to complement the main accounting system, increasing its functionality and ability to meet its purpose as a provider of reliable information.

Costs

Costs are part of the nature of an accounting system, which could be quite expensive to purchase and maintain. Software requires hardware and other equipment, such as printers and scanners, that can add up the total costs of the program. Other expenses to consider include training, customer service and software maintenance. Many business owners select an accounting system based on required features and a budget range. It doesn’t make sense to pay a lot for a system that offers lots of functionalities that will be ignored.

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Instructions

Organizing Your Ledger System

1. Examine your bank statements and compile a list of regular monthly expenses, quarterly and annual expenses, and another list of variable expenses such as office supplies, marketing, entertainment, and travel. Use these lists in setting up your chart of accounts.

2. Establish your chart of accounts. The different ledgers in your COA are traditionally numbered as follows: 1000-1999 assets, 2000-2999 liabilities, 3000-3999 owner’s equity, 4000-4999 revenue, 5000-5999 cost of goods sold, 6000-6999 marketing & intangibles expense, 7000-7999 other revenues, 8000-8999 administrative, travel, personnel & miscellaneous business expenses.

3. The marketing & intangibles expense ledger may include 6000-6099 general expenses, 6100 advertising, 6200 financial fees, 6300 charitable donations, 6400 depreciation, 6500 employee benefits, 6600 taxes, 6700 insurance. Each category will be further divided into numbered subcategories such as officers’ and directors’ insurance, errors & omissions insurance, liability insurance, vehicle insurance, and any other insurance you carry.

4. The administrative, travel, personnel & miscellaneous business expense ledger may include subcategories such as 8100 rent, 8200 electric utilities, 8300 Internet, 8400 telephone, 8500 legal, accounting & consultants, 8600 salaries & wages, 8650 payroll taxes, 8700 office supplies, 8800 repair & maintenance, and other expenses of doing business.

5. Take one of your current bills, a utility bill. Mark your ledger account number on it. Look under the administrative, travel, personnel & miscellaneous category of your COA and find the 8200 electric utilities category. If you separate out utilities in your warehouse from those for the office and those for the showroom, you should create account numbers for each of those categories so your warehouse utility bill may be 8220, the office 8230 and the showroom 8240.

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Instructions

1) Gather the financial records together. This will include all information about current liabilities that were not paid during the period and any receivables that were not received as of the cut-off date for the report. All known assets, including property and other holdings, also should be compiled into a simple listing.

2) Begin compiling the sections for the financial report. This includes a section that details each type of financial component. A basic financial report includes a section for assets and one for liabilities. In some instances, these two sections can be broken down into more detail. For example, assets can be divided into subsections to show property, miscellaneous holdings and outstanding receivables.

3) Compare assets to liabilities. After detailing the income and expenses, the next step is to show how they compare. Deduct the expenses from the income to determine the current amount of net income for the period. Ideally, the organization generated and collected enough revenue to offset expenses for the period. If not, this final figure will show as a negative amount.

4) Relate the net income figure to the other assets of the company. If the net income was a negative figure, the amount will be deducted from the worth of other assets. If the net income was positive, it is added to the worth of the assets. The result will reflect the current overall value of the company.

5) Close with a section of points that require special attention. For example, if expenses exceeded income for the period cited, make note of where the expenses may be addressed more effectively and result in a positive rather than negative figure. Also make note of any areas that seem to be out of line with company goals. This will provide managers and others with ideas for improving the bottom line.

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Economic Effects

Financial accounting contributes significantly to creating a healthy economy. The circulation of money into and out of markets is based largely on the financial data reported by companies within a given industry. Also, many retirement funds are filled with the stocks of businesses whose performances are critical to the financial welfare of the stockholder upon retirement. Financial transparency helps stockholders, brokers and fund managers make wise investment decisions.

Reporting Methods

There are two methods used in interpreting data in financial accounting: accrual and cash. “Under the accrual method revenue is recognized when customers are invoiced, regardless of when payment is received. Similarly, an expense is recognized when the bill is received, not when payment is made”. Under the cash method, at the time of payment of an expense or receipt of income, the transaction is documented.

Accounting Cycle

Financial accountants follow a consistent cycle that includes recording business transactions, posting debits and credits to a general ledger, making adjustments to the general ledger, closing the books, and preparing financial statements.
Four Financial Statements

The two major objectives of businesses are to remain solvent – pay its debt and expenses–and to earn a profit. “The four financial statements are reports that allow interested parties to evaluate the profitability and solvency of a business”. The four financial statements include: balance sheet, income statement, statement of owner’s equity and statement of cash flows. The accountant must analyze the company’s financial records in order to create accurate financial statements.
Ethics

Financial accountants must make judgments on how to record data on a day-to-day basis. “The Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission provide guidance about acceptable accounting practices”. Generally accepted accounting principles (GAAP) help to steer the decisions of accountants who seek to maintain creditability with the general public through assurance that their methods are accurate.

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History

Environmental accounting started receiving attention during the energy crisis in the 1970s. Although the issue was given consideration for a time, the energy crises ended and the 1980s ushered in a new era of economic prosperity. The practice of environmental accounting faded into the background before any standards for measuring economic impacts were developed. Legislation and agreement on how to account for environmental factors and what factors should be counted were difficult to come by. In the 1990s, a large upswing in environmental protection activism brought environmental accounting back into the consciousness of both consumers and businesses. Gradually some standards for environmental accounting were implemented by prominent accounting organizations such as the Financial Accounting Standards Board and the Accounting Standards Executive Committee of the American Institute of CPAs.

Benefits

Environmental accounting allows companies to take all costs, rather than just company expenses, into account when making production and pricing decisions. The depletion of natural resources involves more costs than the monetary ones that appear on company financial statements. Examining our use of and affect on natural resources and the environment around us increases our awareness of the way in which we treat that environment. This awareness allows us to make decisions that will keep our drinking water cleaner, decrease air pollution and manage dwindling natural resources.

Types

There are several relationships that can be examined using environmental accounting. Environmental accounting can be used to monitor our use of minerals and natural oil. We can also examine the costs of water and air pollution. Animal habitats and the farm land needed to produce food can also be examined to determine what impact our activities are having. Opportunity costs are another cost category which can be examined with an environmental and social accounting. Opportunity costs refer to what we do without in order to have something else. For example, the pieces of steel we use to make beams for building construction cannot also be used to make a new car. The health and happiness of employees and other stakeholders can also be weighed when making decisions.

Considerations

Although environmental accounting has many benefits and is a good idea in theory, it can be difficult to put into practice. When instituting environmental and social accounting practices, it is necessary to remember that many of the costs calculated in environmental accounting are intangible and difficult to measure. The company must make sure it applies the same standards and assigns the same values to resources across the organization. Some values are subjective and vary with individuals, so it can be difficult to come to a consensus on what to measure and how. Social accounting can also be challenging, as social values sometimes change quickly.

Potential

Environmental and social accounting have the potential to raise awareness about public concerns. This can help us substantially reduce pollution, protect wildlife habitats and save farmland from development. Environmental and social costing can also help companies to set product and service prices at levels that take into account the true costs. This means that consumers will have to pay more for a product whose production results in a lot of air pollution or whose manufacture required the development of manufacturing plant facilities on farm land. If prices are set in this manner, environmental accounting could possibly help make environmentally costly products more expensive to purchase and green products less so. The goal is to make damaging the environment more costly and thereby less profitable while increasing awareness about the environmental and social impacts of the products we produce and consume.

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Instructions

1) Prepare to conduct an aggregate analysis to reconcile the account. An aggregate analysis looks at the whole account, rather than line items, to determine how much the borrower must pay into the account and how much is to be disbursed from the account.

2) Create a running balance. List each anticipated disbursement from the account for the 12 months the escrow statement covers. Divide the total disbursements by 12 to determine the monthly payment. List each month’s payment and each month’s disbursements, as well as the account balance after each month’s activity.

3) Add enough to the first month’s balance to bring the lowest balance to $0. For example, for an account opened in January, if the beginning balance is $0 and a disbursement brings the lowest monthly balance to -$500 in April, add $500 to January’s balance and refigure each subsequent month’s balance accordingly. April’s balance will be $0.

4) Compute the cushion amount the lender requires. The amount can be as much as two escrow payments under federal law, but state law may cap the cushion at less. Add the cushion amount to the monthly balances.

5) Compare the trial running balance to the actual account balance for the final month of the statement. If the actual balance is more than the trial running balance for that month, the account has a surplus. If the actual balance is less, the account has a shortage. If the lender must use its own funds to pay a disbursement, the account is deficient.

6) Review the account history shown on the statement. Verify the activity noted in the history, including each payment into the account; each item paid from the account, itemized to show the purpose of the payment and the entity to which it was paid; beginning and ending account balances; and the amount of the monthly mortgage payment and the portion applied to escrow.

7) Review the projections of the coming year’s disbursements based on the analysis of the previous year’s activity. Verify that the statement shows the funding requirements and the lowest balance; the amount of the mortgage payment and how much of the payment will be applied to escrow; and an explanation of how a surplus, shortage or deficiency will be handled.

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Instructions

1. Keep up with the work. Studying accounting is a cumulative process, and every level of accounting study builds upon information taught at the previous level.

2. Understand cash versus accrual basis accounting. Under cash basis accounting, expenses and income are counted when a business actually has the cash in hand. Under the accrual basis, expenses and income are counted as soon as they are committed.

3. Learn basic accounting terminology, and not just the formulas and equations. You should be able to identify, prepare and describe the purposes of the three basic accounting documents, including balance sheets, income statements and equity reports. In addition, those serious about their accounting studies should know key formulas like debt-to-income ratio and liquidity index.

4. Complete your assignments and every sample problem as best as you can so that you will know how to solve these problems on the job.

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Original Basis

The original basis on an asset is its original cost of acquisition. This can include the purchase price, as well as all expenditures necessary to bring the asset to its desired condition and location of use. For instance, assume a manufacturing firm purchases a machine. The machine’s original basis includes the purchase price, the shipping costs and the costs incurred to install and setup the machine once it arrives.

Depreciation, Amortization and Depletion

The original basis, along with the asset’s estimated useful life, allocation method and estimated residual value, are used to determine the amount of expense recognized each period. This allocation of expenses is known as depreciation in the case of operating assets, amortization in the case of intangible assets and depletion in the case of natural resources. The entry to record the expense is offset with an entry to a contra-account called accumulated depreciation, amortization and depletion. This reduces the carrying value of the asset on the company’s balance sheet. An asset will be depreciated until its adjusted basis is equal to the estimated residual value.
Repairs, Improvements and Additions

Repairs and maintenance are usually expensed as incurred because they do not offer any additional future benefit to the company. Improvement and additions, on the other hand, can provide new benefits for the company, so they are typically capitalized and depreciated, amortized or depleted over the asset’s useful life.

Determining Adjusted Basis

An asset’s adjusted basis is determined by adding improvements and additions to the original basis and then subtracting depreciation, amortization or depletion. This adjusted basis is reported on the company’s balance sheet at the end of the reporting period.

Use of Adjusted Basis

Depreciation, amortization and depletion are methods of allocation, not valuation. An asset’s adjusted basis may be different from its actual value. When an asset is sold the proceeds are reduced by the adjusted basis to determine the gain or loss realized on the disposition of an asset.

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External Reporting

Financial accounting involves preparing financial statements, such as income statements or balance sheets, to be reported to people or organizations outside of the organization. The organization prepares and issues these external financial reports on a regular basis. Managerial accounting, on the other hand, is used only by management in the organization to monitor the organization’s performance and assist in making decisions based on the organization’s finances.

Publicly vs. Privately Held

The readers of financial statements prepared using financial accounting methods have a different audience or readership depending on the ownership status of the organization. If the organization is privately held, only certain people outside of the organization have access to the financial statements, such as investors or creditors of the organization. If the organization is publicly held, the financial statements are accessible by the general public, allowing both current and potential investors a view of the organization’s financial health.

Standardization

GAAP, or generally accepted accounting practices, is a body of practices and procedures accountants have formulated over the existence of accounting. GAAP affects how all accounting, both financial and managerial, is conducted. Financial accounting involves its own set of uniform or standardized practices, since the information in financial accounting is shared with the public. The Financial Accounting Standards Board provides guidance and rules on how accountants may conduct financial accounting. If a corporation is publicly traded, its financial accounting practices must also meet standards set by the Securities and Exchange Commission.

Information Provided

Financial accounting provides a variety of information about an organization’s financial position, helping external bodies make decisions about whether to invest in or lend to the organization. Financial reports are also used by government bodies and financial analysts as they examine the health of the organization, industry or economy in general. Financial accounting provides the amount, timing and any risks involved with an organization making money or paying its debts. Financial accounting also states the resources at the organization’s disposal and any claims against those resources, as well as gives an accounting of the organization’s earnings. Financial accounting gives external organizations and individuals a picture of how well the organization’s management is performing.

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