TP Javeton WebNet

Author: Admin

  • A Brief Insight Into GAAP

    While many businesses assume that accountants are bound by generally accepted accounting practices and that these are inviolate, nothing could be further from the truth. Everything is subject to interpretation, and GAAP (Generally Accepted Accounting Principles) is no different. For one thing, GAAP permit alternative accounting methods to be used for certain expenses and for revenue in certain specialized types of businesses.

    For another, GAAP methods require that decisions be made about the timing for recording revenue and expenses, or they require that key factors be quantified. Deciding on the timing of revenue and expenses and putting definite values on these factors require judgments, estimates and interpretations which, when arrived at in a forthright and responsible manner are acceptable to GAAP, despite the method used.

    The mission of GAAP over the years has been to standardize accounting methods in order to bring about uniformity across all businesses. But alternative methods are still permitted for certain basic business expenses. No tests are required to determine whether one method is more preferable than another. A business is free to select whichever method it wants.

    However, if a business is to use an alternative accounting method, it must choose which cost of goods sold expense method to use and which depreciation expense method to use. For other expenses and for sales revenue, one general accounting method has been established, which is GAAP, a set of accounting rules used to standardize the reporting of financial statements in the United States; there are no alternative methods.

    Notwithstanding, a business has a fair amount of latitude in actually implementing the methods. One business applies the accounting methods in a conservative manner, and another business may apply the methods in a more liberal manner. The end result is more diversity between businesses in their profit measure and financial statements than one might expect, considering that GAAP have been evolving since 1930.

    The pronouncement on GAAP prepared by the Financial Accounting Standards Board (FASB) is now more than 1000 pages long. And that doesn’t even include the rules and regulations issued by the federal regulatory agency that has jurisdiction over the financial reporting and accounting methods of publicly owned businesses – the Securities and Exchange Commission (SEC).




     

  • Budgeting – Uninspiring But Critically Needed Work


    Budgeting is one of those topics you would rather avoid, but in business, it’s an absolute necessity. To prepare a reasoned and thoughtful budget, an accountant must start with a broad-based critical analysis of the most recent actual performance and position of a given business by the managers who are responsible for getting results.

    Then the managers decide on specific and concrete goals for the coming year. It demands a fair amount of management time and energy. A budget should be worth this time and effort because it’s one of the key components of a manager’s job. To construct budget financial statements, a manager needs good models of the profit, cash flow and financial condition of your business.

    Models are blueprints or schematics of how things work. A business budget is, at its core, a financial blueprint of the business. Budgeting relies on financial models that are the foundation for preparing budgeted financial statements. Those statements include:

    –Budgeted income statement (or profit report): This statement highlights the critical information that managers need for making decisions and exercising control. Much of the information in an internal profit report is confidential and should not be divulged outside the business.

    –Budgeted balance sheet: The connections and ratios between sales revenue and expenses and their corresponding assets and liabilities are the elements of the basic model for the budgeted balance sheet.

    –Budgeted statement of cash flows: The changes in assets and liabilities from their balances at the end of the year just concluded to the projected balances at the end of the coming year determine cash flow from profit for the coming year.

    Budgeting requires good working models of profit performance, financial condition, and cash flow from profit. Constructing good budgets is a strong incentive for businesses to develop financial models that not only help in the budgeting process but also help managers in making strategic decisions.

  • A Brief Description Of The Sole Proprietorship


    A sole proprietorship is the business or an individual who has decided not to carry his business as a separate legal entity, such as a corporation, partnership or limited liability company. The proprietorship business type is not a separate entity. Any time a person regularly provides services for a fee, sells things at a flea market or engage in any business activity whose primary purpose is to make a profit, that person is a sole proprietor.

    If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C “Profit or Loss From a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business activity.

    As the sole proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all it is liable for, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. If they are sued or can’t pay their bills, they are personally liable for the business incurred expenses and liabilities.

    A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements in order to keep abreast of how his business is doing. Banks usually require financial statements from sole proprietors who apply for loans. And a partnership needs to maintain a separate capital or ownership account for each of the partners.

    The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. Although sole proprietors don’t have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners’ equity – not only to track the business, but for the benefit of any future buyers of the business.

    The question you should ask yourself when planning to start a business of your own is, which business type affords me the most protection under the law? And the answer to this question is most assuredly the general corporation; but along with the protection it provides to you, the business person (or CEO), comes the added responsibility of adherence to the law as well as your obligation to stock holders, if any. The decision could be an interesting one that may take some time to come to terms with.

  • A Look at Partnerships and Limited Liability Companies


    Some business owners choose to create partnerships or limited liability companies instead of a corporation. A partnership can also be called a firm, and refers to an association of a group of individuals working together in a business or professional practice.

    While corporations have rigid rules about how they are structured, partnerships and limited liability companies allow the division of management authority, profit sharing and ownership rights among the owners to be very flexible.

    Partnerships fall into two categories. General partners are subject to unlimited liability. If a business can’t pay its debts, its creditors can demand payment from the general partners’ personal assets. General partners have the authority and responsibility to manage the business. They’re analogous to the president and other officers of a corporation.

    Limited partners escape the unlimited liability that the general partners have. They are not responsible as individuals, for the liabilities of the partnership. These are junior partners who have ownership rights to the profits of the business, but they don’t generally participate in the high-level management of the business. A partnership must have one or more general partners.

    A limited liability company (LLC) is becoming more prevalent among smaller businesses. A LLC is like a corporation regarding limited liability and it’s like a partnership regarding the flexibility of dividing profit among the owners. Its advantage over other types of ownership is its flexibility in how profit and management authority are determined.

    limited liability company can have a downside, however. The owners must enter into very detailed agreements about how the profits and management responsibilities are divided. It can get very complicated and generally requires the services of a lawyer to draw up the agreement.

    A partnership or LLC agreement specifies how profits will be divided among the owners. While stockholders of a corporation receive a share of profit that is directly related to how many shares they own, a partnership or LLC does not have to divide profit according to how much each partner invested. Invested capital is only of the factors that are used in allocating and distributing profits.

    NAVAN Global, the REAL SEAL!

  • You’ve Heard Of a Corporation What Exactly is it?


    Most businesses start out as a small company, owned by one person or by a partnership. The most common type of business when there are multiple owners is a corporation. The law sees a corporation as a real, live person. Like an adult, a corporation is treated as a distinct and independent individual who has rights and responsibilities.

    A corporation’s “birth certificate” is the legal form (filing certificate) that is filed with the Secretary of State of the state in which the corporation is created, or incorporated. It must have a legal name, just like a person. A corporation is separate from its owners and it is responsible for its own debts. The bank can’t come after the stockholders if a corporation goes bankrupt.

    A corporation issues ownership shares to persons who invest money in the business. These ownership shares are documented by stock certificates, which state the name of the owner and how many shares are owned. The corporation has to keep a register, or list, of how many shares each share holder owns. Owners of a corporation are called stockholders because they own shares of stock issued by the corporation.

    One share of stock is one unit of ownership; how much one share is worth depends on the total number of shares that the business issues. The more shares a business issues, the smaller the percentage of total owners’ equity each share represents.

    Stock shares come in different classes of stock. Preferred stockholders are promised a certain amount of cash dividends each year. Common stockholders have the most risk. If a corporation ends up in financial trouble, it’s required to pay off its liabilities first. If any money is left over, then that money goes first to the preferred stockholders. If anything is left over after that, then that money is distributed to the common stockholders.

     

  • Making Your Accounting Principles Acceptable




    It would be very easy for an employee to expect fair treatment from professionals within the company s/he’s employed with. To expect them to act within the precepts of the Golden Rule: “Do Unto Others as You Would Have Them do Unto You” which, if company management were to engage in such honorable behavior, workers would have little or nothing to worry about. But that’s not the case and therefore principles and systems must be employed.

    If everyone involved in the process of accounting followed their own system, or no system at all, there would be no way to truly tell whether a company was profitable or not. Most companies follow what is commonly referred to as GAAP (Generally Accepted Accounting Principles), and there are huge tomes in libraries and bookstores devoted to just this one topic.

    Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP. If GAAP is not the set of principles used for preparing financial statements, then a business needs to make clear which other form of accounting they have used and are bound to avoid using titles in its financial statements that could mislead the person examining it.

    GAAP is the gold standard for preparing financial statements and/or a financial report. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses.

    Different principles have been established for different types of business entities, such as for-profit and NFP (Not For Profit) companies/organizations, governments and other enterprises. GAAP is not cut and dried, however. They’re guidelines and, as such, are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy.

    You have probably heard the phrase “creative accounting,” which is when a company pushes the envelope a little (or a lot) too far to make their business look more profitable than it might actually be. This is also known as massaging the numbers, a practice that can spiral out of control and quickly turn into accounting fraud (or cooking the books). The results of these practices can be devastating and ruinous to hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.

  • Can Financial Window Dressing Help Your Business?


     

    Financial managers can do certain things to increase or decrease net income that’s recorded in the year. This is called profit smoothing, income smoothing or just plain old window dressing. This isn’t the same as fraud, or cooking the books, though, just in case that thought had crossed your mind.

    Most profit smoothing involves pushing some amount of revenue and/or expenses into other years than they would normally be recorded. A common technique for profit smoothing is to delay normal maintenance and repairs. This is referred to as deferred maintenance. Many routine and recurring maintenance costs required for autos, trucks, machines, equipment and buildings can be delayed, or deferred until later.

    A business that spends a significant amount of money for employee training and development may delay these programs until the next year so the expense in the current year is lower. A company can also cut back on its current year’s outlays for market research and product development.

    Some businesses might ease up on their rules regarding when slow-paying customers are written off to expense as bad debts or uncollectible accounts receivable. These businesses can put off recording some of their bad debts expense until the next reporting year.

    A fixed asset that is not being actively used may have very little current or future value to a business. Instead of writing off the un-depreciated cost of the impaired asset as a loss in the current year, the business might delay the write-off until the next year.

    You can see how manipulating the timing of certain expenses can make an impact on net income. This isn’t illegal although companies can go too far in massaging the numbers so that its financial statements are misleading. For the most part though, profit smoothing isn’t much more than robbing Peter to pay Paul.

    Accountants refer to these as compensatory effects. The effects next year offset and cancel out the effects in the current year. Less expense this year is balanced by more expense the next year. The important thing is knowing how far to push the envelope in these kinds of maneuvers and keep yourself and your company out of trouble with the IRS, ’cause that kind of a problem you just don’t need.