Accounting Basics: Financial Reporting and GAAP Principles

Accounting Basics

Accounting is a systematic process of recording, classifying, summarizing, and interpreting economic transactions. It's essential for businesses to track their finances accurately so they can make informed decisions. One of the primary branches of accounting is financial accounting. This branch deals with the preparation of periodic reports detailing a company's financial status to external parties.

Financial Reporting

Financial reporting refers to the disclosure of information about historical financial performance, current standing, and future expectations. These reports present a snapshot of how well the business has performed up until a certain point while also providing projections for what investors might expect moving forward.

Generally Accepted Accounting Principles (GAAP)

In the United States, GAAP provides standards for accountants when preparing financial statements. These principles ensure consistency and transparency across all companies within an industry.

Double Entry Bookkeeping System

This system records every transaction twice - once through debit entries which increase liabilities and equity accounts and decrease assets; and secondly through credit entries which have the opposite effect. By using this method, it becomes easier to reconcile accounts since any discrepancy would appear immediately in either the debits or credits side.

Journal Entries

A journal entry is an initial record kept of each transaction before posting them into ledger accounts where totals are calculated. Each transaction gets two separate entries - one debit and another credit - regardless of whether there was only one actual exchange made between two entities.

Revenue Recognition

Revenue recognition involves recognizing income from sales during specific periods based upon criteria set forth by the Financial Accounting Standards Board (FASB). For example, revenue could be recognized over time under a long term contract or at completion if services were rendered simultaneously with payment received.

Assets & Liabilities Classification

Asset classification includes items such as cash, inventory, accounts receivable (money owed), etc., whereas liability classification consists of short-term debt like taxes due soonest and long-term obligations like bonds issued years ago.

Closing Entries & Preparing Financial Statements

After all transactions have been recorded and posted, closing entries help zero out temporary accounts (e.g., Income Summary), leaving permanent ones intact (like Retained Earnings). Then financial statements - including Profit & Loss statement (P&L) and Balance Sheet - are prepared per GAAP rules.

Internal Control Over Financial Reporting

Internal control ensures accuracy by having checks against fraud or error during processes like payroll verification or bank deposits counting. It also helps maintain compliance with laws regarding tax payments, labor law limits etc..

Learn about financial reporting, Generally Accepted Accounting Principles (GAAP), double entry bookkeeping system, journal entries, revenue recognition, assets & liabilities classification, closing entries, and internal control over financial reporting in accounting.