Accounting Defined

Watching an awards show of any kind, there will be a time when they introduce the accountants for the evening. Wait. What? Why are accountants anywhere near the major awards shows? Well, they are the ones responsible for tabulating the votes and figuring out who won. Sometimes it works out and sometimes… well, sometimes the presenters are given the wrong card and they announce that the wrong movie wins… and the blame goes back to the accountants, in this case unfairly.

Accountants are found in all industries and offices. They play an integral part in the day to day business dealings by recording transactions, keeping records, performing audits and reporting financial information. They also advise their bosses on taxation matters and work at keeping balanced books.

Accounting defined is the act or process of keeping financial accounts and while a lot of the basic things like money coming in versus money going out and that sort of thing can be handled by a bookkeeper, the more advanced stuff is usually done by a professional accountant.

In short, if you have a business, you need an accountant. They are the financial brains behind the operation, they are the ones who use a systematic approach to record the financial transactions, they use comprehensive and complex strategies to summarize, analyze and report things to not only management in their own company but to oversight agencies and the proper tax collection authorities as well. They keep the business running in the right direction, and a good one will foresee pitfalls and steer the company clear of them well before they impact the situation. In short, they are the money brains behind a business.

They will also help management make sound and solid business decisions, having beforehand informed them of what’s been going on with the company’s finances. If you are the head of a company you have a lot to do yourself, which is why getting someone professional on the team to take over the money side of things is a good idea. And yes, they can also tally votes, and tell management about the resources available to them in matters of taxation, money flow and the ins and outs of daily commerce.

The next time you are watching that awards show, give the poor accountants a little credit, they’re not just bookworms hunched over a desk crunching numbers, they are the lifeline of the company.

What Is a Checking Account? Defined

Checking accounts are offered by banks as a place to safely store your money until you need it. They’re the ones you want if you plan on accessing and spending your money on a regular basis (compared to a savings account, which is only for money you want to save and with which you can collect interest).

The benefits of a checking account vary depending on the bank. Some banks will offer free checks or debit cards for opening a new account with them; others only provide these services for a fee. If you’re opening a checking account for the first time, make sure you’ve read all the fine print. How much do you need to deposit up front? Is there a monthly fee for holding the account? Do you need to maintain a minimum balance? What about fees associated with the ATM? Most banks offer their own ATM’s at no charge, but bill you transaction fees if you use the ATM of another branch.

Another thing to consider when opening a checking account is how you plan on accessing it. Does your bank of choice offer online banking and bill pay? What about monthly statements? Some banks offer additional incentive if you choose to receive online statements instead of ones sent in the mail – it wastes less paper and is better for the environment.

Ask about checks and debit cards. Unless you plan on physically going to the bank every time you need to deposit or withdraw money, checks and debit cards will be how you control the flow of expenses. You’ll want to make sure you understand everything about your bank’s system – how much checks cost, how many you’ll receive, how soon you can get more, etc. Ask about debit cards and what measures the bank has in place to protect you from identity theft. What happens if you lose your card? How much is a replacement? How much does it cost to stop fraudulent charges if someone else has gained access to your card?

Last but not least, don’t forget overdraft protection. When you’re overdrawn, you’ve tried to spend more money than what’s currently in your account. This costs the bank money to fix the mistake, so they charge you for each attempt. To avoid this potentially frustrating and costly mistake, inquire after their overdraft protection – a sort of insurance you can buy that saves you the cost of fees if you ever accidentally withdraw. (Very useful if you’re sharing your account with someone else and can’t always keep an eye on their spending.)

It might sound overwhelming to open a checking account, but most of these are one-time questions that can answered in a single visit to your bank. Just make sure you’re fully committed to your bank before choosing to open an account, because while you can legally close a checking account at any time, some banks will charge you a fee if you do it within the first 30-90 days.

Changes in Accounting

Changes in different methods in accounting create a whole number of distinctive issues for an Accountant to address. An illustrative example follows fictitious Pear Corporation, who specializes in producing industrial trucks. After analyzing the financials, Pear Corporation realized that the percentage-of-completion method of accounting for income from long-term contracts creates a more accurate view of income. Thus, they were faced with the dilemma of switching from their current completed contract method, over to the more accurate, percentage of completion. This is an example of an accounting change in principle. This, along with change in estimate, and change in reporting are the three changes in accounting that will be discussed. Also, it is crucial to note that errors are not considered accounting changes.

Like the opening completed contract example shows, a change in principle (policy) is where a company changes from one generally accepted accounting principal to another. Another example would be changing from LIFO (last in first out) to FIFO (first in first out), or changing from the accrual method of accounting to either cash basis or a hybrid mixed basis. Nonetheless, there are three approaches to reporting these changes: currently, retrospectively, or prospectively. Consequently, FASB requires retrospective approach, which the Online Journal of Accountancy defines as, “Statement no. 154 adopts a “retrospective” approach to accounting principle changes. It defines retrospective application as applying a “different accounting principle to prior accounting periods as if that principle had always been used.” In effect, a company would be required to adjust prior period financial statements such as the income statement, statement of cash flows, and the balance sheet. As well as, they would have to adjust the carrying amounts of assets and liabilities and the beginning balance of retained earnings.

Unlike a change in principle, a change in estimate is recorded prospectively. As the book Intermediate Accounting 14ed. states, some examples of change in estimates are as follows: uncollectible receivables, inventory obsolescence, useful lives and salvage values of assets, periods benefited by deferred costs, liabilities for warranty costs and income taxes, recoverable mineral reserves, and change in depreciation methods. Also, easily enough, accounting changes are accounted for in the period effected. For example if the change in estimate effects only the present period and not the future ones, only record that change in the current period. Likewise, if it affects the future ones, you can account for that change. Under normal circumstances it is not necessary to disclose the change in estimate. During normal operations it is assumed that these adjustments will be needed, thus there is no need for a disclosure; however, in a circumstance where multiple periods are effected, companies need to disclose the future effects of the change in estimate.

The last type of change in accounting is the change in reporting entity. Consequently, this is more expansive then the prior two discussed and also easier explained through examples since there is no broad definition. One such example could be with a hypothetical company that has multiple different sectors, and in prior periods each sector reported it’s own financial statements. Well, for one reason or another the stock holders would rather see the statements consolidated for all the sectors to give a better view of the standing of the company. The company would have to then come up with consolidated statements for the current period as well as all prior periods done the old method. This way, a comparison can be done on a period-to-period basis.