WFU Law School
Law & Valuation
Chapter 3 - Accounting Basics

3.1 Introduction to Accounting

This section gives an overview of financial accounting -- its interesting history, its essential format, the principles that guide accountants in presenting business information, and a critique of current accounting practices.

Whether the business is a multinational conglomerate (like General Electric) or a small publisher (like the author of this book), the format for the presentation of accounting information will be essentially the same.

You will find that even the most complicated balance sheets and income statements for the largest, mos complex corporations are simply more detailed versions of the statements included here. If you understand these simple statements, you can figure out the more complex ones -- mostly.

3.1.1 - History of accounting

The first known accounting system was developed sometime in the fifteenth century to keep track of daily business transactions. Over time, accounting data has come to be used to improve efficiency, find mistakes and spot graft. Accounting data is also widely used in determining a company's value -- both in securities markets and legal contexts. (More 3.1.1>>)

3.1.2 - Accounting reports and GAAP

An accounting system involves keeping records of business transactions as they occur and producing reports that summarize the results of the transactions. The reports, called financial statements, are typically prepared according to generally accepted accounting principles (GAAP). The most basic and most frequently encountered financial statements are the balance sheet, the income statement, the retained earnings statement, and the statement of cash flows. (More 3.1.2>>)

3.1.3 - Accounting principles

Financial statements are prepared based on several common principles -- namely, accounting statements are fixed in time, the business is assumed to be a "going concern," businesses are separate and distinct from their owners, financial statements reflect historical costs (not current market value), all transactions are recorded in one currency (such as U.S. dollars), companies are expected to be consistent from year to year. (More 3.1.3>>)

3.1.4 - Critique of current accounting practices

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Chapter 3 - Accounting Basics

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004