Financial Accounting Harrison Horngren: A Guide to Principles and Best Practices
Financial accounting refers to the process of recording and reporting a company's financial transactions to external entities. As a crucial aspect of running a business, financial accounting provides a view of how a company is operating, its profitability, financial health, and the nature of its financial transactions. The primary objective of financial accounting is to ensure that financial statements adhere to Generally Accepted Accounting Principles, which provide uniformity and comparability across different businesses' financial statements. This article discusses the principles and practices advocated in the book "Financial Accounting" by Charles T. Horngren, Walter T. Harrison Jr., and M. Suzanne Oliver, providing an insight into the world of accounting.
The Importance of Financial Accounting
Without financial accounting, businesses would be unable to determine their financial position or how well their operations are performing; this would make it difficult to assess the company's financial health. Accurate financial accounting means that businesses can access capital, including applying for loans, and making decisions when investing or expanding their operations. Good financial accounting also assists businesses in complying with regulations and tax laws, which are necessary for a smooth operation. The book "Financial Accounting" by Harrison, Horngren, and Oliver, teaches the fundamental principles of accounting and prepares readers with the knowledge to make impactful financial decisions for their businesses.
The Principles of Financial Accounting
Financial accounting should satisfy generally accepted accounting principles set by the Financial Accounting Standards Board (FASB); these standards ensure consistency and comparability of financial statements across industries and companies. The principles of financial accounting are broken down into four categories, which include; relevance, reliability, comparability, and consistency. Relevance refers to whether information is significant and useful to the end-user, which aids in making informed decisions. Reliability refers to the accuracy of financial information, ensuring that it is recorded in a timely and precise manner. Comparability ensures that information is presented uniformly across the financial statements, while consistency ensures that the same accounting policies and principles apply in all periods.
The Financial Statements
Financial statements are a crucial element in financial accounting, providing relevant information about a firm's financial standing. The three main financial statements include the balance sheet, the income statement, and the statement of cash flows. The book "Financial Accounting" by Harrison, Horngren, and Oliver explains that the balance sheet provides an overview of a company's assets and liabilities, including the owner's equity. The income statement portrays a firm's revenues, expenses, and net income for a selected period. The statement of cash flows shows how a firm used its cash during a specified period.
The Accrual Basis of Accounting
The majority of companies use the accrual basis of accounting to report their financial statements. This method involves recording transactions as they occur, regardless of whether money has changed hands. Therefore, revenue and expenses are recorded when they occur, and not when cash exchanges hands. The advantage of using the accrual basis of accounting is that it provides a more accurate depiction of a company's financial position by matching expenses with revenues, resulting in financial statements that are more insightful for decision-making.
Revenue recognition is a vital aspect of financial accounting. According to the principles of accounting, revenue should be recognized when it is earned, and not when payment is received. This highlights that a company should record revenue at the time it completes a sale or provides services, even when payment has not yet been received. This principle improves the accuracy of financial reports by showing the timing of transactions and helps readers of financial statements make informed decisions.
Inventory accounting records assets that businesses have in stock to sell to customers. The book "Financial Accounting" by Harrison, Horngren, and Oliver explains that there are two accounting methods that companies use to record their inventory, which are the First-In, First-Out (FIFO) method and the Last-In, First-Out (LIFO) method. These methods determine which costs associated with the goods sold should be assigned to sales revenues, which affects the amount of reported gross profit. FIFO assumes that the first goods to be received are the first sold, while LIFO assumes that the last goods received are the first sold.
Over time, businesses use equipment and other assets that bind them for an extended period. Depreciation accounting is essential in financial accounting for companies to keep track of how long assets last through their useful life and to allocate the cost of them over that time. The book "Financial Accounting" by Harrison, Horngren, and Oliver explains that depreciation can be recorded over different time periods, including straight-line depreciation, declining balance, and units of production.
The purpose of financial accounting is to provide meaningful information to users to make informed decisions. Financial analysis helps in achieving this objective. The book "Financial Accounting" by Harrison, Horngren, and Oliver teaches readers how to analyze financial statements and identify trends, ratios, and other essential aspects that are useful in decision-making.
Ethics in Financial Accounting
Financial accounting is an area that requires ethical principles to ensure that financial statements are accurate and beneficial to users. It is essential that accountants working in financial accounting practice ethics in their work to protect their credibility and the integrity of financial statements. Accounting firms have codes of ethical conduct that emphasize integrity, objectivity, confidentiality, and professional competence.
Financial accounting is a crucial aspect of any business operation, and the book "Financial Accounting" by Harrison, Horngren, and Oliver provides essential principles and practices to guide users on accounting best practices, nuances, and analytical tools to succeed. Understanding the fundamental principles of financial accounting and using them in compliance with Generally Accepted Accounting Principles (GAAP) contributes to the effectiveness of the process in a business. Adopting these concepts will ensure that businesses can gain valuable insights into their operations' financial health to make critical decisions that positively impact the company's future.