Question

What are general accepted accounting principles?

How is the double entry system used? What do debit and credit mean?

What is a bond and how do investors decide how much to pay for a bond?

What are the four basic financial statements and what is the purpose of each?

Answer 1

1. GAAP - GAAP stands for Generally Accepted Accounting Principles. They lay out the authoritative framework of guidelines for financial reporting which companies must follow when compiling their financial statements.

2. Double Entry System - Double Entry System of accounting deals with either two or more accounts for every business transaction. For instance, a person enters a transaction of borrowing money from the bank. So, this will increase the assets for cash balance account and simultaneously the liability for loan payable account will also increase.It’s a fundamental concept encompassing accounting and book-keeping in present times. Every financial transaction has equal and opposite effect in at least two different accounts.

3. Debit and Credit - The Debit and Credit are two aspects of the double entry system, which is invented by “Luca Pacioli” the father of bookkeeping. According to the double entry system, Every business transaction has impacted at least two accounts and which is recorded as the Debit one account and credit second account. Debit is shown on the left side of the accounts and Credit is shown on the right side of the account.

4. Bond - In finance, a loan contract issued by local, state, or national governments and by private corporations specifying an obligation to return borrowed funds. The borrower promises to pay interest on the debt when due (usually semiannually) at a stipulated percentage of the face value and to redeem the face value of the bond at maturity in legal tender. Investors have to decide whether the bond is priced correctly or not and then they invest. there are various methods available for this.

5. Four basic financial statements are:

a. Income Statement - Presents the revenues, expenses, and profits/losses generated during the reporting period. This is usually considered the most important of the financial statements, since it presents the operating results of an organization.

b. Balance Sheet - Presents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the information presented is as of a specific point in time.

c. Statement of Cash Flow - Presents the cash inflows and outflows that occurred during the reporting period. This can provide a useful comparison to the income statement, especially when the amount of profit or loss reported does not reflect the cash flows experienced by the business.

d. Statement of retained earnings - Presents changes in equity during the reporting period. The report format varies, but can include the sale or repurchase of stock, dividend payments, and changes caused by reported profits or losses.