Finance and Accounting Concepts - Essay Example

?Finance and Accounting Concepts Introduction Accounting concepts play an important role in recording the financial transactions and is a discipline that provides certain information related to financial transactions. Accounting provides important financial information to a wide range of potential users who are able to make several economic decisions for the allocation of economic resources. It consists of financial activities which include collecting, recording, analyzing and communicating the financial information to others. The financial data is a collection of facts which is expressed in numerical symbols and characters. The major task of the accountant is to records the financial transactions and converts data into financial information. The study will deal with the various accounting concepts that have helped the accountants in dissemination of financial information. Accurate financial presentation helps in the systematic recording of the financial transactions and also helps in identification of errors in the accounting procedure. The author of the study will able to give an insight into the basic accounting concepts and its impact on the business activities. Finally, the study will conclude with the various accounting concepts and its practical applications. Accounting Concepts & Procedures Accounting is definitely concerned with the recording of transactions that affect the business activities and is also related to preparation of income statement and the balance sheet. As per the AICPA committee of terminology accounting is regarded as a process of recording, classifying, summarizing and in systematic and significant manner. It is called an information system which helps in the identification, measuring, and communication of economic financial information which permits rationale and judgmental information among users. 1) Art of recording the business transactions: The systematic method of recording financial transactions in the books of accounts which helps in the fulfilment of the objective of the user and the accountant. 2) Systematic Process: Recording financial transactions is regular in nature and is done in methodical and chronological manners. Accounting is done through the application of various rules, regulations, principles and expertise. 3) Measurable in terms of money: The accounting transactions are measurable in terms of money and need to be recorded in the books of accounts. These accounting events are measurable in terms of money. The events which are not measurable in terms of money are not recorded 4) Information Systems: It is information systems that measures the accounting process and communicates about the financial information through an economic entity. It also supplies financial information to the decision makers. 5) Medium: It is also regarded as an important medium for communicating the financial information and their interpretations. The main objective of the financial accounting would be to provide the necessary information to the user in a systematic process. There are various branches of accounting; cost, managerial and financial accounting procedures. It helps in ascertaining the results of the business transactions and also assessing the true financial position of the company. The major functions would be to identify and record the financial transaction of the organization which can be measurable in terms of money, grouping transactions that are similar in nature of a particular place which is done in ledger, summarizing the financial transactions which involve the preparation of income statement, trial balance and balance sheet and interpretation of financial statements by ascertaining the financial position of the company. Some of the major objectives of accounting would be to ascertain the results of a business organization within a particular time period ascertain the true financial position of a business organization and provide the necessary financial information to the users. The different types of users of accounting would be the ones who manage the business, have direct financial interest in the organization. The information management capture data about all aspects of the company’s operational activities. Internal Users: The management and the owners of financial information can be termed as the main internal users. The owners invest their resources in the business and are very much interested in the dissemination of the financial information. Creditors & Investors: These investors and creditors are termed as main external users which have the advantage of analyzing and judging the current financial position compared to the past performance, future potential and risk associated with the potential. Employee and Labour Unions: These groups want financial information regarding the present financial position of the company and their realization of profits. Government: The government on the other hand is interested in knowing about the authenticity of the financial statements of the company. Accounting Concepts & Conventions The accounting concepts and conventions are considered important and is devised to provide a framework for financial reporting (Newman, 2005).This financial reporting involves significant professional judgements by the users, accountants and these user and accountants ensure that the policies adopted by them are not misled by false and inaccurate information. Business Entity Concept: As per the business entity concept it is noted that the owner and the business entity itself is separate from each other (European Commission, 2011). This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. The business enterprises are assumed separate from the owners. As per this concept the business units is treated as a separate concept because it is regarded as a distinctive unit which are regarded separate and artificial body. The business records and the reports are prepared separately and are treated distinctively from the debtors and creditors. It is noted that the business entity regarded separately from the owners and is applicable to all types of organization. Generally, there are three types of organization which consists of sole proprietorship, partnership and corporate organization itself. For example, if the owner of the organization withdraws certain amount of cash for domestic purposes then it would be regarded as the personal expense and not as a business expense (MacKay and Greig, 2009). Cost Concept: As per this concept the assets will be recorded in the books of the accounts at the price to be paid or paid for acquiring the assets. The acquired cost of the asset will be greater or lesser than the fair market price and is to be recorded in the price to be actually paid by the organization. Assets are used in the process of creation of goods and services and in this process the cost expires. This expired cost which is known as depreciation is deducted from the cost of the asset and it is allocated over the economic life of the asset. This concept does not permit the accounting users to show the assets at the present value but the market value and price of the assets keeps on changing frequently. The cost concept satisfies the criteria of feasibility and objectivity and is almost similar to the going concern concept. Matching Concept: Based on the matching concept the income statement is prepared when the income arises then the revenue income exceeds the revenue expenses. Expense is termed as the cost of earning revenue. As per this concept the matching of expenses with the revenue is based on the accrual system of the accounting procedure (Deloitte, 2013). In accountancy revenue is earned when the goods and services are sold and expenses are recognized only when the cash for the good and service is provided. The matching concept is known as the recognition of expenses which is associated with the revenue earned and recognized in accordance with the realization concept. As per the 1964 AAA committee, the matching concept is termed as a process of reporting the financial expenses on the basis of the cause and effect relationship. As per this matching principle the cost acquired for a fixed asset are categorized into two parts which is expired and unexpired. Expired costs of a particular accounting time period are recognized as expenses and the unexpired costs help in generating revenue in the future. Realization or Revenue Recognition Principle: As per this concept the revenue is earned when the goods have been transferred to another person. This happens when the title of the goods has been transferred to another person under the sale of goods act and the services are rendered to the customer and it does not actually matter when the cash is actually realized. The revenue convention makes sure that there cannot be any profit or loss until and unless a sale has occurred (CMS, n.d). As per this convention two categories can be distinguished which are holding and trading gains. Holding gain occurs due to the increase in the value of an asset from holding of an asset. Trading gains would occur when there is actual realization of goods and that is the sale of goods. As per this convention the reporting profits are recorded in the accounting books, which are earned within a particular accounting time period. For example, in cases of contracting job there are certain tasks which cannot be completed within particular time frame. The assets are regarded as some entity which has useful life for more than one year and the cost of the fixed asset would not be regarded as business expenditure (Jain, 2007). Accounting period Concept: The financial accounts are prepared for the accounting transaction occurring within a particular time frame. These financial statements are prepared with the sole objective of ascertaining the results within an accounting period. To measure the financial health of the organization, accounting period should be monitored at regular intervals. For attainment of the objective, the revenue generated within an accounting period has to be assessed within that accounting time frame (Siddiqui, 2006). The assets are regarded as some entity which has useful life for more than one year and the cost of the fixed asset would not be regarded as business expenditure. Going Concern Concept: According to this concept, the business organization will continue to carry on its marketing and business activities for an indefinite period of time. Therefore, it signifies that every business organization has a particular time frame (Weil, 2012). The going concern concept will not dissolve in the future. For example, if a company spends on plant and machinery of Rs 100000 and its life span would be of 10 years then this concept will be reflected in the expenses and balance amount would be recorded in the balance sheet as an asset. The key highlights of the going concern concept would be the preparation of financial statements, depreciation would be charged on fixed assets, it provides great help to investors because of the assurance that they will yield high returns on income (Banerjee, 2010). Dual Aspect Account: Under this convention principle the assets or the goods can be acquired with the help of funds provided by the owner or outside parties like banks, creditors, financial institutions etc. These are also known as equity which are categorised further into two types; owner’s equity capital and outsider’s equity capital (E.K Stice, J.D Stice, and Swain, 2010). Convention of Disclosure: As per this convention of principle the material and the facts must be recorded in the financial accounts and the statements (Zions Bank, n.d.). The company act has provision for transparent disclosure of related facts and figures regarding the present financial position of the company. This convention signifies the fact that all the accounting transactions must be clearly disclosed in the accounting principle which clearly signifies that the full disclosure in financial statements requires the preparation of accounting and non accounting information with all the possible information that might be relevant to the users in understanding of the statements. However, care should be taken that the disclosure would not include business secrets etc. Convection of Materiality: It signifies the importance of the accounting and financial information and this state of importance may vary from different organizations (Bhattacharyya, 2005). These materials need to be disclosed in the financial accounting of the statements of the organization. Any kind of financial information would be material in a particular business situation. Any financial item would be material in a particular situation but may not be material in the other situation. Materiality also depends upon the nature of the items and the accounting period also (Diane Publishing Company, 2000). Convention of Conservatism: This convention principle is used in the case of uncertainties with respect to some business activities and economic events that may occur in the future. As per this convention principle the estimated losses must be recognized into and all the possible income should not be taken into consideration until and unless they are realized. If a management of a company follows this principle stringently then it would helps in creation of large number of reserves for the company. This accounting convention should be applied taking into consideration the interests of the government, creditors and the investors while the presentation of the financial statements. Conclusion Thus, it is observed that the accounting standards developed by International Accounting Standard Board (IASB) have achieved reliability and assurance which are accepted nationally and internationally. Although, different organization follow different accounting conventions it is noted that a sense of uniformity prevails in all the organizations. These accounting conventions, if followed strictly help in prevention of commitment of fraud accounting and chances of manipulation. It is the major responsibility of the management to comply with the accounting standards while preparation of the accounting and financial statements which will in turn helps the external and internal auditor to perform his job efficiently. Reference List Banerjee, B. K., 2010. Financial accounting: Concepts, analyses, methods and uses. New Delhi: PHI Learning Pvt. Ltd. Bhattacharyya, U., 2005. Municipal accounting: Concepts and practical issues. New Delhi: Mittal Publications. CMS, n.d. Accounting Concepts. Available at: [Accessed 17 August 2013]. Deloitte, 2013. IASI 1 Presentation of Financial Concepts. Available at:< http://www.iasplus.com/en/standards/ias/ias1 > [Accessed 17 August 2013]. Diane Publishing Company, 2000. Managerial cost accounting concepts & standards for the federal government: Statement of federal accounting standards. Collingdale: Diane Publishing. European Commission, 2011. International Accounting Standard 1 Presentation of Financial Statements. Available at:< http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias1_en.pdf> [Accessed 17 August 2013]. Jain, P.K., 2007. Financial management. New Delhi: Tata McGraw-Hill Education. MacKay, J. and Greig, P., 2009. Accounting concepts and applications: Solutions and teacher resources cd. Oxford: Macmillan Education. Siddiqui, S.A., 2006. Managerial economics and financial analysis. New Delhi: New Age International. Stice, E. K., Stice, J.D. and Swain, M.R., 2010. Accounting: Concepts and applications. Connecticut: Cengage Learning. Weil, R. L., 2012. Financial accounting: Concepts, analyses, methods and uses. Connecticut: Cengage Learning. Zions Bank, n.d. How to Analyze Your Business Using Financial Ratios. Available at:< https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf?q= > [Accessed 17 August 2013]. Read More