Worldwide Financial Accounting Principles - Coursework Example

FINANCIAL ACCOUNTING II 1 Introduction The future of any developing country or developed country truly depends upon the ECONOMIC growth of the country. The youth of any country play a very vital role in the growth of any country. So the youth and economic state of any country together determine its future. It is a common experience for all of us that money must be spent carefully. If a person is careless in spending money, a day will come when he will be left with no money. Same holds true for a business firm or for a country as a whole. So as students we must try to understand the importance of maintaining accounts keeping international standards in mind. In actual practice, if a business is to be run at profit, it has to sell goods at such a price as will enable it to meet out not only expenses on account of cost of goods sold but also other numerous expenses like rent, salary, cartage, freight, commission , electricity, etc. Thus for making a profit, sales must be kept sufficiently high to meet all the other expenses. To emphasize the necessity of accounting, it can be said that accounting must provide the following information and we should ensure that we completely understand and analyze them: 1. The types and amounts of earning. 2. The types and amount of expenses. 3. The amount of loss, if any. 4. The amount, size and cause of increase or decrease of capital. 5. The nature and value of assets possessed by the business. 6. The nature and value of liabilities. 7. Customer who owe to the business and the amount in each case 8. Suppliers to whom the business has to make payments. 9. Other facts for filling various returns for external use, e.g. income tax, sales tax, duty, etc. We have to keep all these factors in mind and prepare the accounts based on the accounts standards and principle. Definition of Accounting Accounting is defined as the 'the art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof .' The American Accounting Association Committee defined accounting as - The process of identifying, measuring and communicating economic information to permit informed judgment and decision by the user of the information. 2 The Accounting Principles Board of the American Institute of Certified Public Accountants (AICPA) stated "the function of accounting is to provide quantitative information, primarily financial in nature about the economic entities that is intended to be useful in making economic decision." Business Managers and outside interested parties make use of accounting information for decision making that affect the business. The primary purpose of accounting is to provide information about financial transaction, i.e., transaction involving money of a business enterprise. When a person starts a business or even to maintain the accounts of his daily expenditure he must make use of financial accounts. The two primary objective of any business are To earn profit. To have sufficient funds to pay their debts as and when they are required to be paid. This information makes a firm or an individual person take the right business related decision which helps to take the business further. Thus, accounting information, if properly and systematically recorded and reported, can direct a business enterprise to run on successful and efficient lines. Before we move on to understand more about Financial accounting we must clearly understand the advantages-disadvantages and limitations of accounting. Advantages Maintenance of Business records -All financial transaction are recorded in a systematic manner in books of accounts so that there is no need to rely on memory. It is not possible for any human being to remember all what happen in daily operations of business. Preparation of financial statements - Systematic records enable the accountant to prepare a financial statements -trading and profit and loss account to calculate profit or loss during a particular accounting period and balance sheet to state the financial position of the business on a particular date. Profit is a measure of the successful running of the business. Comparison of results - Systematic maintenance of business records enables the accountant to compare profit of one year with those of earlier years to know the significant facts about the changes. This helps the business to plan its future affair accordingly. 3 Decision Making - For day to day solving of a number of problems like what should be the selling price of goods produces, whether a part should be made in the factory or purchased from outside etc., the accountant helps the management by providing the relevant information. Good evidences in courts - Records of business transaction are treated as satisfactory evidence in courts of law. Planning and control operations - Planning operations like sales, production, cash requirement for next accounting periods are achieved with the help of accounting information and estimates based on that information. Management is also interested in observing that the operations in the business are going on according to plan and all the departments are spending within their prescribed limits. Provided information to interested groups - Various interested parties or groups like owners, creditors, management, employees, government, consumers, and creditors are interested in accounting information related to various aspects viz. sales, production, and profit. Accounting provides suitable information to such interested parties. Taxation Problems - In settlement of taxation matters, systematic maintenance of records is a big help. Valuation of business - Accounting records kept in a proper way enables a business unit to determine the purchase or sale price in a simple manner. An insolvent person is a able to explain the past transaction without difficulty if proper accounting records are maintained. Limitations of Accounting Non-Monetary items or events can not be measured or recorded in accounting Accounting data is based on estimates and estimates may be in accurate Accounting information is not without personal influence or bias of the accountant. Fixed assets are shown as cost. Money as a measurement unit changes in value. Thus one must keep in mind these pros and cons while preparing the accounts of any firm or company. 4 Branches of Accounting Accounting has three main forms of branches : Financial Accounting Cost Accounting Management Accounting Let's consider Financial Accounting in detail Financial Accounting is primarily concerned with record keeping directed towards the preparation of profit and loss accounts and the balance sheet. The main purpose of financial accounting is: Recording of the transaction concerning and affecting the business. Preparation of necessary accounts and balance sheet as required by statutes. Apprising the owner of the business about the result of the business over a period of time. According to Kohler -Financial accounting is the accounting of revenues, expenses, assets and liabilities that is commonly carried on in the general office of a business. It is a term often limited to the accounting concerned with the published financial reports in contrasts to internal aspects of accounting such as cost accounting. There is some confusion over the distinction between "book-keeping" and "accounting". This is due in part to the fact that the two are related and that there is no universally accepted line of demarcation between them. Book-Keeping is an art of keeping or maintaining accounts in the prescribed manner. Accounts are maintained for registering or noting the facts of transaction in a clear and understandable form. Accounting is primarily concerned with the design of the system of record, preparation of reports based on the recorded data, and interpretation of the reports. Standard Functions of accounting one must keep in mind are Keeping Systematic Records - The first function of accounting is to keep a systematic record of financial transaction, to post them to ledger accounts and ultimately prepare final statements. 5 Protecting Properties of the business - The second function of accounting is to protect the property of the business. An unauthorized dissipation of assets of the firm will bring it to the stage of insolvency. An accountant thus has to design such a system of accounting as will protect its assets from justified and unwarranted case. Communicating the results - The third function of accounting is to communicate the results obtained from arranging of data to interested parties like proprietors, investors, creditors, employees, government officials and researchers. Meeting legal requirements - The fourth and the last function of accounting is to devise such a system as will meet legal requirements. Under the provision of law, a business has to file various statements. Accounting system aims at fulfilling this requirement of law The various groups that will be interested in accounts are the owners, management, potential investors, creditors, employees, government and researchers. Accounting is an universally approved method of maintaining records which follows some standards and principles which one has to know so that the accounts prepared are easily understandable by all. Accounting is a huge subject so to codify the accounting rules and principles is not as simple as that of in physics or mathematics. Generally accepted accounting principles incorporate the consensus at any time as to which economic resources and obligation should be recorded as assets and liabilities. We must follow these standards and principles as they form the basics and roots of any accounting system and allow us to compare our results with the various other firms or organizations. Following the standards also enable an universal understanding over the accounting system. The standards were introduced to make accounting a Language of Business that would convey the same meaning to all, as far as practicable and to make it meaningful. Some concepts that have been agreed upon are: Business Entity Concept - Business must be treated as a unit or entity apart from its owners, creditors, managers and others. Dual Entity concepts - This principle is the core of accountancy. All business is recorded as having a dual aspect: assets, capital and creditors. Going Concern Concepts - It is defined as any enterprise which is expected to continue operating indefinitely in the future. Accounting Period concept - The net income is measured by comparing the assets of the business at the time of its commencement with those existing at the time of liquidation. The time-interval is called as accounting period. 6 Money Measurement Concept - These accounts to all the factors involved in the business that requires any sort of money transaction. Cost Concept - Assets are recorded at the price we acquire them, which is the cost of the asset. This cost is the basis for all the subsequent accounting for the asset. Periodic Matching of Cost and Revenue Concept - Determination of the period in which revenue is to be realized based on sales, cash and production. Verifiable objective evidence concept - Any accounting transaction must be evidenced and supported by business document. Realisation Concept - This concepts deal with the determination of the point of time when revenues are earned. Accrual Concept - This means to grow, to increase to accumulate the resources. Disclosure Concept - The disclosure concept implies that accounts must be honestly prepared and all material information must be disclosed therein. Materiality Concept - An item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor. Consistency Concept - In order to enable the management to draw important conclusion regarding the working over a number years it is essential that accounting practices and the methods remain unchanged for one accounting period to another. Conservation Concepts - This policy is called as the playing-safe. It takes in to consideration all the prospective losses but leaves all prospective profits. There are certain terms common terms that are used universally to represent accounts like Assets, Liability, Equities, Fixed assets, Balance sheet, revenue, expenses and so on. There are certain formulas which are standardized and used universally. Thus while preparing accounts one should make use of these concepts, formulas and terms as they will make them easily understandable and can be used by others as basis for their accounts. We must make it a habit to follow the concepts as the clients and management approves of such work as it gives the management a clear picture about the business position and helps them to take essential and critical decisions. One must also try to upgrade the account system and maintain a history so that we can always check the record and use them for further references. 7 "Accounting in the business world is not always straightforward". In today's competitive world, from whatever background we belong we need to understand the tools of management when making vital financial decision. There are various factors we need to consider to come up with critical decision for the business. We need to deal with a huge number of qualitative and quantitative factors when trying to reach a real-time decision. A systematic approach will enable us to foresee the inflation and risk involved. It helps one to make a strategic planning and decision making policy. One more thing one must keep in mind about accounting is to communicate the accounts related information to the related people and the presentation of it. We can represent the financial report using PowerPoint are even a simple excel presentation but the purpose and the accounting details must be clear and easy to understand. The annual report is a document released by companies at the end of their fiscal year which includes almost everything an investor needs to know about the business. It generally contains pictures of facilities, branch offices, employees, and products. They are normally followed by a letter from the CEO and other senior management which discusses the past as well as upcoming year. Tucked away in the back of most annual reports is a collection of financial documents. Most of the time you can go onto a company's website and find the Investor Relations link. From there, you should be able to either download the annual report in PDF form or find information on how to contact shareholder services and request a copy in the mail. Keeping all these functions and standards in mind one can prepare the financial accounts of a company or firm more effectively and informatively. References & Articles: 1. Financial Accounting -RL Gupta 2. Management Accounting: Principles and Applications By Hugh Malcolm Coombs, David Hobbs, Ellis Jenkins 3. Faculty of Management and Organization, University of Groningen, 9700 AV Groningen, the Netherlands 4. The Economist Read More