Communication Issues in Accountancy - Assignment Example

 Table of Contents Part-1 2 Part-2 3 Part 3 8 Part-4 14 Communication issues 14 Performance of the accountant 14 Loopholes in the communication 15 Part-5 16 References 17 Part-1 Mr X, a friend, is from the Mass Communications background and hence has no idea about accounting terms and their treatment in the books of accounts. He has recently bought equipment and wants to know the effective life of the equipment i.e. for how many years he will be able to use it. The method of doing this is called “depreciation” in accountancy. To get an idea of what is depreciation one must know certain terms like transaction, debit, credit, account, Profit and Loss A/C etc. The meaning of the word “transaction” is the events that take place in an organization which can alter the financial position of the business. For the purpose of recording a transaction an account is maintained like Cash A/C, Depreciation A/C etc. An “account” can be defined as the summarized record of the transactions. To obtain any information it is not possible to go through all the transactions. So, one can refer to the respective account and find out the details. An “account” is divided into two sides - debit and credit. The right hand side is the “credit” side and the left hand side is the “debit” side. The term “debit” represents all the expenses, losses etc. and “credit” all the incomes and gains. The net of the debit and the credit side gives the balance at the end of the year. At the end of the year, a statement ascertaining the profit and loss is prepared called the Profit and Loss A/c. It is prepared after closing all the accounts and posting the balances in the Profit and loss A/C. If the total of the credit side is more than the total of the debit side there is a profit and if the debit side total is more than the credit side total there is a loss. An account is opened as follows – Table 1. DR Depreciation A/C CR Date Particulars Amount ($) Date Particulars Amount($) Dec 31 To Asset A/C 400 By Balance c/d 400 Part-2 The process of allocation of the cost of the asset is called “depreciation”. In other words, the reduction in the value of assets over its useful life is called depreciation. It does not involve any cash outflow but is only a record in the books (National Productivity Council Of India, Pg no 1). In the books of account every year an amount is recorded as an expense and charged as depreciation in the statement of profit and loss. In accountancy, there are two aspects of recording a transaction – debit and credit. The debit side represents all the expenses, losses etc and the credit side represents the incomes, gains, etc. Depreciation is an expense to the firm and hence recorded on the debit side of the statement. This helps in finding out the true profit or loss of the business operations. The most common method of depreciation is the “Straight Line method”. The others include Sum of Years digits Method and Declining Balance Method. (Howard R. Hughes College of Engineering, Pg No. 2). In Straight Line, the depreciation (D) amount is calculated as Cost of the asset(C) less scrap value (S) and dividing the obtained figure with the estimated useful life of the asset (N) i.e. D=(C-S)/N. The scrap value (S) is the amount that can be realized after disposing off an asset at the end of its effective life. Suppose, the cost of the a machine is 10000$, Scrap value is 2000$, Estimated Life is 5 years then, the Depreciation (D) = (10000-2000)/5 = 1600$ SLM method   Value 10000 Scrape 2000 time (yr) 5 Dep 1600   Year Depreciation 1 1600 2 1600 3 1600 4 1600 5 1600   Figure1. Under the Declining Balance method the amount charged as depreciation is higher in the initial years and goes on diminishing towards the later periods. This may be due to the fact that the profit from the asset goes on diminishing as the asset gets older. For example a car is bought for 4000$ with an expected life of 10 years. The amount of depreciation under the Straight Line Method comes to $400 (assuming the scrap value to be “zero”). If we take the rate of depreciation to be 15%, the amount calculated for the declining Balance method comes to (4000*0.15) = 600$. This is more than the amount calculated under the Straight Line Method. The depreciation amount will be 510$ in the second year i.e. it will go on declining over the years. The amount charged in the last year is going to be the least (Washington State University, Accounting Depreciation methods). Declining method       value 4000 time (yr) 10 Rate (%) 15   year dep WDV   4000 1 600.0000 3400.0000 2 510.0000 2890.0000 3 433.5000 2456.5000 4 368.4750 2088.0250 5 313.2038 1774.8213 6 266.2232 1508.5981 7 226.2897 1282.3084 8 192.3463 1089.9621 9 163.4943 926.4678 10 138.9702 787.4976   Figure2. Depreciation as per Declining Method In the Sum of Years Digit method (SYD) the depreciation amount will be higher like the Declining Balance Method and fall over the remaining life of the asset. It is calculated as (Cost – Salvage value)*remaining life/SYD. Suppose if the working life of the asset is 10 years then, SYD= 1+2+3+4+5+6+7+8+9+10 = 55. Using the formula n(n+1)/2 where n = number of years i.e. 10(10+1)/2 = 55. Now if the cost of the asset is 40000$ the depreciation amount for the first5 years will be calculated as under – (California State University, Sum of the Year Digits Method). Table2. Year Depreciation amount 1 45000*10/55 8182 2 45000*9/55 7364 3 45000*8/55 6545 4 45000*7/55 5727 5 45000*6/55 4909 Part 3 Questionnaire for MFA student: please circle (or bold in electronic) appropriate response 1. How would you classify the your communication skills, including the ability to articulate ideas clearly and concisely? Excellent Good Average Poor Very poor (Good) 2. Do you think you used words that your friend could understand to explain the accounting concept/ term you selected? Always Sometimes Rarely Never (Always) 3. Do you think you used any accounting or other ‘jargon’ that made it more difficult for your friend to understand your explanation? Always Sometimes Rarely Never (Rarely) 4. Did you use any communication aids, such as diagrams or charts, or an example, to help explain the concept/ term? Please identify any/all used: Diagram Chart Example (diagram, charts, example) Other: please specify ____The examples from practical life were represented with help of tables and oral explanation. 5. How effective do you think your use of this/each aid in assisting your friend’s understanding? If more than one type of communication aid was used, please identify the aid under the rating for that aid Very effective somewhat effective Not effective Aid: _Diagrams: effective Charts : some what effective Examples: very effective 6. Having explained this accounting term to your friend, how well do you think your friend now understands that term? Very well Adequately A little Not at all (Adequately) General comments: Throughout the exercise I noticed that communication between two individual is influenced by many other factors like the attitude of both the individuals, the surrounding environment like intensity of light and noise, the level of interpersonal relationship between the two individuals, the standard of language used. Questionnaire for Friend: please circle (or bold in electronic) appropriate response 2. How would you classify the accountant’s communication skills, including the ability to articulate ideas clearly and concisely? Excellent Good Average Poor Very poor (Good) 2. Did the accountant use words that you could understand to explain the accounting concept/ term they selected? Always Sometimes Rarely Never (Always) 3. Did the accountant use accounting or other ‘jargon’ that made it more difficult for you to understand their explanation? Always Sometimes Rarely Never (Rarely) 4. Did the accountant use any communication aids, such as diagrams or charts, or an example, to help explain the concept/ term? Please identify any/all used: Diagram Chart Example (Diagram, Chart, Example) Other: please specify ___Different real life problems were selected and then the accountant gave their solution. This helped in correlating real life situation with theory provided in account. 5. How effective was their use of this/each aid in assisting your understanding? If more than one type of communication aid was used, please identify the aid under the rating for that aid Very effective Somewhat effective Not effective Aid: _Diagram : Effective Chart_ : Effective Example: very effective 6. Having had this accounting term explained to you, do you feel that you now understand that term: Very well Adequately A little Not at all (Adequately) General comments? The whole exercise was quite well. Initially I had no idea regarding accountancy so was nervous, but as the exercise proceeded, I gained confidence that the matter is not so tough as if some body pays attain toward the communication then doubts can be cleared on the spot and the concepts becomes easy to understand. Part-4 Both the questionnaire was analyzed in-depth to find out that how successful the exercise was and how well the communication took place. Communication issues It was found that the accountant took great care while planning whole of the communication exercise. The accountant at first identified that what is the basic knowledge of the friend, so that as per the prevailing knowledge different technical terms can be selected. Such research work done by the accountant also assisted in analyzing the fact that which types of examples will be more convenient for the friend to understand. As both the accountant as well as the friend said communication skill of accountant was good, and they also said that the friend succeeded in understanding the accountancy concept quite well. Performance of the accountant Both the participant of the questionnaire agreed on the fact that the communication skills of accountant were quite good. The accountant took care that no such technical words or jargon should be used which the friend cannot understand; otherwise the whole flow of communication might have been hampered. Learning is a cognitive process and people learn through their experiences, taking this concept into consideration, accountant used different examples from real like situation. After understanding the problem explained in the examples, the accountant asked the friend to solve it. Such practical ways of solving real live problems proved effective is developing good communication between the participants. Charts and graph were also good enough in communicating the facts which the accountant was trying to convey. Both the accountant and the friend accepted that effective. Loopholes in the communication It is fact that the accountant tried hard to develop a good communication channel while explaining the accountancy concept, but till certain loopholes can be identified. As the layman to whom the accountant answered in the questionnaire that some time accountant used certain jargon regarding does words the layman has no idea, so such use of jargon hindered the flow of communication. Both the respondent of the questionnaire reported that chars were not so well used and these were not much effective. The accountant used all possible communication tools for making the friend understand what depreciation is. There are other tools of communication available but within the time frame of 1 hour they couldn't be used effectively. Part-5 After making a comparison between the expert's view rewarding difficulties which often develops in Court and the difficulties which accountant faced while conducting the exercise, it was found that many of these facts proved to be true. For example the experts said methodology issue is one of the vital problems while conducting litigation in court and the accountant faced the same problem. It becomes difficult many a time that how the technical terms and core concepts should be communicated so that other can understand with utmost clarity. Another problem is orderly and clear presentation of the models of communication. If somebody has no idea regarding the matter, then finding the chronological order in which facts has to be given acts as the biggest problem. Many a time the experts find that layman are unable to understand calculations as they have no basic idea that on which basis the calculation are being carried out. So use to calculation many a time leads to communication barriers. The whole process of communication should be well executed, and the experts should continuously ask for feedback so that the communication gap can be well analyzed. Read More