Producing Accounting Information - Assignment Example

Producing Accounting Information Apparently, accounting can be described as a subject that concerns itself with collection, analysis and communication of financial information to the concerned individuals in a given institution in order to assist them in making decisions that are informed (Kimmel et al 2011). Of most importance is that apart from that common assumption of accounting widely known to people as that of keeping regular reports of finances in a given organisation, accounting is mainly concerned with assisting people and organisations to constantly improve their financial information through making astute decisions. Warren et al 2012 say that professionals in this field; accountants must be competent enough to deal with accounting information in relation to potential users. Essentially, it is argued that accounting information should be relied upon the titles of the potential users. Thus accountants must be extremely clear on whom and what purpose accounting information is been given to. Significantly, several groups of people may require such information for both their interest and that of a given organisation. Some of the potential users include; customers, government, managers, suppliers competitors among others (Martin 2009; McLaney and Atrill 2010). According to Gelinas et al 2012, accounting information might not be able to give solid decisions or definite answer to potential users as it is a field that continuous grows in relation to various advancements. None the less, this kind of information is crucial in ensuring that uncertainty is reduced in businesses with reference to their assumed financial position and the overall performance (Bisen 2009). As such, accounting information has three major roles in businesses; rewarding and or payment of employees, repayment of loans, and the reimbursement of money to business owners. Conversely, there are alternative sources of information which might be derived from published articles such as newspapers and magazines which at times is not accurate thus giving conflicting statement on financial matters of given businesses (Peng 2011). According to numerous research that have been analyzed by financial scholars, it is evident that accounting information ranges among the few relied on sources of financial wellbeing and related information on businesses as opposed to other sources. Duening and Click (2004) articulate that most major companies have relied on accounting information in ensuring that checks and balances in their financial department and general well being is observed. Apparently, it is almost difficult to give the actual level of usefulness for accounting information and as such, the best that can be derived from this piece of information is that its impact has been continuously great in the business world (Webster and Hamilton 2012). For instance, it has been argued that one aspect where accounting information could be measurable and achievable relates to trading of shares. Basically, shares as a given portion of ownership in businesses or organisations could be traded in stock exchange to signify the volume, prices and accounting profits that a given business has gained. As a result, potential users and other stakeholders are at liberty to change their views about business in the future (Williams and Williams 2007). For instance, once potential users get information about share in a particular business, then it becomes easier for them to make decisions on whether to participate in the stock exchange buying and selling. Weil et al 2014, argue that having understood the impact of accounting information in businesses and more so for the potential users such as competitors managers among others, it is important to acknowledge that accounting information has certain features that has enabled it to be a useful tool in the field of finance and accounting. In this regard, accounting information has four main features namely: understandability, comparability, reliability and relevance (Needles et al 2008). To begin with, relevance ensures that accounting information is in the best position to influence decision that is made by one or more potential users. As such, information produced must be accessible particularly when decisions are about to be made. For instance, most potential users want to access accounting information from the past and the present to ensure that they make sober decisions. Secondly, the information should be reliable meaning that it should be double checked to ensure that is does not contain errors before it is presented to potential users. Thirdly, compatibility in accounting is crucial as it ensures that potential users are able to recognize and respond to changes that have taken place in the business over a certain period of time. Finally, each of the accounting information should be easy to comprehend at all times especially to potential users since they are the main targets (Drury 2007; Berry and Jarvis 2006). Limitations of the balance sheet in portraying the financial position of a business It is apparent that balance sheet plays a critical role in portraying organizations’ financial position (Pandikumar 2007). However, several limitations are attached on it. One of the evident limitations of balance sheet is that it does not figure out the market value of the entity as well as its liquidation value. In light of this, several assets such as land and buildings are valued at their historical costs instead of their fair values (Rittenberg, et al 2012). In this regard, this is a clear indication that although the intended purpose of balance sheet is to indicate financial position of an organisation, it misses some crucial aspects that could lead miscalculation and focus of organisations’ financial position (Banerjee 2005). As Rittenberg 2011 noted, important organisations’ resources are not recorded on the balance sheet and this could translate to serious underestimation of the value of such resources. For instance, it is apparent that trained employees are considered as primary assets of any organisation. Their manpower plays an indispensable role in ensuring performance of the organisation. According to Higson 2003, trained and experienced employees build an organisational culture of top quality and good customer service, something that ensures organisations developing and maintaining competitive advantage in a highly competitive market (Lewis, et al 2007). Therefore, it is arguably correct to point out that such an asset that is not recorded in a balance sheet makes an organisation to miss an important aspect of indicating its financial performance position thus constitute to one of the limitations of a balance sheet Khan and Jain 2004). In another dimension, although most of the assets and amounts recorded in the balance sheet highly help in indicating the financial position of an organisation, some of them are not accurately recorded (Lee 2006). This comes as a result of these items being recorded on estimates instead of determinant amounts. For instance, organisations estimates the amount of receivable they estimate they will collect as well as the amount of warranty costs they incur for the already sold items. With this in record, it is evident that such an organisation’s book value, its assets less its liabilities as indicated in the balance sheet consequently would not exactly measure the organisation’s market value (Norton 2006). Another limitation that is not perceived or realised as one is the idea of strict accounting standards both local and international (Pride 2009). This can misguide organisations especially in situations where the required balance sheet entry does not have much significance to the organisation. Besides, it is apparent that balance sheet cannot provide all information needed and this may call for consultation from other financial statements such as ratio analysis (Clift, et al 2009). In addition, the information provided in the balance sheet only provide accounts on the past, but can provided little information about the future. Kangarluei, et al 2012 noted that most of the internally generated assets are not recorded in the balance sheet. This translates to limitation of the pure projection of the organisation’s potentiality to generate cash or even cash equivalents. This is supported by the idea that assets that do not qualify recognition principle cannot be recorded in the balance sheet (Shil 2009). In this regard, individuals looking at the balance sheet may not get the right picture of the organisation’s strengths that might help it maintain competitive advantage. Kusano 2012 argued that the overall financial position of an organisation is not entirely dependent on one financial record, but rather depends on several other income statements. Therefore, this means that balance sheet cannot wholly give a quantified account of organisation’s financial position. In another dimension, this implies that other financial statements would automatically affect balance sheet in a way. Krstić and Đorđević 2010 pointed out that financial statements cannot be used in isolation in determining financial position of an organisation. According to Mohana and Reddina 2012, doing so can lender inaccurate information as well as misguided interpretation about the organisation. Although balance sheets provide financial positions, organisations may find it difficult to report on effects of socio-economic factors that might affect organisation’s future performance. Besides, lack of such factors lenders difficulties in the decision making process. Kusano 2012 noted that organisations operating in politically and economically volatile environments may not substantiate benefit accrued from balance sheet. Therefore, a need to have diversified view from other financial statements becomes vital for such organisations to be in a position to grasp the needed attention to overcome political and economic constraints exhibited in the market. With such deliberations, it is apparent that although balance sheets provide a credible platform for financial position overview, several issues might not be reflected in the statement and this acts as a constraint of the balance sheet. In addition, balance sheet cannot be solely used to determine comprehensive financial position o an organisation thus a need to incorporate other financial statement for the same. Ledger accounts and trial balance General journals Date Description Folio Debit Credit 1/4/2013 Bank a/c Cash a/c Capital a/c £26,000 £ 4,000 £30,000 4/4/2013 Purchases A/c Cash a/c £ 700 £ 700 4/4/2013 Purchases A/C (12 Chinese table lamps) Creditors A/C(Ernst Bigswell) £ 24,000 £ 24,000 7/4/2013 Rent A/C Cash A/c £ 1,200 £ 1,200 8/4/2013 Stationery A/C Bank A/c £ 320 £ 320 8/4/2013 Motor vehicle A/c Bank A/c £ 6,000 £ 6,000 11/4/ 2013 Cleaning expenses A/c Cash A/c £ 225 £ 225 12/ 4/2013 Purchases A/c (antique furniture) Creditors A/c (International antiques) £ 7,000 £ 7,000 13/4/2013 Cash A/c Sales A/c £ 1,200 £ 1,200 14/4/2013 Debtors A/C (Aunty Geraldine) Sales A/c £ 2,400 £ 2,400 19/4/2013 Drawings A/c Cash A/c £ 600 £ 600 20/4/2013 Creditors A/C Purchases returns A/c £ 3,000 £ 3,000 21/4/2013 Creditors a/c (Ernst Bigswell) Bank A/c £ 1,500 £ 1, 500 26/4/2013 Bank A/c Debtors A/c £ 2, 400 £ 2,400 28/4/2013 Telephone expenses Creditors A/c £ 250 £ 250 29/4/2013 Bank A/c Sales A/c £ 8, 500 £ 8, 500 29/4/2013 Creditors A/C (International Antiques) Bank A/C £ 4,000 £ 4,000 Ledger T accounts Debit Cash account Credit Date Description Amount Date Description Amount 1/4/2013 Capital A/c £ 4,000 4/4/2013 Purchases A/c £ 700 7/4/2013 Rent A/c £ 1,200 1/4/2013 Cleaning expenses A/c £ 225 13/4/2013 Sales A/c £ 1,200 19/4/2013 Drawings A/c £ 600 30/4/2013 Balance c/d £ 2,475 Total £ 5,200 Total £ 5,200 Debit Capital account Credit Date Description Amount Date Description Amount 1/4/2013 Cash a/c £ 4, 000 Bank A/c £ 26, 000 30/4/2013 Balance c/d £ 30,000 Total £ 30,000 Total £ 30,000 Debit Purchases account Credit Date Description Amount Date Description Amount 4/4/2013 Cash A/c £ 700 4/4/2013 Creditors A/c £ 24,000 12/4/2013 Creditors A/c £ 7,000 Balance c/d 30/4/2013 £ 31,700 Total £ 31,700 Total £ 31,700 Debit Sales A/c Credit Date Description Amount Date Description Amount 13/4/2013 Cash A/c £ 1,200 14/4/2013 Debtors A/c £ 2,400 29/4/2013 Bank A/c £ 8,500 30/4/2013 Balance c/d £ 12,100 Total £ 12,100 Total £ 12,100 Debit Debtors A/c Credit Date Description Amount Date Description Amount 14/4/2013 Sales A/c £ 2,400 26/4/2013 Bank A/c £ 2,400 Debit Creditors A/c Credit Date Description Amount Date Description Amount 4 4/4/2013 Purchases A/c (Ernst Bigswell) £ 24,000 12/4/2013 Purchases A/c (International Antiques) £ 7,000 20/4/2013 Purchases return A/c £ 3,000 21/4/2013 Bank A/c £ 1,500 28/4/2013 Expenses (telephone) A/c £ 250 29/4/2013 Bank A/c £ 4,000 30/4/2013 Balance c/d £ 22,750 £ 31,250 Total £ 31,250 Debit Expenses A/c Credit Date Description Amount Date Description Amount 7/4/2013 Rent A/c £ 1,200 8/4/2013 Stationery A/c £ 320 11/4/2013 Cleaning £ 225 28/4/2013 Telephone expenses £ 250 30/4/2013 Balance c/d £ 1,995 Total £ 1,995 Total £ 1,995 Debit Bank A/c Credit Date Description Amount Date Description Amount 1/4/2013 Capital A/c £ 26,000 8/4/2013 Stationery A/c £ 320 8/4/2013 Motor vehicle A/c £ 6,000 21/4/ 2013 Creditors A/c £ 1, 500 26/4/2013 Debtors A/c £ 2,400 29/4/ 2013 Sales A/c £ 8,500 29/4/2013 Creditors A/c £ 4,000 30/4/2013 Balance c/d £ 25,080 Total £ 36,900 Total £ 36,900 Debit Motor vehicle A/c Credit Date Description Amount Date Description Amount 8/4/2013 Bank A/c £ 6,000 30/4/2013 Balance c/d £ 6,000 Totals £ 6,000 £ 6,000 Debit purchases return A/c Credit Date Description Amount Date Description Amount 30/4/2013 Balance c/d £ 3,000 20/4/2013 Creditors A/c £ 3,000 Total £ 3,000 Total £ 3,000 Debit Drawings A/c Credit Date Description Amount Date Description Amount 7/4/2013 Cash A/c £ 600 30/4/2013 Balance c/d £ 600 Total £ 600 Totals £ 600 Trial balance Mariana Ortega Trial balance as at 30th April 2013 Item Debit (£) Credit (£) Cash 2, 475 Bank 25, 080 Motor vehicle 6, 000 Capital 30,000 Creditors 22, 750 Drawings 600 Sales 12, 100 Purchases 31, 700 Purchases returns 3,000 Rent expense 1,200 Stationery expense 320 Cleaning expenses 225 Telephone expenses payable 250 Stock 500 Total 68100 68100 Bibliography; Banerjee, A., 2005. 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