How Accounting Concepts Enhance Usefulness of Financial Statements for External Users - Essay Example

Describe The Key Accounting Concepts And Discuss How They Enhance The Usefulness Of Financial ments For External Users Weil, Schipper and Francis (2012, p. 12) argue that understanding the financial health of a company is very critical for in making sound decisions. Investors, for instance, are interested in knowing the financial health of a company in order to make an informed investment decision. The same applies to creditors, shareholders, creditors, employees, managers, the government and society who are interested in knowing the financial health of a company to be able to make informed decisions. The information that external users are interested in are usually presented in the financial statements. Three of the most critical financial statements that companies must prepare at the end of every financial year include the statement of financial position, income statement and statement of cash flow (Atrill et al. 2011, p. 62). Because users of financial statements make decisions based on the information presented in these financial statements, accountants are expected to ensure that the information presented is as accurate as possible and are in tandem with the accounting concepts and principles. Accountants are expected to follow the accounting concepts and principles in preparing financial statements to ensure that users are not misled by the adoption of practices and policies that are in violation of the accounting profession. Therefore, before publishing, financial statements, accountants are expected to ensure that the treatment of the accounts is consistent with the established accounting concepts and policies. IASB Framework recognizes a number of accounting concepts that accountants must adhere to in preparing the financial statements. The first major accounting concept followed in preparing final accounts is the going concern concept. When preparing financial statements, accountants are expected to make an assumption that the company will continue operating in the foreseeable future without the possibility of the management ceasing operations. Therefore, when preparing final accountants, accountants must assume that will realize its assets and pay its debts in the normal course of business operations. The adoption of going concern concept is critical since it informs the external users that the management of the company has no intention whatsoever of liquidating or ceasing the operation of the firm in the near future (Atrill et al. 2011, p. 67). Adoption of going concern concept in the preparation of final accounts is critical since it shows investors that their investments are safe as the company has no intention of liquidating. Adoption of going concern concept if final accounts preparation is critical for creditors as it shows that the company will continue in operation and be able to pay its debts and be in need of more supplies. The same applies to employees, government, shareholders and the public that have an interest in the company. Materiality is another major accounting concept that accountants must adhere to when preparing the final accounts to be used by external parties. Materiality concept maintains that accountants should only record that has an impact on the financial statement (Carey, Knowles and Towers-Clark 2014, p. 14). An event is considered material is the inclusion or the omission of the inventory information can influence the decision of users of the financial statement. For instance, the omission of a customer who owes $500 to a form that has net asset amounting to $20 million will be considered immaterial to the financial statement. By contrast, the omission of a customer owing a company $3 million will be material to the extent that it will influence the decision of users of the financial statement. The matching concept enhances the usefulness of the financial statements for external users since it ensures that only relevant information the influence decision making is included in the financial statement. Accordingly, the matching concept is helpful to users since it avoids the inclusion of events that does not add value to users in making decisions about a company. In fact, the inclusion of only those events that are material enhances the accuracy of the information presented in the financial statements. Timeliness is another major accounting concept that accountants must take into account when preparing final accounts. Timeliness concept requires that users of financial information should be presented with the accounting information in time to enable them make decisions in time (Weil, Schipper and Francis 2012, p. 33). Timeliness of accounting information to enhance the usefulness of financial statements for external users since it ensures that the users receive account information when they are still relevant to decision making. Delaying the presentation of accounting information is discouraged since it renders the information being presented less relevant to the decision making requirements of the users. The timeliness of the presentation of financial information is also enhances the financial statement for the external users since it helps protect the users of accounting information from using outdated information on decision making. To ensure the timeliness of information, management of companies must ensure that financial statements are prepared regularly, half yearly or yearly. This ensures that users are presented with up to date information on which to base their decisions. Completeness is another accounting concept that accountants must adhere to in preparing financial accounts. Completeness is a concept that holds that the information presented to users is complete in all aspects to enable users makes the right decision regarding the financial statement (Hendrickson 2013, p. 21). The completeness concept is important since it enhances the usefulness of financial statements for users by ensuring reliability. Incompleteness of information is undesirable since it not only affects the relevance of the financial statement, but also the reliability of the information presented. Therefore, to enhance the usefulness of financial statements for users, the management must ensure that the information presented is complete in all material aspects. Dual concept is another major accounting concept that accountants are expected to follow when preparing final accounts of a company. Dual concept is based on the equation (Assets = Equity + liabilities) (Greig and MacKay 2009, p. 9). Assets here refer to the things owned by a company while liabilities refer to the things that a firm owes outsiders. Equity represents what the company owes to its shareholders/investors. Accordingly, accountants are expected to ensure that the information presented in the statement of financial position is in compliance with the accounting equation. This ensures that, whenever one side increases; there must be a corresponding increase on the other side. The same applies to when there is a decrease on one side of the question in which there should be a corresponding decrease on the other side of the equation. The adoption of the dual concept in financial statement preparation is critical since it enhances the reliability of the information presented (Porter and Norton 2012, p. 16) . This concept is also related to completeness since it shows that the information presented is complete and accurate in all aspects. For instance, the fact that the information presented on both sides of the statement of financial position and the statement of income reflect some degree of accuracy, which increases the reliability and usefulness of the information for users in making decisions. Cost concept is another major accounting concept that is adopted in preparing financial statements for use by stakeholders. According to the cost concept, all assets owned by a company should be recorded at the price paid when acquiring the asset. Cost concept recognizes the fact that assets depreciate in value (Pingle 2013, p. 56). Therefore, when recording assets in the statement of financial position, accountants are required to reflect the assets at cost and the depreciation amount deducted to arrive at the net value of the asset at the time of financial statement preparation. Cost concept enhances the usefulness of financial statements for users in a variety of ways. Firstly, cost concept enhances the usefulness of the statement of financial position by ensuring that users of the information show the price at which various assets owned by a company were acquired. It also shows users the amount by which the assets have depreciated and the final net value. This is important for users in making decisions about the financial health of a company, particularly with regards to how the company maintains its assets, notes Garnsey (2006, p. 22). Objectivity is another major accounting concept that management is expected to adhere to in preparing financial statements to enhance their usefulness. The objectivity concept maintains that accounting information be presented on the basis of objective evidence (Albrecht et al.. 2007, p. 41). In this case, the management must ensure that the accounting information presented in the financial statements is supported documents, such as receipts, invoices, and bank statements among other supporting documents. In other words, the objectivity concept holds that preparation of accounting information must begin from the source documents. The objectivity concept is critical since it enhances the usefulness of the financial statements by ensuring that all the information presented are accompanied by source documents.Accordingly, this ensures that the financial statements that users base their opinion are prepared using factual information rather than personal opinion of accountants or management. Matching is the other accounting concept that must be adhered to in preparing financial statements to ensure accuracy and reliability. Matching concept requires that the revenues generated and expenses incurred are recorded in the same financial period (Bisman 2007, p. 11). The adoption of this concept is important since it enhances the accuracy and reliability of the information presented in the financial statements. As such, users are able to make decisions based on accurate and reliable decisions. In conclusion, a financial statement is a critical tool that stakeholders use to evaluate the financial health of a company in order to make a rational and accurate information. Therefore, to avoid the presentation of misleading information by the adoption of practices and policies that are in violation of the accounting profession, the IASB Framework has established a variety of accounting concepts. The concepts guide accountants in preparing financial information, that are not only accurate, but also reliable and relevant for external users in making decisions. 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Pingle, M 2013, Basic accounting concepts: a beginners guide to understanding accounting. Xlibris Corporation, New York, NY. Porter, G., & Norton, C 2012, Financial accounting: the impact on decision makers. Cengage Learning, Mason, OH. Weil, R., Schipper, K., & Francis, J 2012, Financial accounting: an introduction to concepts, methods and uses. Cengage Learning, Mason, OH. Read More