Impact of Accounting Principles - Case Study Example

Task Impact of Accounting Principles Introduction Financial ments are documents which are used in reporting the financial activity and performance of an organisation for a given period of time. These reports are generated out of the actual activities which occur during the given period within that organisation. There are policies and guidelines which have been established, and which must be followed in the financial reporting within the financial statements. These policies and procedures form the accounting principles which govern financial reporting. The accounting principles must be followed in the production of financial reports and statements in order to ensure that there is uniformity in the aspect of financial reporting. While this is considered to be critical to effective financial reporting, these principles are also a significant part of the financial control within organisations. The principles have different impacts upon the organisation as discussed below. Revenue recognition principle This could be termed as the most significant accounting principle among all the available accounting principles. The concept of revenue recognition remains critical to financial reporting because it seeks to determine the sources of finance and expenses, in order to determine profitability of the organisation. This principle remains critical to business operations because it seeks to ensure that all the revenue generated becomes recognised through the various records used by the organisation (Kothari, Ramanna, and Skinner 252). Organisations within different industries must ensure the development of appropriate and standardised approaches through which the revenue recognition will be effected. This principle results in the development of an approach for making comparison of different accounting concepts to determine effectiveness of the organisation. Sainsbury which is a retailing outlet for household good would effectively adopt an approach for recognising revenue based on cash basis. This would be mainly because most of the transactions are undertaken instantly and the days is received upon the exchange of the product. Once the cash has been received it become recognised as a sale and revenue. UNIQOL, which is involved in a different level of retailing would have to combine the accrual and cash basis of revenue recognition in its processes. This would be mainly because of the various products which are sometimes shipped and cash is received later. Harmonisation of these transactions remains essential as the organisation seeks to ensure there is accuracy in the process of revenue recognition. The use of these different approaches will be critical in the determination of the profitability of the organisation. While much products might have been dispatched during a certain period when the organisation was busy, payments might not have been received instantly and upon their receipt, the transaction becomes recorded. This ensures that the efficiency of the organisation can be established in terms of the duration which debtors take to settle their debts. Reduction of this time becomes critical in ensuring that the organisation is deemed to function efficiently. The revenue recognition principle remains one of the most significant to the organisations because of the capability to be used in determining the recording of revenue and also the determination of the effectiveness in the functioning of the organisation. The matching principle This principle is used in determining the time and period when expenses and revenues should be recorded within a financial statement. The greatest effects of this principle occurs on the income statement of organisations. The matching principles presents a direct effect upon the financial statement of any organisation because the reporting of financial input involves the revenue and expenses (Weygandt et al. 179). The principle is based on the need to report and match expenses with revenue based on the period when they were incurred and gained respectively. These two fundamental financial issues should be able to match with each other within the financial statements where they are recorded. For effective comparability and understanding of the sources of income within organisations, the matching principle remains an important principle. Within the retailing sector, the matching principles has relatively less impact on the financial statements. The element of accrual accounting which is utilised to ensure the matching principle remains relatively simple. This is mainly because the income and expenses which the organisations incur are direct and do not have complex procedures for accounting. In the accounting aspects for the organisations which are involved in the retailing, the principle would be immensely applied on the cost of goods. While the good are purchased in large batches, it is critical to determine the costs of good for each period. This is ensured through finding the cost of the goods sold within that period. While Sainsbury could utilise this principle through directly costing the sales which have been undertaken within a given period, the case of UNIQOL would be different when seeking to apply the same principle. The inventory within the organisation moves relatively slow and the matching principle could be increasingly difficult to implement directly as stipulated. This is mainly because the products sold could be returned and the organisations needs to put this into consideration. The matching principle remain a significant element in financial reporting which is utilised in determining the causes of profits and loses. The application of the principle remains important to organisations although it will have different impact on the apparel industry when compared to retailing outlets like Sainsbury. Disclosure principle This principle is based on the requirement for companies to provide all financial information to any stakeholders who can use the information to make decisions about the company. Much of the information which does not involve sales and related costs is presented in the foot notes of the financial statements. Under the provision of this principle, organisations are expected to report to their stakeholders the financial position of the company. This information remains critical to the decision making process by the stakeholders. It is however a common practice for many organisations to fail to undertake such activities given the nature of business operations. While public companies might be obliged to do so, private organisations have the liberty of choosing the kind of information to present within their financial statements. The responsibility of the accounting principles on disclosure lies in presenting the critical information to stakeholders for use in the decision making process. This principle would have significant effect upon the organisation in determining the kind of information to present to the public. KOHL’S corporation is the organisation which the disclosure principle would have the most impact. This is because the organisation is a publicly trading company and has many parties interested in knowing the financial performance and even other related activities. It is critical to disclose as much information possible to ensure the stakeholders, which are also investors understand all the functions of the financial management element within the organisation The element of disclosure does not have much impact upon Sainsbury because it is a privately owned organisations and does not have any public members interested in the profitability of the organisation. It is however important to ensure that the organisation still discloses some information to stakeholders. The fundamental focus for the private organisations would be the customers who are the main source of income for the business. This disclosure principle application within the private organisation would become limited to information which would enhance the level of trust of the patients upon the products of the company. This becomes critical in seeking to retain customers and establish a strong brand like the case of UNIQLO. Brand development could be enhanced by the disclosure principle, although the organisation cannot be forced to disclose certain information which could be classified as private. Historical cost principle Historical cost accounting refers to the principle in which the accounting aspects seeks to present financial information based on the value of the products when they were purchased. This involves based the value of assets on the nominal cost rather than the current cost of the assets. The historical cost principle has significant effect on the valuation of assets which are owned by a company. This is mainly because the value of assets does not change since this principle fails to consider depreciation and changes in the market value of assets. As a result a company might appear to have little value in the assets since they were acquired at low prices and are currently values at high prices. This principle presents minimal impact on the organisation presented within the context of this report. Many of the organisations are involved in the retailing business and have limited impact upon the financial statement of the organisation The impact of historical cost principle results in diminishing value of some fixed assets while whose value continues to appreciate with time. As organisations involved in the retailing of products, there is little impact of the historical cost principle since many of the financial elements reported involve marketable securities like the case of KOHL’S corporation. The application of this accounting principle is limited in the valuation of fixed assets and the principle has relatively insignificant effects on current assets. The historical cost principle effectiveness in the financial statement s is limited to making economic decisions which are long term financial decisions within an organisation. Business decision cannot be made on the basis of historical cost accounting since they involve current assets which values cannot be determined historically. This makes the principle to become relatively less relevant to UNIQOL and Sainsbury which are both involved in the retailing business and have few fixed assets of the their own. The business operations of these organisations is based on current assets whose valuation must be retained at the current market value for efficiently. Evacuation of the business and profitability would not involve the application of historical cost but rather the current costs to determine different financial elements relating to profits and losses, which must be evaluated using current market value. Conclusion The accounting principles are utilised in governing the element of financial reporting within organisations. Their application however, depends on the industry regulations regarding financial reporting as well as he target audience for the reports being developed. The historical cost principle for example is best applied in KOHL which is an organisation dealing with securities and the application of historical cost is essential for effective financial reporting in the industry. The disclosure principle is also critical within this organisation because there are many shareholders who have securities within the company and they must be provided with actual information through financial reporting. the matching and revenue recognition principles are relatively necessary and must be effective applied within all financial reporting aspects regardless of the industry an organization is operating in. these two accounting principles provide the basic understanding of financial reporting which is undertaken within any organisations, and in any industry. Works cited Kothari, S. P., Karthik Ramanna, and Douglas J. Skinner. “Implications for GAAP from an Analysis of Positive Research in Accounting.” Journal of Accounting and Economics 50.2 (2010): 246–286. Print. Weygandt, Jerry J. et al. “Accounting Principles.” Issues in Accounting Education 25.1 (2010): 179–180. Print.  Read More