Stocktaking John R Dyson - Assignment Example

Accounting JOHN R. DYSON and Section # of (a) What are the differences between financial and management accounting? Accounting statements are prepared by all organizations, big or small; in order to keep a check on the financial condition of the company and manage the finances it holds, such as the Balance Sheet, the Income Statement, the Cash Flow Statement etc. These statements are prepared on the basis of certain rules and principles which determine their validity and reliability in order to make them acceptable for the stakeholders. There are two major accountancy types according to Accountingformanagement.com (2009): Managerial Accounting refers to the provision of information to the insiders in an organization, such as managers; whereas, financial accounting pertains to the provision of financial information to the outside stakeholders, such as creditors and government etc. Managerial accounting thus differs significantly from financial accounting in certain aspects which are discussed below. The fundamental difference, as mentioned earlier and as illustrated by Tutor2u.com (2010), is the purpose behind financial and management accounting, wherein the former is used to for external stakeholders and the latter is used to prepare statements for internal purposes of an organization. Furthermore explained by Tutor2u.com (2010), the reason why these statements are used by the respective agents defines the focus of the statements, financial accounting emphasizes on the results and consequences of the activities that have occurred in the past and thus sheds light on the affects on the finances of the company, whereas managerial accounting focuses on utilization of these statements for decision making for the future of an organization and thus could be at any time while financial accounting statements are over a specific period, usually the accounting period in the particular industry in which the company operates. Extending this purpose further, financial accounting stresses on the objectivity of the data and verifies them according to accounting standards, while managerial accounting is more concerned with emphasizing those items which are more relevant in the decision making procedure. In addition, financial accounting requires that the statements should be exact, accurate and therefore stresses on particularity of data, and on the contrary managerial accounting signifies the timeliness of data which is needed for decision making. Since the users of the statements would have a different criterion for the statements, financial accounting focuses on the synopsis of the entire organization’s financial data as it is used by the external stakeholders who do not need every minute detail of the company, while managerial accounting produces reports and statements with complete illustration and detail about every aspect of the organization separately, the length and detail of the reports produced herein is in the hands of the management and they are not obliged by law to follow any standard rules, the reports are prepared such that decisions could be taken accordingly. Hence, as the scope of financial accounting comprises of external users, therefore it has to follow the Generally Accepted Accounting Principles (GAAP), whereas managerial accounting method provides the luxury of evading these rules due to its scope being strictly internal, and therefore subjectivity is acceptable, and it is necessary for any incorporated company to follow the financial accounting procedure when preparing external reports which are a legal requirement, while managerial accounting method is not required. Another major contrasting characteristic in both these accounting methods is that financial accounting values the monetary nature of the information, whereas managerial accounting can also comprise of non-monetary instruments, such as units, quantity, productivity etc. Therefore, to sum up the entire debate on the difference between the financial accounting method and the managerial accounting method, it would be apt to state that the underlying purpose which requires the statements to be prepared greatly determines which method needs to be followed, and thus it defines the scope, extent and the framework of these statements. (b) Explain and illustrate most common accounting rules used in JOHN R.DYSON. The preparation of accounting statements follows certain rules and principles which a firm must adhere to when preparing financial statements. The accounting principles which are considered cardinal in the accounting framework are subdivided into three broad categories, namely: boundary rules, measurement rules and ethical rules. John R. Dyson (2007) refers to these accounting theories and practices in a grasping manner. The boundary rules define the limits within which data is collected. The Institute of Administrative Management (2010) illustrates that it comprises of the Entity Rule, which states that a business must be kept separate from its owner, therefore a boundary must be drawn between the private life transactions of the owner and the business, and if they overlap then they must be apportioned appropriately. The Periodicity Rule pertains to the collection of data in a given period of time, therefore a time boundary is demarcated for data collection. The Going Concern Principle narrates that it must be substantiated that a business entity would not dissolve but will remain in business in the future, and thus widening the boundary of the existence of an organization. The last principle under boundary rules defines the extent to which data could be collected, therefore stating that only that information which has a quantitative value could be used, it must not be value based or subjective, and hence the last rule is known as the Quantitative Rule. After the boundaries have been defined according to which data would be collected, the accountants move on to following the Measurement Rules, as according to Labspace.com (2006), these rules determine how the information would be gathered and how would it be recorded by the firm. There are basically six most commonly accepted measurement rules which fit this criterion. Since money is considered the ideal unit of measurement in accounting, thus all units are converted to monetary value before they can be incorporated into the statements and reports, in order to make comparison and calculation on a standardized basis, thus the Money Measurement Concept carries immense significance in accounting. Furthermore, measurement rules entail that any accounting transaction should be recorded at its original cost, adjustments could be made to these values in the financial statements, but it must be ensured that the original cost is stated, as according to the Historical Cost Concept. Similarly, it is incumbent upon a firm, in accordance with the Realization Principle, that it should record a transaction when it is realized, despite it being spread over a larger time frame that is greater than the accounting period in which the transaction occurs. This is a prerequisite to the Matching Principle which ensures that the expenses of one period are matched off against the revenues of the same period, and are not wrongly subtracted from any other period’s revenues. Furthermore, the Materiality principle requires that an organization should only record transactions which are worthy of being recorded, which have a material significance, and the Dual Aspect concept states that both the debit and credit affects of any transaction must be recorded. Throughout the preparation of statements, the Ethical rules must be followed, which are significant for the smooth running of a company. According to Labspace.com (2006) the Prudence concept instigates a firm to overestimate the expenses and underestimate the incomes, in order to provide a leeway in a worst scenario case. The Consistency rule forces a business to maintain stability in its procedures, and therefore the firm must not allow any alteration in the accounting rules unless absolutely necessary, and as mentioned earlier, the statements should be prepared according to generally accepted standards, and not on subjective basis, therefore the ethical rule of Objectivity sets in. Lastly, the Relevance rule states that a firm must produce statements which depict the true condition of the business, and must not conceal or misrepresent any financial circumstances, and thus ensuring relevance to reality. All these principles must be followed for a company to produce acceptable accounting statements. References Accountingformanagement (2009) Introduction to managerial accounting (cost or management accounting). Retrieved June 14th 2010 from http://www.accountingformanagement.com/ Dyson. John R (2007) Accounting for Non-Accounting Students. Financial Times Prentice Hall Institute of Administrative Management (2010) Fundamental Accounting Concepts- Lecture 2. Retrieved June 14th 2010 from http://myjimgreen.co.uk/IAM%20Lectures/IAMLecture2.ppt Labspace (2006) 8.3 Accounting: Accounting Rules. Retrieved June 14th 2010 from http://labspace.open.ac.uk/mod/resource/view.php?id=361066&direct=1 Tutor2u (2010) Comparison of Financial and Management Accounting. Retrieved June 14th 2010 from http://tutor2u.net/business/accounts/financial_management_accounting_comparison.htm Read More