Financial and Management Accounting - Essay Example

Introduction Accounting and finance are identified as basic theories that govern business transactions. These two theories define the financial status of a company and organization by providing a clear and concise records of a company’s financial performance. According to Weetman (2006) finance and accounting heavily relies on four core principals. They include; relevance, understandability, reliability and comparability of the financial statement. These principles are important for the financial data provided to be considered credible. Evidently the process of finance and accounting entails a systematic approach used by businesses to record and summarize the financial state and performance of a business. This report is going to define finance and accounting, discuss the theories of accounting and finance, and the policies that govern individuals in this area of specialization. Definition of Finance Weetman (2006) defines finance as the evaluation of how money is spent or invested. Finance entails the process of monitoring once assets and investments and making momentary decisions based on them. Thus finance can be narrowed down as the management of cash flow in an institution or personal investments. Definition of Accounting Accounting is the process of collecting data on current economic trends and evaluating how these trends affect the financial success of an organization or individual. Wood and Sangster (2012) describe accounting as, “the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.” According to Wood and Sangster (2012) accounting is divided into two groups namely: financial accounting and management accounting. Financial accounting and management accounting Weetman (2006) defines financial accounting as the process a company takes to make its financial records public by reporting them to external bodies. Alexander and Nobes (2010) state that a comprehensive process of financial accounting involves the evaluation of a company’s income statements, balance sheet and cash flow. Thus, financial accounting provides an overview of the current financial state that dictates whether a business entity or individual is in a strong position to incur certain expenses. For instance, the financial position of a company will determine whether the company is able to employ new staff, invest in another location or increase employee pay. As a result those working in the department of finance and accounts should be able to understand how different social and economic trends influence financial decision and offer sound financial advice for business entities and personal use. Financial advisors and accountants are therefore guided by ability to analyze and interpret data for clients. Management accounting is defined as the process of collecting, measuring and evaluating financial information for further interpretation. Management accounting involves the process of compiling financial information of a business entity or an individual for external bodies to use (Gray et al. 1996). In most instances, these records are presented to potential investors to an organization or government authorities for the purpose of taxation. The information provided in these records must be credible, clear and reliable for these external entities to make their decision based on the information provided. Individuals in this department are guided by internal regulatory reforms that govern an institution or organization (Benedict and Eliot, 2012). What Guidelines should govern individuals working in this area Individuals working for the department of finance and accounts in an institution play an important role as they provide comprehensive data on the finances and provide advice on whether an individual or a company can take part in trade transactions. These individuals critically evaluate the inflow and outflow of cash and its relevance to business activities of an organization which further dictates the financial stand of an institution or individual. However, it is important to note that these individuals are governed by regulatory rules by institutions as well as government policies. In order for an individual in this field to work effectively, he or she has to follow a certain criteria in their field of expertise. Individuals working in finance and accounting need to have an extensive understanding of the different aspects of finance and accounting which entails the preparation of financial statements through book keeping. This way both individuals and organizations are able to make informed decisions for their businesses and personal lives. Professionals in this field are tasked with the duties of monitoring financial accounting and managing accounts. The use of qualitative and quantitative data that is relevant for the management of accounts is critical in the process of decision making and preparation of financial reports. According to Weetman (2006) financial advisors and accountants do not have to follow a standard process in managing the organizational and personal finances or accounts. However, individuals working in the department of managing accounts should adopt strategies that are aligned to the demands of a business entity and use this information in offering sound financial advice. Therefore it is effective to use both internal and external factors that influence a business entity to critically compare, explain their relevance, reliability and understandability as presented by the financial statements (Weetman, 2006). To avoid some of the shortcoming presented by financial statements, financial managers must adhere to the rules and regulations presented by regulatory bodies and government policies (Weetman, 2006). Ethical and Moral obligations A publication by Deloitte (2012) argues that regulatory guidelines and government policies, are implemented as a means to deter financial advisors and accountants from committing ethical and moral mistakes. The implementation of these policies and guidelines are set to reduce the number of fraud cases in business entities and the mismanagement of financial records. Porter et al. (2003) discussed three types of fraud that take part in the financial management of a business entity. They include; “misappropriation of corporate assets, manipulation of accounting information and the deception of third party” (Porter et al. 2003). Misappropriation of corporate assets means that a person steals from a business entity by illegally possessing fixed assets of a company. This kind of immoral behavior is common among dishonest book keepers and financial auditors. Manipulation of accounting information means that an individual intentionally provides internal or external entities of a company with misleading information on the finances and accounts of the company. Deception of the third party means deliberately misleading a client or investor in order for an organization or business enterprise to profit. The three types of fraud addressed by Porter et al. (2003) present the lack of honesty among individuals working in this area, thus the guidelines come in to explain how fraud affects a business or an individual’s job. These government policies encourage individuals working in the field of accounts and finance to work in honesty and provide credible to both internal and external parties in an organization. According to Bebedict & Eliot (2012) certain guidelines are introduced as a means to promote professionalism and eliminate the feeling of subjectivity by recipients and accountants. Objectivity and independence are identified are ethical guidelines that guide individuals in the area of finance and accounting. These two ethical aspects require accountants and financial advisors to present credible and reliable information without any form of biasness whatsoever. In cases whereby a company hires external bodies to evaluate their financial records and finances, these bodies and the company must ensure that there is no form of personal relationship between them and staff of the company. Hence people working in finance and accounting must be free of any form of corruption and work in a transparent manner. This means that the information presented by these individuals should be true and clear and provide conclusive data to internal and external parties. Transparency and clarity are vital factors in presenting financial or accounting information. This is because it is difficult for some business entities to fully comprehend some of the technical terms used by financial advisors and accountants in present statements and records. In compiling account records and statements individuals working in these departments must use simpler terms in defining the financial situation of a person or business entity for every concerned party to understand (Porter et al. 2003). Disadvantages of Financial Statements As mentioned earlier, financial statements are the main documents used by finance and accounting personnel and are often accompanied with shortcomings. It is therefore important for these persons to clearly understand the disadvantages of using financial statements in their interpretations. Gray et al. (1996) identify window dressing as one of the major limitations presented by financial statements. Window dressing refers to the use of an innovative way to conceal some information and make the financial record to be more appealing to the concerned parties. In most instances finance accountants will use this technique to provide misleading information and as a result lead to information to the company as well as external bodies. Additionally the use this technology tends to question the credibility of a company or an individual as it presents information that is false. Consequently the recurrent mispresentation of financial data, may lead to accounting scandals in and outside a company. Accounting scandals arise when an individual records false information regarding a company’s sales, revenue income or profit margin. Hill et al (2002) states that accounting scandals will in most instances lead to mismanagement of resources in a company which further leads to the bankruptcy of an institution. Conclusion The most important aspect of finance and accounting is being knowledgeable about the financial and accounting system. This way the concerned parties are well informed of the challenges and advantages of their actions. If the individuals working in this field are aware of what is expected of them in the work area and profession, then finance and accounting becomes an effective system in managing a company’s assets and investments. These individuals must be guided by both professional and moral obligations to ensure that finance and accounting is a transparent and credible unit of an organization. Therefore, financial record keeping requires high level of integrity, knowledge, credibility and expertise. References Alexander, D. & Nobes, C. (2010). Financial Accounting an International Introduction. Harlow, Essex: Pearson Education Limited Benedict, A. & Elliot, B. (2012). Financial Accounting an Introduction. Harlow, Essex: Pearson Education Limited Deloitte. (2012). United Kingdom Jurisdiction. Retrieved From: http://www.iasplus.com/en/jurisdiction/europe/country55 (Accessed on 12th Oct 2015) Gray, R., Laughilin, B. & Bebbington, J. (1996). Financial Accounting Methods and Meaning. Oxford: Thompson Business Press. Hill, A., Chaffin, J. & Fidler, S. (2002). Enron: Virtual Company, Virtual Profits. Financial Times. Retrieved From: http://specials.ft.com/enron/FT3648VA9XC.html (Accessed 11th Oct 2015) Porter, B., Simon, J. & Hartely, D. (2003). Principles of external auditing. Chichester: John Wiley & Sons LTD. Weetman, P. (2006). Financial and Management Accounting: An introduction. Harlow: Pearson. Wood, F. & Sangster, A. (2012). Business Accounting 1 (12th ed). Harlow: Pearson. Read More