Accounting Theory - Assignment Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : Accounting Theory Tutor : xxxxxxxxxxx @ 2010 David Moldings Ltd1 sells marble products. 90% of the marble blocks were transferred to work in progress (WIP). The remaining 10 were assigned to the marble scrap heap. Michael and Angelo requested to use the remnant of marble block. They made a statue and presented it to the management. Everyone including the management was happy except the accountant who could not find the policy in the company accounting manual. The fact that the accountant could not find any policy for the statue in the company’s accounting policy manual has a major impact. It means that the company is operating outside its scope of work and responsibilities. As a result, the company is more likely to spend a fortune in the inauguration ceremony carried out to unveil the statute. This means that the company will have to forego some of its activities, since a lot has already been spent. The company is likely to suffer heavy losses as a result of the money which was allocated at the ceremony. The budgeted money that was meant for previous year and it did not incorporate the statue. The applicable conceptual accounting framework for the above mentioned case is the Australian Accounting Standards (AASs). It provides a framework which is used for setting accounting standards and helps in resolving accounting disputes. By the fact that the accountant did not find any policy in the company policy manual is a clear evidence of the disputes that is most likely to occur. These disputes between the accountant and the management can be solved by the AASs. The relevant principle is the matching principle. David Moldings Ltd1 spent a lot of money in terms of the celebration, thus incur expenses. The matching principle states that, expenses must be equal to the revenue incurred. In this principle, expenses are accepted not when the work is performed (i.e. when the statue was completed) but when product makes its contribution to the revenue, however, in this case the statue was place at the company’s premises as a testimony to the high quality of their products and the skills of their workforce. The matching principle allows greater assessment of actual profitability as well as performance. David Moldings Ltd held a small ceremony to unveil the statue. The money used for the ceremony had already not been accounted for in that year. The management does not however recognize the impact of their action to the company. The management placed the statue in a prominent place at the company’s premise to act as a testimony for the high quality product and skills of their workforce. This means that the management had no intensions of selling the statue but use it as a testimony. The company incurred expenses with no revenue coming in. Michael and Angelo permission to use the remnant of the marble block to make a statue is not something which the company should be proud of. The accountant suggestion states that the statue is not considered as an asset by the company, meaning, if it is not an asset then it is a liability to the company. This is clearly evident by the accountant policy which states that the material used by both Michael and Angelo had already been accounted for as material wastage expense at cost. On the other hand, my policy explains how the company has spent in terms of ceremony for the statue (Wolk, Dodd and Rozycki 2007). The money used for the inauguration of the status had not been accounted for at the beginning of the year. Meaning the David Moldings Ltd is incurring what we call ‘the unnecessary costs’ in accounting. According to the matching principle, expenses incurred should be equal to the revenue received. However, this is not the case here, since the company’s expense incurred outweighs the revenue. This is evident when the accountant states that the company does not consider the statue as asset, meaning they are counting their losses. There is a strong correlation between the accountant’s suggestion and my stated policy. The money and the material used for the statue could be used by the management or the company at large in carrying out different duties or activities within the organization. Companies are established in order to make profit but not losses. The management should consider attaining the company’s set goals at the year end. It should have accounted or permitted both Angelo and Michael in the preceding year. This would allow the company to account for the statue. It may also ask its employees to make statues for sale, by doing so, the statue will be considered as an asset rather than a liability to the company. This will however help the management to generate income to the company, thus increase its profitability at the year end. This policy will not only help the company to increase its overall output but boost the employee’s morale as well. There will be a positive impact when the company or management decides to account for the statue in the year 20X1. The effect of accounting for the statue in the year 20X1 is that the company will have to re-order new raw materials. This means extra costs will be incurred in the process. Capital + Liability = Asset. For the statue to qualify as an asset, the organization should be more than willing to seek a readily available capital and be ready to incur liabilities as well. This capital may be in terms of capital owned, borrowed capital, working capital or capital employed. My assumptions are that when the management accounts for the statute, there is a possibility that it will gain profit by doing so. This is clearly evident by the number of people who liked the statue including the management. Another assumption is that the statue will improve the company’s image as compared to its competitors. Question 2 By June 20X2, the management incorporated the policy in the company’s accounting manual, such that it is accessible to both the accountant, management and the employees at large. The statue is considered as one of the company’s product, thus it is sold. The company minimum order was increased. Marble scrap is accounted by the company and used in the creation of statue. This policy is listed in the company financial notes. The employee’s work force and skills is used to generate income to the organization or the company (David Moldings Ltd). The exchange rate on 30 June 20X2 was A$1.00 = US$0.80. The various policy and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The more recent pronouncements come as Statements of the Financial Accounting Board (SFAS). Normally GAAP includes a confined applicable Accounting Framework which is related to the accounting law, rules and Accounting Standard. General accounting standard should be incorporated in order to eliminate any possible doubts that are likely to arise between the accountant and the management or the company. There is no source that provides how transactions should be handled. Convectional rule has been adopted by many companies if not all. This principle provides that the Financial Accounting Standard Board is responsible for the accounting standard as well as principle (Devine 2004). General Accounting Principle (GAAP) is relevant since it provides an overview of what the company ought to do. It also states rules that can be incorporated by the company’s policy manual. Not all policy can be incorporated in the company accounting manual. However, the organization can continue with the creation of the statue while ensuring they act within the sated principle (General Accepted Accounting Principle). The General Accepted Accounting Principle provides how business transactions should be treated by different business entities. This rule provides consistency while reporting or in the preparation of financial statement at the year. This principle has been advanced into sub-principle, such as materiality principle and principle of consistency. It functions in a way that, while preparing the balance sheet for example, it must balance, that is, the debit and credit side must be similar. For instance the book keeper proposed that material wastage cost be accounted as; Bank 10,000 and the value for material wastage should also be 10,000. These value paves way for double entry. Meaning, the company can obtain either long term loan or short term from the bank for the 10,000 material wastage cost. GAAP considers a bank as an asset; therefore, the money borrowed will automatically become an asset to the organization. This money will help the organization to get back to its feet and continue its business operation just like any other business or company. On my part, I propose that the sale of the statue be incorporated in June 20X2 so as to enable the organization to make use of both raw material as well as the marble scrap that will be sold. By doing so, the company’s raw material would have been accounted for fully, thereby eliminating any unnecessary costs as well as wastages. Thus increase the company’s profit or revenues for the year. Reference Devine, Carl Thomas. Accounting theory: essays Routledge new works in accounting history. Chicago: Routledge, 2004. Wolk, Harry I., James L. Dodd, and John J. Rozycki. Accounting theory: conceptual issues in a political and economic environment. Australian: Sage Publications, 2007. Read More