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Financial Management - Essay Example

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Financial management Introduction Accounting is a systematic way of recording financial transaction, analysing them and then reporting them. It is a record where all business transactions/ activities are recorded. In accounting, the information regarding a certain business organization is recorded and can be presented to other parties who could need it…
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Download file to see previous pages They should who the business is currently progressing and how it is likely to perform in the future. Accounting has its objectives which it is supposed to fulfil. In order to fulfil these objectives, there are concepts and conventions that have to be followed and adhered to. This essay describes ten accounting concepts citing practical examples for each concept. The essay will distinguish between the concepts which are contained in IAS1 from those that are not contained in the IAS1. IAS1 accounting concepts Consistency The first concept of accounting is the consistency. The accounting records should be consistent. The financial statements of one financial year should be consistent with the financial statement of another financial year (Stickney, 2010). They should be easily comparable. There are instances where the methods used in the preparation of financial statement of a certain year are changed in the next financial year hence it becomes difficult to compare the two. This should only be done when the reason is very genuine and satisfactory. Otherwise, the methods should always be similar. A good real life example of the consistency concept is that of a company that uses straight line method in computing depreciation of assets. In all the subsequent years, straight line basis should be used in the computation. This will enable the comparison of depreciation in various financial years. Going Concern Under this concept, it is assumed that an entity should continue to operate for an indefinite period. Recording of assets in the financial statement should be on the basis of original costs rather than the market value (Stickney, 2010). In addition, the concept assumes that the assets will be useful in the business for an indefinite period of time. The idea is that there is no intention to sell the assets in the foreseeable future. In preparing the financial statement, the management is supposed to keep in mind that the business will be in operation for a long period of time and in case there are any plans that there are some assets which will be liquidated in the near future, disclosures should be made on the statements. A real life example of a going concern is where a business is being sold to another person. The business will be sold with all its operations, liabilities and assets as they were under the ownership of the previous owner. Nothing should be changed since under the going concern concept, the business is expected to continue as it is indefinitely. Accrual basis It is the requirement under IAS1 that the financial statements of a business entity should be prepared on the accounting accrual basis (Stickney, 2010). Only the cash flow is exempt from this requirement. This means that revenue is supposed to be recorded in the time it was earned. It does not matter when the money or the earnings will actually be received. In the case of expenses, they should be recognized in the year they were incurred and the time they have actually been paid does not matter. For instance, if the business issues goods on credit in a certain financial year, this transaction should be recorded in the financial statement of that year even if the money is to be received in subsequent year(s). Materiality In a business, there are transactions which have the ability to affect the decision making of the management (Stickney, 2010). Such transactions ...Download file to see next pagesRead More
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