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Accounting is crucial for business to keep track on expenses incurred on operational activities. Present report deals with importance of accounting in preparation of financial statements in the best possible manner. Journal entries are recorded and then ledger accounts are prepared. Moreover, trial balance is extracted by which financials such as income statement and balance sheet is produced in effective way. Moreover, cash books and BRS is produced with much ease. Furthermore, sales and purchase ledger control accounts are generated. Thus, accounting is quite helpful to business.
To: Line Manager
From: Junior Accountant
Subject: Accounting regulations and terms important for company
Accounting has immense importance in the business which helps in preparation of final accounts in the best possible manner. It is useful because firm can easily attain financial position whether it is producing profits or not. For overcoming this problem, financial statements are prepared so that business may be able to analyse its health in effective manner. The financials such as balance sheet, income statement and cash flow statement are quite important to be prepared as it help to ascertain financial position of the firm with much ease. In relation to this, such final accounts cannot be prepared without referencing and implementing accounting principles, concepts, terms and regulations which forms the base for preparation of financials of business. It guides accountant to easily prepare accounts by using such principles and as such, fair and correct position of organisation can be extracted helpful for stakeholders to effectively rely on final accounts in the best possible way. Moreover, it is beneficial for company as forecasting can be done with help of financials (Richardson, 2017).
Meaning of financial accounting
This accounting is done in order to prepare final accounts of the firm in effective manner. It is termed as historical accounting as previous data is analysed and as such, business transactions are recorded and then, financials are prepared exhibiting true view of performance of the business with much ease. This type of accounting is helpful as various day-to-day transactions occurred in organisation are recorded and financials are prepared helping stakeholders to take better and enhanced decisions. Stakeholders such as investors and creditors are one of the main external users of accounting information as they provide necessary funds to the business. Investors rely on financials so that they may analyse whether net earnings are adequate or not and dividends will be paid in good quantum or not. This means that financials help them to assess whether funds should be provided to company or not. On the other hand, creditors also rely on financials as solvency and liquidity position is analysed by them and as such, they take better decision that funds in effective manner. Thus, by relying on the financial statement, internal and external stakeholders are able to make better decisions with much ease.
Regulations of financial accounting
The regulations help in preparation of final accounts in that way which exhibits true position of company in effective manner. Regulations help to easily assess fairness of financials and as such, no manipulation may be done which affects stakeholders' decisions as inaccurate, false information is imparted impacting on decision-making. In order to overcome such manipulation, accounting regulations are provided by accounting bodies guiding accountants to prepare financials as per the guidelines enacted by bodies. FRC guidelines are imparted by corporate governance regulator of the nation which regulates accounting for organisations and government units as well (Maynard, 2017). The frameworks are described below-
IASB: It is abbreviated as IASB (International Accounting Standards Board) guides accountants so that accounts can be prepared without any manipulations in the best possible manner. Moreover, principles enacted by IASB are universally acceptable by investors as financials exhibits true and fair view as per the regulations made by board.
IFRS: This is a professional accounting body which help to guide accountant to easily prepare financials without intercepting any errors. It stands for International Financial Reporting Standards.
FRC: It is abbreviated as Financial Reporting Council which aims to foster development in the country in effective manner. Moreover, it also regulates firms and government departments. Accounting rules and principles: Accounting is evaluating and to interpretation of book keeping records. It is also prepares the financial information of the company which involves the measurement of transactions. The main objective of accounting is to maintain the books of accounts and to prepare the annual accounts. There are ten main accounting principles, these are:
Economic entity assumption: In this principle of accounting, it will make difference between business and owner. All books of accounts records the day to day transaction of the business (Accounting Concepts, Principles and Basic Terms, 2017).
Cost principle: cost refers to the amount spent when a product originally obtained. According to this concept an asset is ordinarily entered in accounting records at the price paid for the assets. And this transaction should record in an accounting statements.
Monetary unit assumption: In this principle it is assumed that the currency of purchasing power is not change over the time. So its results is company ignore the effect of inflation on recorded amounts.
Time period assumptions: In this concept report the complex and ongoing activities of a business in relatively short, difference between time such as five moths.
Full disclosure principle : In this record those transactions which is disclosed in the statements this financial statements' information provide to the investors.
Going concern concepts: This principle allows the company to defer some its prepaid expenses until accounting periods.
Matching principle: In this principle include those records that those expense be matched with the revenues (Sela, Ashkenazy, Katoh and Pupko, 2015).
Revenue recognition principles: this is the concept of accounting records transactions which is recognised as soon as the products has been sold and then the actual amount received.
Materiality: In these transactions should be materialistic, the transaction may be proven in this concept.
Conservation: In these accountants to anticipate or disclose losses, and not allows a similar action of gains.
The conventions and concepts relating to consistency and material disclosure:
The convention of consistency requires that once an organization decide that this policy has been used for some time and it should continue to follow year by year. Accounting process should unchanged from one period to another. In this principle if any changes required in techniques which may affect the business so it should be changed. Inconsistency in the application of accounting methods it may affect the reported data. Materiality concepts refers that it not need to a strict theoretically correct treatment, in this includes all significant things should be recorded and the things or transactions which is insignificant in nature are avoided by the company. Because if the cost which is insignificant in nature of recording and showing in statement such events may not be justified and the investor doesn't take the right decision. So its help to improve the quality of the financial statements, and the investors or outsider easily take the decision regarding investments (Brausch, 2017). It is necessary to disclose all material information to make the statements clear and understandable.
Business records each and every transactions so that it may keep track on the operational activities in effective manner. In relation to this, journal entries are recorded when business transaction occurs. These entries are made in chronological order so that proper base can be formed for preparation of final accounts quite effectually. Summarized set of transactions are prepared with the help of recording journal entries in book of accounts. The entries are prepared for Alexandra which is listed below-
Business inculcates expenditures for earning desired income in the best possible manner. In relation to this, income statement is prepared by firm so that it may keep track of expenses and as such, try to initiate control so that it may not exceed revenue (Rodrigues and Rodrigues, 2018). This implies that Profit and Loss account shows expenditures and income earned at a particular period in effective way. By analysing such statement, business may be able to reduce unnecessary expenses by which revenue may be injected in a better way. Thus, with the help of preparation of income statement, stakeholders are also benefited to take enhanced decisions.
Balance sheet is another useful financial statement which provides clarity regarding assets and liabilities held by the company at a specified time frame. This statement is prepared generally at the end of period. This help business to assess whether it has adequate assets to fulfil liabilities or not (Christensen, Lee, Walker and Zeng, 2015). This is required so that firm may be able to know current position of assets and liabilities with much ease. It means that exact position is exhibited with the help of financials. Balance sheet is produced for the trader below-
It is quite effective of analysing revenue earned and expenditures incurred in the business. Moreover, by extracting income statement, business can easily initiate control on expenses and as such, earnings can be produced more by reducing expenses in the best possible manner. This statement classifies various expenditure and as a result, firm can eradicate those which are affecting profits. Thus, income statements is prepared for the company below-
Balance sheet also known as statement of financial position help to ascertain quantum of assets are adequate in relation to the liabilities (Qvortrup, 2015). In simple words, business easily attains whether assets help at a particular point of time are enough for meeting obligations such as liabilities. Thus, it is also called as position statement as it provides assets and liabilities position of the company in the best possible manner. The balance sheet for the firm is produced below-
Accounting concepts “consistency” & “Prudency”:
The consistency concept of accounting refers that company should follow the same policy and method one year to another. For using of this concept the company get accurate result year by year. For example, if a company charged a depreciation on a company fixed assets according to straight line method, this method should be followed one year to next year and so on. And then stock value of the cost or market price whichever is less. So this principle is in each year. For getting a good result for the business. The concept of consistency is necessary for the purpose of comparison. The investors of the company who want invest in the organisation or a company so the company should provide the relevant data to the investors which is appropriate and accurate.
Prudency concepts records the expenses and liabilities as soon as possible but it requires that accountant to record revenue when it is actually done. In this concept the company earn profit than the actual revenue is recorded in financial statements. This concept is accept worldwide, so statements is prepared on this principle. It also makes the comparability of financial information and it helps in the true and fair presentation of the records. Prudency concept company should not recognise an asset at a value that is the higher than the amount which is expected to be recovered from its sale or use (Kim and Zhang, 2016).
Depreciation refers to the reduction of cost on a fixed asset from one year to another year. It allows a portion of the cost of a fixed asset to the revenue. The main purpose of calculating the depreciation are: The time period over which the organisation consider the fixed assets to be productive. Useful life of the assets the company may consider sell the assets at a reduced amount so this value is known as the salvage value. The cost of the assets includes taxes, shipping and their expenses.
Types of depreciation
Straight line method : It involves rate of depreciation is on fixed assets is same and use the assets cost same one year to another (Francis, Hasan, Park and Wu, 2015). For example; if a company purchase a machine for AUD 100000 and the useful life of machine is 10 year and interest year is 10%
So the depreciation is (100000*10/100)=10000
Written down value method :Written down value method is very appropriate for calculating depreciation. In this method depreciation is charged on reducing balance of an assets and a fixed rate. From using of this method we get the residual amount of an asset one period to another at the time of sold the assets we get the scrap value of these assets. Example a company purchase furniture of AUD 100000 and useful life is 4 year and rate is 10 % so the depreciation is :
1st year =100000*10/100=10000
2nd year =90000*10/100=9000 and so on
The financials are effective for company as true and fair view of position of business is imparted.
The assets were 137000 and liabilities were 137000 while stockholders equity was 102000. Thus, accuracy is extracted as both balances are equal.
Bank Reconciliation Statement (BRS) is produced as transaction entered by the business are not recorded by the bank. This means that accounting book of firm in which transactions are entered do not match with bank passbook. Thus, there are discrepancies in records of business and that of bank records. In order to rectify the same, BRS is produced by which balances can be matched in organisation's records and bank passbook shows correct balance. Thus, trial balance is prepared for rectifying discrepancies in effective way (Loughran and McDonald, 2016).
There are various causes which imparts difference in bank records with that of bank. In relation to this, first cause is cheques that are outstanding. This implies that when cheques are not cleared by the bank, difference occurs as organisation records the same in accounting books but cheques remain outstanding. Other causes are dishonour of cheques, interest charged etc by which balances differs in records of bank and firm.
Cash book is effective way to analyse expenses and income generated by the way of cash. In simple words, it is a book which records receipts and payments of money. This means that it is a type of journal in which cash deposits and withdrawals are effectively recorded in the best possible manner. Moreover, on debit side, receipts are recorded while on credit side, payments are recorded. The cash book is made below for the firm-
Hereby it can be concluded that with the help of accounting, financial statements are prepared in the best possible way. Moreover, transparency, accuracy can be achieved by accountant by following guidelines provided by the professional bodies quite effectually. Moreover, effective results can be obtained by complying with accounting regulations, principles and concepts. Thus, accounting has immense importance to business.
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