Financial accounting is a branch of accounting that focuses on the recording, summarizing, and reporting of a company’s financial transactions and performance to external stakeholders. It provides a systematic way of organizing and communicating financial information in the form of financial statements. Which are essential for decision-making by investors, creditors, regulators, and other interested parties.
Key features and concepts of financial accounting include:
Financial Statements: It results in the preparation of three primary financial statements. The balance sheet (statement of financial position), the income statement (statement of comprehensive income), and the cash flow statement. These statements provide a snapshot of a company’s financial health and performance over a specific period.
Generally Accepted Accounting Principles (GAAP): It follows a set of standard accounting principles and guidelines established by accounting standard-setting bodies. In the United States, GAAP maintains by the Financial Accounting Standards Board (FASB).
Accrual Accounting: Most businesses use accrual accounting, where transactions are recorded when they occur, regardless of when cash stands exchanged. This method provides a more accurate representation of a company’s financial position and performance.
Double-Entry Bookkeeping: It relies on the double-entry bookkeeping system. Where every transaction affects at least two accounts, with equal debits and credits.
Assets, Liabilities, and Equity: It categorizes a company’s resources and obligations into assets (e.g., cash, inventory), liabilities (e.g., loans, accounts payable), and shareholders’ equity (e.g., retained earnings, common stock).
Revenue Recognition: Principles for recognizing revenue are crucial in financial accounting. Revenue stands typically recognized when it earns, and the performance obligation is satisfied, not necessarily when cash receives.
Matching Principle: The matching principle states that expenses should recognize in the same period as the related revenues they helped generate. This principle ensures that financial statements accurately reflect the company’s profitability.
Consistency and Comparability: It aims to present financial information consistently over time to allow for meaningful comparisons across different periods and between companies.
Investors, creditors, analysts, and other stakeholders must make informed decisions about a company’s financial health, profitability, and stability. It plays a vital role in providing transparency and accountability in business operations and fosters trust between companies and their external stakeholders.
You can Fix Sage Error Code 1406 with Tips and Instructions Step by Step; “Sage 50” is efficient accounting software that has been in particular designed to make enterprises handy for small businesses and sole investors. This software program has made the technique of accounting extra green and powerful. With the help of this software, the customers can remedy all of the complex issues which they encounter whilst doing the technique of accounting.
This software now not most effective aids in coping with your debts but additionally aids in forecasting all your income and loss, sales, and the future of the enterprise. While running on accounting software, there are possibilities that the users might stumble upon a few malfunctioning. One common trouble which the users would come upon is the Sage 50 blunders or errors code 1406. When the users face this mistake code, there is not anything which they would need to stress approximately. This problem can be without difficulty solve by way of following the instructions supplied on this blog. The customers also get the choice of connecting with the Sage Tech Support Number.
Steps to restore or fix Sage Error code 1406;
The users can without difficulty comply with the underneath-given steps to resolve Sage Error 1406. The steps which the users would adopt are as given beneath:
Solution step 1:
The person would need to pick the Start Key and then within the seek container, kind command.
The customers can press Ctrl+Shift on the keyboard and then press the Enter button.
Now you will be able to see the permission conversation field on the display.
Further, kind “Regedit” and then press the Enter button.
You might now create a backup report which might ensure that your vital records save after which make sure that this folder save in your chosen location.
Further, choose the export alternative from the file menu.
Then click on the shop option and then reboot the device to see whether the error seems again or now not.
Solution step 2:
The customers must access the command option.
Then hold Ctrl+Shift collectively after which click on the Enter button.
You might then must type ‘cleansing and press the quest button.
Once you’ve got performed the stated steps, reboot the system and test if the problem pertains.
Solution step 3:
Access the gadget restore alternative and then press the Enter button.
Then you’ll need to pick the device repair from the result which you would get.
Further, you may input the password at the side of the username.
Then sincerely reboot your gadget and check whether the error solve or now not.
Solution step 4:
The customers then need to click on the Start Button.
Then in the search box, the customers could have to kind ‘replace’ and then press the Enter button.
Now you would see a Windows replace container that might open.
Further click on the Install Updates key.
Once you execute rebooting, then click again to analyze whether the error nonetheless exists.
If the users are not able to resolve the difficulty of the usage of the solutions given above, then you definitely would have the option of connecting with the Sage helpline range. This carrier is available for users on a 24-hour foundation and is completely freed from fees.
How to Fix Sage Error Code 1406? Tips and Instructions
Personal Loan: A good interest rate can be said to be one that is lower than your national average. A lot of factors go into play to decide the best interest rate offers for you. In general, the rates can vary from 9% to 36%. However, interest is not the only factor that you should be concerned about when looking for a personal loan. There’s more that you have to see and understand! Let’s take a look!
What Influences Personal Loan Interest Rates?
Personal loans are known as unsecured loans as there’s no collateral to back them up. This is one of the reasons why the interest rates may go high for a personal loan. At times, in the personal loan, you may also come across the term, “annual percentage rate”, which stands for the extra loan costs other than the principal balance. This number reflects the amount that you are going to submit with your interest.
The personal loan interest rates highly depend upon the credit score. The higher the credit score is, the lesser will be the interest rates. If you have a record of on-time payments, then your credit score will go high, ultimately lowering down the interest rate. In short, the higher the interest rate, the lesser will be the interest rate of your personal loan. Also, don’t forget about the debt-to-income ratio. In this case, the lower the DTI is, the lower would be the interest rate.
In case, you aren’t able to grab the lower interest rates, then you may apply with a potential co-applicant. The lender will go through the co-applicants repayment ability, annual income, DTI, etc. to determine the interest rate. Don’t forget that your co-applicant would be equally responsible for the repayment of the loan, in case you aren’t able to meet the deadlines.
How Personal Loans May Affect The Credit Score?
It’s important to look around for the lowest interest rate; however, the submission of applications to various lenders may bring a slight hit on your credit score. The best way to exclude multiple hard inquiries is through performing a comparison shop, within a short while, as that will lower down the impact. If within a matter of a few weeks only, the various hard inquiries occur, then some credit score models may count them as single events only.
If you are lucky, then you may get pre-approval; and, that may lead to very few inquiries, or in short, the process ends up becoming a lot easier. If you make a habit of making on-time payments for your personal loans then it can even improve the whole credit score. Though, if you fail to meet the deadlines, then the sweet credit score is definitely going to see a drop.
Factors to Look For When Considering Offers:
They below are;
Fees:
Get to know about any and every kind of feed that’s out there. Find out how many fees the lender is going to charge in the name of prepayment penalties, late fees, origination fees for clearing the loan early.
Loan Term:
It’s basically how much duration or payment installments is going to take to clear off the loan amount. It’s simple, the shorter the period or installments are, the cheaper the APR will be.
Monthly Payment:
What’s your monthly salary? Will you be able to afford the monthly payments, and even meet the other debts, and necessary expenses?
Discounts Available:
If you take a loan from a financial institution where you already have an account, then you may expect the rate to go down.
Conclusion:
It’s essential to know the personal loan interest rates before applying for a loan, and that’s why we recommend you to spend enough time among the lenders so that you can perform a good comparative analysis. More than knowing the interest rates that fit their credit profile, one must first ascertain whether or not they will be able to catch up with the monthly payments of the personal loan. Lastly, we just want to say that play with a personal loan in such a manner, so that there’s enough room for other financial needs that you may have to take in the future.
The different types of Financial Accounting; Financial accounting classifies under the head of accounting functions that specifically maintain the financial transactions of companies; Accounting essay; Financial accounting explains the different types with their objectives or intentions or motives. The guidelines under accounting use to summarize and classify all transactions; It also involves preparing the financial statements of a company which gives an overview of the economic stability of a company to its investors.
This article can explain the Financial accounting different types with their objectives or intentions or motives.
This pertains to the recording of all business transactions in the books of prime entry, posting them into respective ledger accounts, balancing them, and preparing a trial balance, from and out of which a profit and loss account showing the results of the business and also a balance sheet depicting assets and liabilities of the business concern is prepared. This in turn forms the basis for analysis and interpretation for furnishing meaningful data to the management.
The Accounting essays in types of accounting are part, both methods rely on the same conceptual framework of double-entry accounting for recording and reporting analysis data at the end of a certain period; Two types or methods of financial accounting are cash and accrual or remedial account; Although they differ, both methods rely on the same conceptual framework as double-entry accounting for recording, analyzing, and reporting at the end of a given period of time; Such as a month, quarter or financial year.
The information generated by accounting is used by various interested groups such as individuals, managers, investors, creditors, government, regulatory agencies, taxation authorities, employees, trade unions, consumers, and the general public. Depending on the purpose and method, accounting can be broad of three types; 1] financial accounting, 2] cost accounting, and 3] management accounting. Financial accounting is mainly concerned with the preparation of financial statements. It is used on some well-defined concepts and conventions and helps formulate comprehensive financial policies.
Cash Account:
If you are the owner of a business, by adopting cash accounting you can only focus on corporate transactions involving cash. Other economic events with no monetary input do not matter because they do not make it to the financial statements. The business prefers to go for the cash accounting method only to focus on cash transactions that involve cash. Any other transaction that does not include any monetary value does not go into the financial statements.
Under this method, all-cash credit cash entries are based on the number of related loans and transactions carried out. Under the cash accounting method, a corporate bookkeeper always debits or credits the cash account in each journal entry on a transaction basis. For example, to record customer remittances, the bookkeeper debits the cash account and credits the sales revenue account. Do not mistake cash debit accounting for banking debit. The former means an increase in the company’s money, while the latter reduces the money in the customer’s account.
Accrual Account:
The records of the company maintain the transaction under all modes irrespective of any monetary value. It also involves making entries about cash which is beyond other transactions that do not include monetary transactions. The method acquired in financial accounting is depositing an item and recording it legally when a cash transaction occurs. Under the contingency method of accounting, a company records all transaction data regardless of monetary inflows or outflows.
In other words, this accounting type incorporates the cash accounting method but takes into account all transactions that carry out the operating activities of the corporation. In a financial dictionary, “earned” means an item to store and record as legally binding, even if there is no cash payment.
The phrases “accounts payable” and “accounts receivable” perfectly illustrate the concept of pronunciation. The accounting, also known as the payable seller, represents the amount of money that the seller of a business paid at a given point in time. The entity accrues the debtors until it settles the underlying debts. The same analysis applies to customers. Receivables are another name for accounts receivable that represent the money customers pay to a business.
What are the different types of Financial Accounting? Image from Pixabay.
Objectives or intentions or motives of financial accounting:
What are the intentions or motives of financial accounting? Knowing the goals of financial accounting can have the effect of being an accountant and truly understanding what your business is doing. Accounting Objectives; Accounting norms can appear to be unfamiliar and discretionary; however, by learning the calculated structure you will have a reasonable foundation to comprehend the hypothesis of accounting rules without falling back on repetition retention. The goal of financial accounting is to give data to the end-client; however, the calculated system, or Statements of Financial Accounting Concepts (SFAC), mentions to us what characteristics that data must-have.
Significance:
For data to be valuable to end-clients, it must be important. That implies that it must assistance a financial assertion peruser to settle on choices about the financial prosperity of the organization. For financial specialists, this verifiable think back serves to help settle on venture choices. To be important, data should likewise be current. Organizations report financial outcomes on a quarterly or yearly premise to fulfill this target. End-clients need the latest data conceivable to settle on the best choices.
Unwavering quality:
Accounting data must be solid. If an organization doesn’t create dependable financial proclamations, at that point speculators can’t pick up the data they have to decide. Dependable data can check, is liberated from predisposition, and isn’t deceiving. To assist organizations with meeting this goal, public bookkeepers will freely confirm accounting medicines and exchanges and issue conclusions dependent on these reviews. This makes end-clients more all right with their dependence on financial data.
It is both Reliability and Relevance; A significant target is to get ready for such financial proclamations that are dependable, and choices can found on it. For this reason, such Accounting should speak to a dependable portrayal of exchanges and occasions embraced by the business, ought to speak to in their genuine substance and monetary reality point of view.
Straightforward:
Among all the goals examined above, it is the essential target that Financial Accounts are set up so that they are effectively justifiable by proposed clients. Nonetheless, while meeting this goal as a primary concern; it must be similarly fundamental to guarantee that no material data discard because it will be mind-boggling and unwieldy to comprehend for different clients. To put it plainly, endeavors must make to plan Financial Accounts simply to know at every possible opportunity.
Similarity:
An auxiliary nature of financial data is that it must be equivalent. This is the reason we have a setup arrangement for recording and detailing accounting data. Financial specialists regularly are given decisions on where and when to contribute. By having tantamount information, these speculators can make relative decisions about their venture openings. Nonetheless, similarity, being an auxiliary quality, must take on a supporting role to pertinence and dependability.
Consistency:
Consistency is another auxiliary nature of financial data. Since end clients are frequently given financial data that traverses different timeframes; these clients should have the option to look at data across financial periods. As guidelines change, and as organizations change, it won’t generally be conceivable to have totally steady data. Be that as it may, when accounting data isn’t steady, norms require the revelation of the irregularity. This is a case of the essential nature of dependability taking a front seat to the optional nature of consistency.
Meeting the Objective of Various Stakeholders:
Another fundamental target is addressing the requirements of different partners, which are related to the business. Various partners have various purposes, for example; loan specialists to the business mean to evaluate the ability of the business to pay interest and head; which loan to the business or planned moneylenders; so they are more intrigued by the dissolvability of the business and spotlight on that perspective. Additionally, clients are keen on knowing the development and steadiness of the business and spotlight more on income explanations; and, financial articulations to decide the capacity of the business to give better business terms and a reliable gracefully of products and enterprises.
A fixed budget can be usefully employed when budgeted output is close enough to the actual output. A budget can define as a management tool that puts the managers in control of the financial health of the organization. How the manager manages the budget is key to their value. Budget facilities the planning and resource allocation and help to estimate, itemized, analysis, and examined the entire product and service that the organization offers to the customer. It is also important to note that budget levels should be determined based on what is likely to happen in the future rather than based on what has happened in the past. So, what is the question we discuss; What is a Fixed Budget in Financial Management? with Meaning and Definition.
Here are explain the Concept of Financial Management topic of Fixed Budget with Meaning and Definition.
The Chartered Institute of Management Accountants (UK), defines a fixed budget as the budget which design to remain unchanged irrespective of the level of activity actually attained. It is based on a single level of activity. A fixed budget performance report compares data from actual operations with the single level of activity reflected in the budget. It is based on the assumption that the company will work at some specified level of activity and that a stated production will be achieved. It suggests that the budget not adjusts when the production level changes.
Introduction:
The objective of the budget is to measure the financial structure of the organization and budget is a tool that forces management to be accountable in a structured and objective way. However, in practice, fixed budgeting is rarely used. The main reason is that actual output is often significantly different from the budgeted output. In such a case the budget cannot use for cost control. The performance report may be misleading and will not contain very useful information. For example, if actual production is 12,000 units in place of the budgeted 10,000 units, the costs incurred cannot compare with the budget which relates to different levels of activity.
Since, in fixed budgeting, units overlook, a cost to cost comparison without considering the units may give misleading results. The performance report prepared under fixed budgeting merely discloses whether actual costs were higher or lower than budgeted costs. The fact that costs and expenses are affected by fluctuations in volume limits the use of the fixed budget. If budgeted costs compare with the actual costs at the end of the year, it will be difficult to infer how successful a business firm has been in keeping expenses within the allowed limits.
Definition of Fixed Budget:
A fixed budget, also called a static budget, is a financial plan based on the assumption of selling specific amounts of goods during a period. In other words, fixed budgets are based on a set volume of sales or revenues. This is an easy way for management to plan out expenses; and, operations when they assume that sales volume and total revenues will be a set amount during a period.
“The Fixed budget are those that are drafted to remain the same regardless of the activity levels it actually attained.”
Budgeting is a simple process of consolidating budget and adhere to them as closely as possible. It is a process that turns manager attitudes forward-looking to the future and planning; managers can anticipate and react accordingly to the potential problem before it arises. The budgeting process allows the manager to focus on the opportunities instead of figuratively. Budgeting aims to give management an idea of how well the organization is projecting the income goals and how well the organization managing the working capital.
The budgeting exercise should able to increase the profit reduce inappropriate expenses; and, it also helps to expand the markets. To achieve the budgeting aim, the management needs to build a budgeting system. A budget system varies from organization to organization and it is not a unitary concept. The fundamental concept of the budget system involves estimating the future performance of the organization, comparing the actual performance to the budget; and, analyzing the deviation of the actual result against the budget. The factors that determine the type or style of an organization depend on the type of organization; the leadership style, the method of preparation, and the desired result.
What is a Fixed Budget in Financial Management? Image credit from ilearnlot.com.
What is a Fixed Asset? A fixed asset is a long-term part of a property that a company possesses and utilizes in the generation of its revenue and is not anticipated that would be devoured or consumed into cash in coming next one year. They are typically bought to generate income. They are also known as Capital Assets and Property, Plant and Equipment. These assets are normally not meant to sell or are not easily convertible into cash and therefore are categorized under non-current assets in the balance sheet. The assets accounts will then be overstated and depreciation programs for such missing unite of equipment will presumably continue. So, what discusses is: Understand Fixed Assets Accounting in Financial Management.
The Concept of Financial Management is to explain Fixed Assets Accounting for the Business.
Consequently, net income will be misstated because of the omission of losses on retirement of plant assets and because of erroneous depreciation charges. Unless internal controls over plant and equipment are carefully designed many units of equipment are likely to be broken, discarded or stolen without any entry being made in the accounting records for their disposal.
One important control device which guards against failure to record the retirement of assets is the use of controlling accounts and subsidiary ledgers for plant and equipment. The general ledger ordinarily contains a serpent assets account and related depreciation accounts for each major classification of plant assets, such as land, buildings, office equipment and deal very equipment.
For example,
The general ledger will contain the account office equipment and also the related accounts depreciation expense: office equipment and accumulated deportation: office equipment, the general ledger account, office equipment, contains entries for a variety of items: typewriters, filing cabinets, dictaphones, desks, etc..
It is not possible in this one general account to maintain adequate information concerning the cost of each item, its estimated useful life, book value, insured value, and another date which may be needed by management as a basis for decisions on such issues a replacement, insurance, and taxation.
A subsidiary ledger should, therefore, be established for office equipment, and for each of the other general ledger accounts which represent many separate units of plant property. The subsidiary ledger in a manual accounting system may consist of a hard life, with a separate card of each unit of property, such as a typewriter or desk.
Each card shows the name of the asset, identification number, and such as details as the date of acquisition, cost, useful life, depreciation, accumulated depreciation, insurance coverage, repair, and gain or loss on disposal. Every acquisition of office equipment is entered in the controlling account and also on a card in the subsidiary ledger.
Similarly, every disposal of an item of office equipment is entered in both be controlling account and the subsidiary ledger. Each card in a subsidiary ledger for plant and equipment shows an identification number which should also appear in the form of the metal tag attached to the asset itself. Consequently, a physical inventory of plant and equipment can be taken and will prove whether all units of equipment shown by the records are actually on hand and being used in operations.
Fixed Assets entry on Accounting Book:
The following are examples of fixed asset accounting:
Land: Includes the purchased cost of land, and may also include the cost of land improvements.
Buildings: Includes all facilities owned by the entity.
Furniture and fixtures: Includes tables, chairs, filing cabinets, cubicle walls, and so forth.
Machinery: Typically refers to production machinery.
Vehicles: Can include company cars, trucks, and more specialized moving equipment, such as forklifts.
Computer equipment: Includes all types of computer equipment, such as servers, desktop computers, and laptops.
Computer software: Usually only includes the most expensive types of software; all others are charged to expense as incurred.
Construction in progress: This is an accumulation account in which are recorded the costs of construction. Once an asset is completed, the balance is moved to the relevant fixed asset account.
Intangible assets: Includes all nontangible assets, such as the costs of patents, radio licenses, and copyrights.
Leasehold improvements: Includes the costs incurred to renovate leased space.
Office equipment: Includes copiers and similar administrative equipment, but not computers.
Some Fixed Assets is explaining for better Understand:
The following assets are explained below are:
Land.
Buildings.
Vehicles, and.
Plant and Equipment.
Land:
Land used in the operation of a business should be recorded separately from land acquired as an investment or speculation. Procedures in accounting for the two types of land differ considerably.
Land held for business use appears on the balance sheet as a part of plant and equipment, and expenses associated with it are operating expense, whereas land acquired as an investment is classified with other investment assets, and applicable expense sometimes is capitalized, they are treated as non-operating or financial expenses.
Land acquired for use in the operation of a business should always be recorded separately from the building that may be located thereon. The principal reason for this is that the buildings are subject to depreciation, which must be treated as an operating cost, while it is not customary to take into consideration any depreciation on land in ascertaining the operating costs of a business.
In cases where an auditor finds land and building recorded in a single real estate account, he should recommend segregation of the land and buildings with a specific value on each. This will facilitate the computation of depreciation of building apart from the land.
Land is,
In a sense, the most permanent asset of a business, the auditor should ascertain that the land account is charged with (1) the original cost, (2) the expenses incident to the purchase, such as a cost of investigating the title, recording the deed, commissions paid, and any other expenses that represent an addition to the purchase price and (3) the cost of subsequent improvements that increase the value of the land, such as draining, grading, building approaches, assessments for sewers, and great improvements.
Not infrequently. Assessments for improvements charged off as current operating expenses. Such costs, however, should be charged to the land account. When land is sold. The land account should be credited with the cost price, while the difference between the cost and the selling price should be recorded separately as a loss or again. Under this procedure, the balance of the land account will always represent the original cost plus the cost of improvements of the land owned.
Buildings:
Buildings may be acquired through the purchase of real estate in which case separate values should be placed upon the buildings and land, the basis of the valuation being cost. In the preparation of annual should be valued at cost plus addition and improvements less the depreciation.
For balance sheet purposes, the buildings are generally listed at cost with the allowance for depreciation being deducted. The difference is extended as the book value of the buildings. Occasionally the question arises whether the accounts for buildings, as well as land and other types of plant and equipment should be marked up from the basis of cost to a higher current value determined by an appraisal.
In the audit of the buildings account the auditor should prepare working papers in which different buildings are segregated. These working papers should show the book values at the beginning of the period under audit the cost of additions or deductions during the period.
These beginning and ending balance should be checked with the amount of the building and ending balance on the balance sheet as both dates and should be in agreement with the account on the books.
If the subsidiary building ledger is maintained it should be compared with the controlling account in the general ledger to see that they agree all additions and deductions during the period should be carefully examined to be sure that they have been properly accounted for, due care being used to distinguish between capital and revenue expenditure.
Vehicles:
Every organization that has vehicles must have a vehicle politics. This will write down the policy on a range of cases such as:
Insurance.
Depreciation.
Repair and Maintenance.
Purchasing, disposal, and replacement.
Private usage of it by staff.
What needs to be done when an accident happens.
Driver training and qualifications, and.
Carrying the passengers.
The costs of replacement and repair must be good in the budget procedure. For every vehicle, there must be a record of journeys so that the operating costs per Km can be evaluated and private use closely monitored. Buying fuel for cash is risky, and it might be safer to establish an account with a reputable fuel company and pay every month by check instead.
Plant and Equipment:
Transactions that change the amount of investment in the plant and equipment of a business have a tendency to occur infrequently and to involve relatively large amount Current assets, on the other hand, are in the more or less fluid state, undergoing smaller changes constantly.
Although a company’s methods of internal accounting control generally apply to all transactions, whether they relate to current assets or to plant and equipment. the auditing procedures differ for the two groups.
In auditing current assets at the balance sheet date, the auditor is concerned with the balance on hand. changes that occurred during the year are not substantiated in detail except in audits designed as complete audits, With plant and equipment, the auditor is concerned with all changes that took place during the audit period regardless of the type of audit that is being performed ALL of any substantial amount that either increase or decrease the value of such assets must be examined.
Finally, Other advantages afforded by a plant and equipment ledger are the ready availability of information for the periodic computation of depreciation, and for entries to record the disposal of individual items of property. A better basis is also available for supporting the date in the tax return, for obtaining proper insurance coverage, and for supporting claims for losses sustained on the insured property.
In well-managed companies, it is standard practice to control expenditures for plant and equipment by preparing a budget of all planned acquisitions for at least a year in advance. A first essential to the preparation of such a budget is a detailed record showing the assets presently owned, their cost, age, and remaining useful life.
Understand Fixed Assets Accounting in Financial Management. Image credit from #Pixabay.
What is Revenue Expenditure? A revenue expenditure (REVEX) is a cost that is charged to expense as soon as the cost is incurred. By doing so, business is using the matching principle to link the expense incurred to revenues generated in the same reporting period. The amount incurred on maintaining the earning capacity of the business, The benefit of which is direct and would be in the same accounting year itself in which such expenditure has been incurred is termed as revenue expenditure. So, what is the discussion? Meaning, Definition, and Types of Revenue Expenditure.
The Concept of Revenue Expenditure of explanation in Meaning, Definition, and Types.
Any expenditure incurred in connection with the operation and administration of daily activities of the business is called revenue expenditure. REVEX is incurred for maintaining earning capacity and working efficiency of the fixed assets. Revenue expenditure is incurred for acquiring merchandise for resale either in its original or improved form. Its benefit expires within a year. The most important point to remember here is that the benefit of revenue expenditure would exhaust in one year.
Revenue expenditures are recurring in nature. REVEX should be matched with the revenue receipts of the business enterprise. The basic aim and object of incurring revenue expenditure are to run and maintain the earning capacity of the business enterprise. Note: REVEX is shown on the debit side of the trading and profit and loss accounts.
“It is an expenditure charged against operation; a term used to contrast with capital expenditure”.
Revenue expenditure is incurred in the current period or in one period of account. The benefit of the revenue expenditure is utilized in that period itself.
All the expenditures which are incurred in the day to day conduct and administration of a business and the effect of which is completely exhausted within the current accounting year are known as “revenue expenditures”.
These expenditures are recurring by nature i.e. which are incurred for meeting day to day requirements of a business and the effect of these expenditures is always short-lived i.e. the benefit thereof is enjoyed by the business within the current accounting year. These expenditures are also known as “expenses or expired costs.” e.g.
Purchase of goods, salaries paid, postages, rent, travel expenses, stationery purchased, wages paid on goods purchased etc. This expenditure is incurred on items or services which are useful to the business but are used up in less than one year and, therefore, only temporarily increase the profit-making capacity of the business.
Revenue expenditure also includes the expenditure incurred for the purchase of raw material and stores required for manufacturing saleable goods and the expenditure incurred to maintain the- fixed assets in proper working conditions i.e. repair of machinery, building, furniture etc.
The Purpose of Revenue expenditure:
Revenue expenditure is incurred for the following Purposes:
All establishment and other expenses incurred in the normal course of business. For instance, Administrative expenses of the business, expenses incurred in manufacturing and selling products.
Expenses incidental to the carrying of a business, the benefit of which is consumed within the accounting period. For instance, Rent, Wages, Salaries, Advertising, Taxes, Insurance etc.
Expenditure on goods purchased for resale. Example, the cost of goods purchased or the cost of raw materials etc.
For maintaining fixed assets in working order. For instance, repairs, renewals, and replacement of existing assets, depreciation etc.
These revenue expenditure items appear in Trading and Profit and Loss Account.
Items of Revenue Expenditure:
Expenditure on Rent, Wages, Carriage, Salaries, Postage, Insurance, Advertising etc.
Interest on loan borrowed for running the business.
Cost of goods bought for resale.
Cost of raw materials consumed in the course of manufacturing.
Expenses incurred for maintenance of various assets by way of repairs, renewals and replacement on building, plant, machinery, tools, fixtures, van, car etc. to keep them in good condition.
Depreciation of fixed assets.
Taxes and legal expenses.
Loss arising from the sale of fixed assets.
Maintenance of lights and fans.
All expenses incurred in the manufacturing and distribution of the products handled.
Wages paid for the sale of goods.
Loss of goods by fire or other reasons.
Discounts and allowances.
The Types of Revenue expenditure:
There are two types of revenue expenditure:
Maintaining a revenue-generating asset: This includes repair and maintenance expenses, because they are incurred to support current operations, and do not extend the life of an asset or improve it.
Generating revenue: This is all day-to-day expenses needed to operate a business, such as sales salaries, rent, office supplies, and utilities.
Other types of costs are not considered to be revenue expenditures, because they relate to the generation of future revenues. For example, the purchase of a fixed asset is categorized as an asset and charged to expense over multiple periods, to match the cost of the asset against multiple future periods of revenue generation.
Revenue expenditure includes the following types of expenditures:
Items of expense incurred for producing finished goods such as the purchase of raw material and other direct expenses etc.
Establishment cost such as rent, light, repairs etc.
Administrative costs such as salaries of the staff, telephone expenses etc.
Selling and distribution expenses such as advertisement expenses, commission etc.
Financial accounting Importance, Nature, and Limitations; It is a system that collects information, processes, and reports about changes in the performance, financial status, and financial status of an entity. A person’s ability to track the financial transactions of a person’s business, during which, he knows as financial accounting skills as a result of his operation. Do you study to learn: If Yes? Then read the lot. Let’s Study Financial Accounting Importance, Nature, and Limitations.
Every Company Current year or the end of the year want to know the financial status of the business. Financial Accounting Importance, Nature, and Limitations.
It is done by recording, summarizing, and presenting all such financial figures in the form of financial reports or statements using standardized guidelines. Such financial statements generally include balance sheets, income details, and cash flow details; which summarize a company’s performance over time. Financial accounting skills generally do not include the ability to report the value of a company but can provide enough information for the evaluation of others.
Definition of Financial Accounting:
Financial Accounting concerns with providing information to external users. It refers to the preparation of general-purpose reports for use by persons outside a business enterprise, such as shareholders (existing and potential), creditors, financial analysts, labor unions, government authorities, and the like. Financial accounting is oriented towards the preparation of financial statements which summarise the results of operations for selected periods of time and show the financial position of the business at particular dates.
Every entity, whether for-profit or not-for-profit; aims at creating maximum value for its stakeholders. The goal of maximum value addition best achieves; when there is a mechanism to monitor the management and the board of directors. Financial accounting helps in such monitoring by providing relevant, reliable, and timely information to the stakeholders.
Inputs to a financial accounting system include business transactions that are supported by source documents, such as invoices, board resolutions, management memos, etc. These inputs are processed using generally accepted accounting principles (GAAP). The processed information is reported through standardized financial statements.
Importance of Financial Accounting:
Financial accounting is integral to companies of all sizes because it helps in the following importance below are: They are three important points.
Communication of information externally.
Communicate information internally, and.
Comparison through analysis.
First Point:
This point explains Communication on information externally. The statements and reports generated by financial accounting use to communicate information about the overall health and well-being of the company to external parties. Such external users may include suppliers, banks, and leasing companies, etc. who are not part of the company but require all this information to analyze the progress of the company and compare it with their expectations.
Second Point:
This point explains Communicate on information internally. A company’s finance team or its employees who are interested in stock-based compensation etc. constitute the internal users of the information generated by financial accounting practices. The reports generated with the help of financial accounting skills are helpful for this purpose as well.
Last Point:
This point explains Comparison through analysis. Since financial accounting requires the use of standardized guidelines, the financial statements generated by all companies are comparable, providing a standard method of analysis.
Scope and Nature of Financial Accounting:
The following points are important to understand the scope and nature of financial accounting:
Contents:
The end product of the financial accounting process is the financial statements that communicate useful information to decision-makers. The financial statements reflect a combination of recorded facts, accounting conventions, and personal judgments of the preparers. There are three primary financial statements for a profit-making entity in India, viz., the Income Statement (statement of revenues, expenses, and profit), and the Balance Sheet (like the statement of assets, liabilities, and owner’s equity) and cash flow statement. The accounting information generated by financial accounting is quantitative, formal, structured, numerical, and past-oriented material.
Accounting System:
The accounting system includes the various techniques and procedures used by the accountant (preparer) in measuring, describing, and communicating financial data to users. Journals, ledgers, and other accounting techniques used in processing financial accounting information depend upon the concept of the double-entry system. This technique includes generally accepted accounting principles (GAAP). The standard of generally accepted accounting principles includes not only broad guidelines of general application but also detailed practices and procedures.
Measurement Unit:
Financial accounting primarily concerns with the measurement of economic resources and obligations and changes in them. Financial accounting measures in terms of monetary units of a society in which it operates. For example, the common denominator or yardstick used for accounting measurement is the rupee in India and the dollar in the U.S.A. The assumption is that the rupee or the dollar is a useful measuring unit.
Users of Financial Accounting Information:
Financial accounting information intends primarily to serve external users. Some users have a direct interest in the reported information. Examples of such users are owners, creditors, potential owners, suppliers, management, tax authorities, employees, customers. Some users need financial accounting information to help those who have a direct interest in a business enterprise.
Examples of such users are financial analysts and advisers, stock exchanges, financial press and reporting agencies, trade associations, labor unions. These user groups having direct/indirect interests have different objectives and diverse informational needs. The emphasis in financial accounting has been on general-purpose information which, obviously, is not intended to satisfy any specialized needs of individual users or specific user groups.
Users or Role in Financial Accounting:
The most basic motives or objectives of financial accounting is the preparation of general-purpose financial statements; which are financial statements meant for use by stakeholders external to the entity; who do not have any other means of getting such information, i.e. people other than the management. These stakeholders include:
Investors need the information to estimate the intrinsic value of the entity and to decide whether to buy, hold, or sell the entity’s shares. Equity research analysts use financial statements to conduct their research on earnings expectations and price targets.
Working as Employee groups:
Employees and their representative groups interest in information about the solvency and profitability of their employers to decide about their careers, assess their bargaining power and set a target wage for themselves.
Lead as Lenders:
Lender’s interest in the information enables them to determine whether their loans and the interest earned on them will pay when due.
Suppliers and other trade creditors:
Suppliers and other creditors interest in the information that enables them to determine whether amounts owing to them will pay when due and whether the demand from the company is going to increase, decrease, or stay constant.
One of the Customers:
Customers want to know whether their supplier is going to continue as an entity; especially when they have a long-term involvement with that supplier. For example, Apple interests in the long-term viability of Intel because Apple uses Intel processors in its computers and if Intel ceases operations at once; Apple will suffer difficulties in meeting its own demand and will lose revenue.
His also Governments and their agencies:
Governments and their agency’s interest in financial accounting information for a range of purposes. For example, the tax collecting authorities, such as IRS in the USA, interest in calculating the taxable income of the tax-paying entities and finding their tax payable. Antitrust authorities, such as the Federal Trade Commission, interest in finding out whether an entity engages in monopolization.
The governments themselves interest in the efficient allocation of resources; and, they need financial accounting information of different sectors and industries to decide on federal and state budget allocation, etc. The bureaus of statistics are interested in calculating national income, employment, and other measures.
Also Public:
The public interests in an entity’s contribution to the communities in which it operates; its corporate social responsibility updates; its environmental track record, etc.
Limitations of Financial Accounting:
Financial accounting is significant for management as it helps them to direct and control the firm activities. It also helps business management in determining appropriate managerial policies in different areas, such as production, sales, administration, and finance.
Financial accounting suffers from the following limitations which have been responsible for the emergence of cost and management accounting:
Financial accounting does not provide detailed cost information for different departments, processes, products, jobs in the production divisions. Management may need information about different products, sales territories; and, sales activities which are also not available in financial accounting.
Financial accounting does not set up a proper system of controlling materials and supplies. Undoubtedly, if material and supplies do not control in a manufacturing concern; they will lead to losses on account of misappropriation, misutilization, scrap, defectives, etc.
The recording and accounting for wages and labor are not done for different jobs, processes, products, departments. This creates problems in analyzing the costs associated with different activities.
It is difficult to know the behavior of costs in financial accounting as expenses not classify as direct; and, indirect and therefore cannot classify as controllable and uncontrollable. Cost management which is the most important objective of all business enterprises; cannot achieve with the aid of financial accounting alone.
Financial accounting does not possess an adequate system of standards to evaluate the performance of departments and employees working in departments. Standards need to develop for materials, labor, and overheads so that a firm can compare the work of workers, supervisors, and executives with what should have been done in an allotted period of time.
Other limitations:
Financial accounting contains historical cost information that accumulates at the end of the accounting period. The historical cost is not reliable for predicting future earnings, solvency, or overall managerial effectiveness. Historical cost information is relevant but not adequate for all purposes.
Financial accounting does not provide information to analyze the losses due to various factors; such as idle plant and equipment, seasonal fluctuations in the volume of business, etc. It does not help management in taking important decisions about the expansion of business, dropping of a product, alternative methods of production, improvement in product, etc.
Also, Financial accounting does not provide the necessary cost data to determine the price of the product being manufactured or the service being rendered to the consumers.
Despite the above limitations, financial accounting has utility and is an important and conceptually rich area. Because of growing business complexities and advances in knowledge of human behavior and decision processes; the scope and methods of financial accounting are changing. Financial accounting theory and practice will probably broaden and improve considerably in the future.
Financial Accounting Importance, Nature, and Limitations.
Meaning of Financial Accounting: Financial accounting is an area of accounting that focuses on providing useful information to external users. Accounting, in your heart, is actually a set of very simple concepts and principles. Once you understand the basics of accounting, you will be able to understand any business or accounting concept. Accounting in general deals, identifying business activities, like sales to customers, recording these activities, like journalism, and transmitting these activities with people outside the organization with financial activities. Do you study to learn: If Yes? Then read the lot. What is Financial Accounting? Meaning and Definition.
Explains – What is Financial Accounting? Meaning and Definition.
Financial accounting is a special branch of accounting that keeps track of the financial transactions of a company. Using the standardized guidelines, transactions have been recording in financial statements such as financial reports or income details or balance sheets, briefly presenting. Financial accounting, however, is a subdivision of the general area of accounting that focuses on gathering and compiling data to present external users in a usable form. So what does that mean? In fact, the main purpose of financial accounting is to provide usefully; financial information outside those people or organizations that often call external users.
Definition of Financial Accounting:
Financial Accounting is concerned with providing information to external users. It refers to the preparation of general-purpose reports for use by persons outside a business enterprise, such as shareholders (existing and potential), creditors, financial analysts, labor unions, government authorities, and the like. Financial accounting is oriented towards the preparation of financial statements; which summarise the results of operations for selecting periods of time and show the financial position of the business at particular dates.
As well as the definition of Accounting.
According to R.N Anthony:
“Nearly every business enterprise has the accounting system. It is a means of collecting, summarizing, analyzing and reporting in monetary terms, information’s about business.”
According to Smith and Ashburne:
“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character and interpreting the result thereof.”
The ability of an individual to keep track of the financial transactions of a business; resulting from its operation over a period of time, is knowing as his financial accounting skills. This is done by recording, summarizing, and presenting all such financial data in the form of financial reports or statements, using standardizes guidelines.
Such financial statements usually include the balance sheet, income statement, and cash flow statement; which summarize the performance of a company’s operations over a period of time. Financial accounting skills usually do not encompass the ability to report the value of a company; but, to be able to provide sufficient information for others to assess it themselves.
Users of accounting information – Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers (Elliot, Barry & Elliot, Jamie: Financial accounting and reporting). You are studying, Who are the Users of Accounting Information inside the Organization? In the Business have two types of person Internal and External. Users of accounting information – Internal users (Primary Users) – Owners, Management, and Employees. Also External users (Secondary Users) – Investors, Creditors, Members of Non-profit Organisations, Lenders, Suppliers, Government, General public, Customers, Regulatory Authorities, and Research Scholars. Accounting has been defined as – the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof. So, what is the question we discuss; Who are the Users of Accounting Information inside the Organization?
In the Business have two types of person Internal and External. Who are the Users of Accounting Information inside the Organization?
The Following are:
Who are the Main Users of Accounting?
Accounting information of a business enterprise is used by a number of parties. Different parties use accounting information for different purposes depending on their needs. Therefore, the accounting information system of a business enterprise must be designed in a way that should generate reports to satisfy the needs of everyone interested in accounting information. Accounting provides financial data so individuals can analyze the financial health and stability of a business. While there are many users of accounting information there are also many reasons why this information would be needed.
Some reasons can include measuring the financial performance of assets, liabilities, equity, income, expenses and cash flow all in order to have the information to make better financial decisions. Other reasons include making financial decisions for investment, credit and operational decisions. There are several types of users who will use financial statements for managerial accounting, but they generally fit into either internal or external users. Each group will use this information for different purposes.
Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.
Who are internal users of accounting?
Internal users of accounting information (sometimes known as internal users), typically work within the company. Internal users (Primary Users) of accounting information include the following:
#Owners
Owners invest capital to start and run business with the primary objective to earn the profit. They need accurate financial information to know what they have earned or lost during a particular period of time. On the basis of this information, they decide their future course of actions such as expansion or contraction of business. The owners provide funds for the operations of a business and they want to know whether their funds are being properly used or not. They need accounting information to know the profitability and the financial position of the concern in which they have invested their funds. The financial statements prepared from time to time from accounting records depict them the profitability and the financial position.
#Management
Management uses accounting information for evaluating and analyzing an organization’s financial performance and position, to take important decisions and appropriate actions to improve the business performance in terms of profitability, financial position, and cash flows. One of the major roles of management is to set rules and procedures to achieve organizational goals. For this purpose, management uses the information generated by financial as well as managerial accounting system of the organization. Management is the art of getting work done through others, the management should ensure that the subordinates are doing work properly.
Accounting information:
Accounting information is an aid in this respect because it helps a manager in appraising the performance of the subordinates. Actual performance of the employees can be compared with the budgeted performance they were expected to achieve and remedial action can be taken if the actual performance is not up to the mark. Thus, accounting information provides “the eyes and ears to management”. The most important functions of management are planning and controlling. Preparation of various budgets, such as sales budget, production budget, cash budget, capital expenditure budget, etc., is an important part of planning function and the starting point for the preparation of the budgets is the accounting information for the previous year.
How to Control?
Controlling is the function of seeing that programs laid down in various budgets are being actually achieved i.e. actual performance ascertained from accounting is compared with the budgeted performance, enabling the manager to exercise controlling case of weak performance. Accounting information is also helpful to the management in fixing reasonable selling prices. In a competitive economy, a price should be based on cost plus a reasonable rate of return. If a firm quotes a price which exceeds cost plus a reasonable rate of return. It probably will not get the order. On the other hand, if the firm quotes a price which is less than its cost, it will be given the order but will incur a loss on account of the price is lower than the cost. So, selling prices should always be fixed on the basis of accounting data to get a reasonable margin of profit on sales.
#Employees
Employees are interested in the financial position of a concern they serve particularly when payment of bonus depends upon the size of the profits earned. They seek accounting information to know that the bonus is paid to them is correct. Occasionally, employees will use accounting information to see how stable a company is for their job security. More often though, employees will be interested in a business’s financial information when it relates to their income as sometimes bonuses, commissions, profit sharing or other financial metrics are used as a financial incentive.
Employees who do not have a hand in the core management of the business are considered external users of accounting information. They are interested in financial information because their present and future are tied up with the success or failure of the business. The success and profitability of business ensure job security, better remuneration, job promotion, and retirement benefits.
Who are the external users of accounting?
External users of accounting information (sometimes called secondary users), External users (Secondary Users) of accounting information include the following:
#Investors
Incorporate the form of business, the owner is often separated from the management. Normally investors provide capital and management run the business. The accounting information is used by both actual and potential investors. Actual investors use this information to know how their funds are used by the management. And, what is the expected performance of the business in the future in terms of profitability and growth? On the basis of this information, they decide whether to increase or decrease investment in the corporation in the future.
Investors use accounting information;
Potential investors use accounting information to decide whether or not a particular corporation is suitable for their investment needs. Those who are interested in investing money in an organization are interested in knowing. The financial health of the organization to know how safe the investment already made is and how safe their proposed investment will be. To know the financial health, they need accounting information. Which will help them in evaluating the past performance and future prospects of the organization?
Thus, investors for their investment decisions are dependent upon accounting information included in the financial statements. They can know the profitability and the financial position of the organization in which they are interested to make. That investment by making a study of the accounting information given in the financial statements of the organization.
#Creditors
Use the financial information to make decisions whether credit will be extended or restraints on spending will be put in place to pay down debts owed to the creditor. Before extending credit, banks typically require businesses to present financial statements to judge creditworthiness. Creditors (i.e. supplier of goods and services on credit, bankers and other lenders of money) want to know the financial position of concern before giving loans or granting credit.
They want to be sure that the concern will not experience difficulty in making. Their payment in time i.e. the liquid position of the concern is satisfactory. To know the liquid position, they need accounting information relating to current assets, quick assets and current liabilities. Which is available in the financial statements.
#Members of Non-profit Organisations
Members of non-profit organizations such as schools, colleges, hospitals, clubs, charitable institutions, etc. Need accounting information to know how their contributed funds are being utilized and to ascertain. If the organization deserves continued support or support should be withdrawn from keeping in view the bad performance depicted by the accounting information and diverted to another organization. In knowing the performance of such organizations. The criterion will not be the profit made but the main criterion will be the service provided to society.
#Lenders
Lenders are individuals or financial institutions that normally lend money to businesses and earn interest income on it. They need accounting information to assess the financial performance and position and to have a reasonable assurance that the business to whom. They are going to lend money would be able to return the principal amount as well as pay interest thereon.
#Suppliers
Suppliers are business individuals or organizations that normally sell merchandise or raw materials to other businesses on credit. They use accounting information to have an idea about the future creditworthiness of the business and to decide whether or not to continue providing goods on credit.
#Government
Government agencies use the financial information of businesses for the purpose of imposing taxes and regulations. Central and State Governments are interested in the accounting information because they want to know earnings or sales for a particular period for purposes of taxation. Income tax returns are examples of financial reports which are prepared with information taken directly from accounting records. Governments also need accounting information for compiling statistics concerning business which, in turn, helps in compiling national accounts.
#General public
The general public also uses accounting information for business organizations. For example, accounting information is:
Education for students of accounting and finance.
Valuable data for those researching on organizational impacts on individuals and the economy as a whole.
Information for the people looking for job opportunities.
Information about the future of a particular enterprise.
#Customers
Accounting information provides important information to customers about the current position of a business organization and to make a judgment about its future. Customers can be divided into three groups – manufactures or producers at various stages of production, wholesalers and retailers and end users or final consumers. Consumers need accounting information for establishing good accounting control. So that cost of production may be reduced with the resultant reduction of the prices of the goods they buy. Sometimes, prices for some goods are fixed by the Government. So it needs accounting information to fix reasonable prices so that consumers and manufacturers are not exploited.
Prices are fixed keeping in view fair return to manufacturers on their investments shown in the accounting records. Manufacturers or producers at every stage of processing need assurance that the organization in question will continue providing inputs such as raw materials, parts, components, and support, etc. The wholesalers and retailers must be assured of the consistent supply of products. The end users or final consumers are interested in the continuous availability of products and related accessories. Because of these reasons, accounting information is of significant importance for all three types of customers.
#Regulatory Authorities
For ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders. Who rely on such information in forming their decisions.
#Research Scholars
Accounting information, being a mirror of the financial performance of a business organization is of immense value to the research scholars. Who wants to make a study to the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research the scholar needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities, and shareholders’ funds. Which is available in the accounting records maintained by the firm.
Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analyzed and reported. Explanation of Financial Statements: Objectives, Importance, and Limitations – Keep study and learn. This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should be disclosed, how it should be disclosed, and which financial statement should prepare.
Financial Statements explanation of each, Meaning of Financial Statements, Objectives of Financial Statements, Importance, and Limitations of Financial Statements.
Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can draw from these statements alone.
However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, common-size statements, trend analysis, schedule of changes in working capital, funds flow, cash flow analysis, and ratio analysis. Related learn Financial Accounting: Meaning, Nature, and Scope!
Meaning of Financial Statements:
Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which shows the financial position of a business concern in an organized manner. We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts. For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared.
The trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in the credit column. To find out the profit earned or loss sustained by the firm during a given period and its financial position at a given point in time is one of the purposes of accounting. For achieving this objective, financial statements are prepared by the business enterprise, which includes the income statement and positional statement.
A firm communicates to the users through financial statements and reports. The financial statements contain summarized information on the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should prepare very carefully and contain as much information as possible.
Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
Statement of financial position (or Balance sheet): Balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
Income statement (or Profit and loss account): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.
More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management. Financial statements are prepared from the accounting records maintained by the firm.
These two basic financial statements viz:
(i) Income Statement, or Trading, and Profit & Loss Account and (ii) Positional Statement, or Balance Sheet portrays the operational efficiency and solvency of any business enterprise.
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY
A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholder’s equity.
The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time. So, we can also say that the last step of the accounting cycle is the preparation of financial statements.
The income statement is another term used for Trading and Profit & Loss Account. It determines the profit earned or loss sustained by the business enterprise during a period. In the large business organization, usually one account i.e., Trading and Profit & Loss Account is prepared for knowing gross profit, operating profit, and net profit.
On the other hand, in small size organizations, this account is divided into two parts i.e. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared. The positional statement is another term used for the Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by the Balance Sheet.
To provide reliable financial information about economic resources and obligations of a business enterprise.
Reliable information about changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
Financial information that assists in estimating the earning potential of the enterprise.
Other needed information about changes in economic resources and obligations.
To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users
Objective and Importance:
The profitability of Business:
Financial statements are required to ascertain whether the enterprise is earning the adequate profit and to know whether the profits have increased or decreased as compared to the previous years so that corrective steps can be taken well in advance.
The Solvency of the Business:
Financial statements help to analyze the position of the business as regards to the capacity of the entity to repay its short as well as long-term liabilities.
The Growth of the Business:
Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion about the growth of the business. For example, an increase in sales with a simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.
Financial Strength of Business:
Financial statements help the entity in determining the solvency of the business and help to answer various aspects viz., whether it is capable to purchase assets from its resources and/or whether the entity can repay its outside liabilities as and when they become due.
Making Comparison and Selection of Appropriate Policy:
To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt the sound business policy by making Intra firm comparison.
Forecasting and Preparing Budgets:
The financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these shortcomings. Financial statements help the management to make the forecast and prepare budgets.
Communicating with Different Parties:
Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.
Limitations of Financial Statements:
Manipulation or Window Dressing:
Some business enterprises resort to manipulating the information contained in the financial statements to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing.
Use of Diverse Procedures:
There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under the straight-line method or written down value method. However, the results provided by comparing the financial statements of such business enterprises would be misleading.
Qualitative Aspect Ignored:
The financial statements incorporate the information which can be expressed in monetary terms. Thus, they fail to assimilate the transactions which cannot be converted into monetary terms. For example, a conflict between the marketing manager and sales manager cannot be recorded in the books of accounts due to its non-monetary nature, but it will certainly affect the functioning of the activities adversely and consequently, the profits may suffer.
Historical:
Financial statements are historical as they record past events and facts. Due to continuous changes in the demand of the product, policies of the firm or government, etc, analysis based on past information does not serve any useful purpose and gives the only postmortem report.
Price Level Changes:
Figures contained in financial statements do not show the effects of changes in the price level, i.e. price index in one year may differ from the price index in other years. As a result, the misleading picture may be obtained by making a comparison of figures of the past year with current year figures.
Subjectivity & Personal Bias:
Conclusions drawn from the analysis of figures given in financial statements depend upon the personal ability and knowledge of an analyst. For example, the term ‘Net profit’ may be interpreted by an analyst as net profit before tax, while another analyst may take it as net profit after tax.
Lack of Regular Data/Information:
Analysis of financial statements of a single year has limited uses. The analysis assumes importance only when compared with financial statements, relating to different years or different firm.
Financial statements are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first step in the accounting process but they are the end products of the accounting process which give concise accounting information of the accounting period after the accounting period is over. To know the profit or loss earned by a firm, Trading, and Profit and Loss Account is prepared. Balance Sheet will portray the financial condition of the firm on a particular date.
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