Category: Accounting Content

Accounting Content!

The Account is the art of conveying financial information about a business unit for shareholders and managers etc. Accountancy has call ‘business language’. In Hindi, the words ‘लेखा विधि’ (account law) and ‘लेखाकर्म’ (accounting) are also useful in ‘Accountancy’. Accounting Content, Financial, and Accountancy!

Also learn, Accountancy is a branch of mathematical science that is useful in finding out the reasons for success and failure in business. The principles of accountancy are applicable to business units on three divisions of practical arts, namely, accounting, bookkeeping, and auditing.

As Well as the definition “Accountancy refers to the art of writing business practices in a scientific manner and classifying articles and preparing summaries and interpreting the results.”

The functioning of Accountancy is to provide quantitative information regarding economic units, which are basically financially inadequate. Which is useful in taking financial decision-making, accountancy, identifying, and measuring. Analyzing information relevant to an economic event of an organization There is a process for doing and collecting. Which is used to prompt users of this information.

  • Management Accounting of Functions, Advantages, and Limitations

    Management Accounting of Functions, Advantages, and Limitations

    The meaning of management accounting is Presentation of accounting information is to assist in the management of management accounting policy creation and to help in the day-to-day operation of an undertaking. Management Accounting of Functions, Advantages, and Limitations. Thus, it is related to the use of aggregated accounting data with the help of financial accounting and cost accounting with the objective of planning, planning, controlling and decision making by the management. Management accounting link management with accounting is the subject of management accounting as any accounting information required to make managerial decisions. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Better Explanation of Management Accounting of Functions, Advantages, and Limitations. With Meaning and Definition.

    Management Accountancy is a composite mix together in all aspects of complete, financial accounting, cost accountancy, and financial management. This crystal becomes clear that management presents accounting management accounting information in the form of processed data collected from financial accounting, cost accounting so that it can be very useful in the management part to make appropriate decisions in management, Scientific methods, when necessary.

    Meaning of Management Accounting:

    Management Accounting is the presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities. In other words, it helps the management to perform all its functions including planning, organizing, staffing, directing and controlling.

    Definitions of Management Accounting:

    In the words of J. Batty:

    “Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”

    According to R. N. Anthony:

    “Management Accounting is concerned with accounting information that is useful to management.”

    According to ICWA of India:

    “Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.”

    According to CIMA London:

    “Management accounting is the provision of information required by management for such purposes as the formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.”

    According to the American Accounting Association:

    Management Accounting is “The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”.

    From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.

    The Objects or Functions of Management Accounting:

    The primary object of Management Accounting is to present the accounting information to the management. The Following objects are:

    Planning:

    Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash, etc., i.e., in planning a very wide range of activities of the business. Not only that, but it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the program of activities to be undertaken.

    Organizing:

    By preparing budgets and ascertaining specific cost center, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an inter-relationship grows among different parts of the enterprise.

    Motivating:

    By setting goals, planning the best and economical courses of action and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.

    Coordinate:

    It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of “Master Budget”. In this way, it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without “Budgetary Control”.

    Control:

    The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.

    Communicate:

    It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.

    Interpret Financial Information:

    It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a piece of sufficient knowledge about the subject since accounting is a highly technical subject.

    And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.

    Miscellaneous:

    • While evaluating the efficiency and effectiveness of different policies.
    • Locating uneconomic as well as the inefficient place of business activities, and.
    • Solving business problems, e.g., to expand the existing business unit or not, etc.

    Advanced Advantages of Management Accounting:

    Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.

    Advanced technique and features:

    The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in favor of the company.

    Cost transparency:

    In the corporate world, the majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures budget actions and provides cost transparency to the company.

    Flexibility and freedom:

    Management accounting systems of a flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.

    Marginal costing:

    Marginal costing is possible with the aid of the management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use scarce materials and resources. It also recommends actions based on a fixed cost, contribution, and other extras.

    The efficiency of the company:

    Companies opt for Management accounting as it increases the efficiency of the company in performing operations. It contributes to striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company as a whole.

    The bar of Profitability:

    Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.

    Simplifies the decision making in Financial Statements:

    Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, the management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.

    Enables the fluctuation of business monetary fund:

    One of the essential factors in business is the monetary fund. Management accounting enables control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.

    Assist in goal completion:

    The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.

    Future prediction from the past result:

    Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intent, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.

    Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.

    Key Advantages of Management Accounting:

    The following advantages maybe derive from Management Accounting:

    • The business activities are managing better by the application of both budgeting and planning.
    • No doubt it helps to increase the efficiency of the business.
    • Measures the actual performance in comparison with the budgets.
    • Also helps to improve the relationship between management and labor.
    • It helps the management to chalk-out future plans of action on the basis of past results.
    • Helps the management in such a way that the latter can maximize the rate of return on capital employed.

    Advanced Limitations of Management Accounting:

    The origin of management accounting can trace to overcome the limitations of financial accounting and cost accounting. Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:

    Historical Nature:

    Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control, and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.

    Technical Subject:

    Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.

    Recording of Actual Cost:

    In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.

    Incomplete Knowledge of Costs:

    In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.

    No-Provision for Cost Control:

    Costs cannot control through financial accounting as there is no provision for corrective action because of expenses being record after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.

    No-Evaluation of Business Policies and Plans:

    There is no device in financial accounting by which the actual progress can measure against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them if need be.

    Not Helpful in Decision-Making:

    As the data available is of historical nature, financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is requiring to take decisions but the information provided by financial accounting is not adequate.

    Though cost accounting came into existence to remove the limitations of financial accounting its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants. Further, most of the techniques of management accounting are also being used by the cost accountants.

    That is why; management accounting is treating as the extension of cost accounting. But for our purpose of the study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting. Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.

    Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.

    Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developing to cope with the limitations of financial accounting and cost accounting. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।

    Management Accounting of Functions Advantages and Limitations
    Management Accounting of Functions, Advantages, and Limitations. Image Credit from #Pixabay.
  • Accounting Principles points in Meaning Definition and Features

    Accounting Principles points in Meaning Definition and Features

    Explore the importance of accounting principles. Learn about their meaning, definition, and features, and understand how they guide the efforts of accountants and auditors. To search for the goals of the accounting profession and for expanding knowledge in this field, A logical and useful set of principles and procedures are to develop. Explained each one point, Accounting Principles points in Meaning Definition and Features. We know that while driving our vehicles, follow standard traffic rules.

    Accounting Principles Understand in these points Meaning, Definition, and Features.

    Without adhering traffic rules, there would be much chaos on the road. Similarly, some principles apply to the account. Thus, the accounting profession cannot reach its goals in the absence of a set of rule to guide the efforts of accountants and auditors. The rules and principles of accounting are commonly referring to as the conceptual framework of accounting.

    Meaning of Accounting Principles:

    They are a man make. Unlike the principles of Physics, Chemistry and other natural sciences; accounting principles were not deduced from basic axioms, nor their validity is verifiable through observations or experiments. These principles are drawn from the practical practice of accounting.

    Definition of Accounting Principles:

    They have been defining by the Canadian Institute of Chartered Accountants as,

    “The body of doctrines commonly associated with the theory and procedure of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experience, historical precedent statements by individuals and professional bodies and regulations of Governmental agencies.”

    According to Hendriksen (1997), Accounting theory may define as logical reasoning in the form of a set of broad principles that;

    • Provide a general frame of reference by which accounting practice can evaluate, and.
    • Guide the development of new practices and procedures.

    The theory may also use to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.

    No list of universally accepted principles can prepare but still, certain principles are drawn which are acceptable by most of the accountants.

    According to the Terminology Committee of AICPA,

    “The word principles are used to mean a general law or rule adopted or preferred as a guide to action; a settled ground or basis of conduct or practice.”

    A.W. Johnson describes as,

    “Broadly speaking, these principles are the assumptions and rules of accounting, the methods, and procedures of accounting and the application of these rules, methods, and procedures to the actual practice of accounting.”

    Definition and Explanation:

    Accounting is the language of business through which economic information is communicating to all the parties concerned. In order to make this language easily understandable all over the world, it is necessary to frame or make certain uniform standards which are accepting universally. These standards are termed “Accounting Principles”.

    They may define as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions. It is a body of doctrines commonly associated with the theory and procedures of accounting. They are serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.

    The American Institute of Certified Public Accountants (AICPA) has advocated the use of the word” Principle” in the sense in which it means “rule of action”. It discusses the generally accepted accounting principles as follows: 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 accumulating, analyze and report.

    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 disclose, how it should disclose, and which financial statement should prepare. Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Thus, we may define Accounting Principles as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions.

    Features of Accounting Principles:

    They are synthetic. It is acceptable because they are believing to be useful. The general acceptance of an accounting principle usually depends on how well it meets the following three basic norms:

    • Usefulness.
    • Objectiveness and.
    • Feasibility.

    A principle is useful to the extent that it results in meaningful or relevant information to those who need to know about a certain business. In other words, an accounting rule, which does not increase the utility of the records to its readers, is not acceptable as an accounting principle. A principle is objective to the extent. That the information is not influencing by the personal bias or Judgement of those who furnished it. Accounting principle says to be objective when it solidly supports by facts. Objectivity means reliability which also means that the accuracy of the information reported can verify.

    Accounting principles should be such as are practicable. A principle is feasible when it can implement without undue difficulty or cost. Although these three features are generally finding in accounting principles. An optimum balance of three is struck in some cases for adopting a particular rule as an accounting principle. For example, the principle of making the provision for doubtful debts find on feasibility and usefulness though it is less objective. This is because of the fact that such provisions are not supporting by any outside evidence.

    Essential Features of Accounting Principles:

    They are acceptable if they satisfy the following norms:

    Relevance or Usefulness:

    A principle will be relevant only if it satisfies the needs of those who use it. The accounting principle should be able to provide useful information to its users otherwise it will not serve the purpose. Also, know this What do you think of Data Warehousing?

    Objectivity:

    A principle will say to be objective if it bases on facts and figures. There should not be a scope for personal bias. If a principle can influence the personal bias and whims of users. It will not be an objective principle and its usefulness will limit. The cost principle will be more useful than the value principle. Because the value will base on market prices and personal judgment will differ in finding out value.

    Feasibility:

    The accounting principles should be practicable. The principles should be easy to use otherwise their utility will limit. While showing fixed assets in the balance sheet, it will be more feasible to take cost less depreciation. If the assets are shown on market value or replacement cost basis. Then, it will involve difficulties and different persons will take different values because market prices go on changing every time.

    The features mentioned above should be present in accounting principles. But in some cases, the optimum balance of these features is struck for adopting. A particular rule as the accounting principle. Sometimes one feature may have to sacrifice for the other so that it may adopt as the principle. Explains and define Entrepreneurial Marketing and SME.

    We may show fixed assets at replacement cost. Because it is practicable and actual cost principle may not be able to give correct results. As the rise in price index will make it less useful. Similarly, the principle of making provision for doubtful debts founds on the feasibility and usefulness basis though it is less objective. Such provisions are not supporting by any outside evidence and there is always a fear of personal bias.

  • Financial Accounting: Meaning, Nature, and Scope

    Financial Accounting: Meaning, Nature, and Scope

    Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Define with Explain it each one Concept of Financial Accounting Discuss the topic, Financial Accounting – Meaning, Definition, Nature, Scope, and Disadvantages of Limitations. Using standardized guidelines, the transactions record, summarize, and present in a financial report or financial statements such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. It also learns Accountability in Financial Management.

    Learn, Explain Financial Accounting: Meaning, Nature, Scope, and Disadvantages. 

    If a corporation’s stock is publicly traded, however, its financial statements [Hindi] (and other financial reporting) tend to widely circulate, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It’s important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.

    Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is an organization that develops accounting standards and principles. Corporations whose stock publicly trade must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. The similarity between Financial and Management Accounting.

    Meaning of Financial Accounting: 

    Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees, and government. Thus, it concerns with financial reporting and decision-making aspects of the business.

    The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be 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 a financial character and interpreting the results thereof.”

    Financial Accounting:

    The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. It is commonly carrying on in the general offices of a business. It concerns with revenues, expenses, assets, and liabilities of a business house. Also, they have the two-fold objective, viz,

    • To ascertain the profitability of the business, and
    • To know the financial position of the concern.

    Nature and Scope of Financial Accounting:

    Financial accounting is a useful tool to manage and to external users such as shareholders, potential owners, creditors, customers, employees, and government. It provides information regarding the results of its operations and the financial status of the business.

    The following are the functional areas of financial accounting:-

    1] Dealing with financial transactions:

    Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.

    2] Recording of information:

    Accounting is the art of recording financial transactions of a business concern. There is a limitation on human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journal and other subsidiary books and it is useful for management in its decision-making process.

    3] Classification of Data:

    The recorded data arrange in a manner to group the transactions of similar nature at one place so that full information of these items may collect under different heads. This is done in the book called ‘Ledger’. For example, we may have accounts called ‘Salaries’, ‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of such accounts, the trial balance prepare.

    4] Making Summaries:

    The classified information of the trial balance uses to prepare a profit and loss account and balance sheet in a manner useful to the users of accounting information. As well as, the final accounts prepare to find out the operational efficiency and financial strength of the business.

    5] Analyzing:

    It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet. Also, the purpose is to identify the financial strength and weaknesses of the business. It also provides a basis for interpretation.

    6] Interpreting financial information:

    It is concerned with explaining the meaning and significance of the relationships established by the analysis. It should be useful to the users, to enable them to take correct decisions.

    7] Communicating the results:

    The profitability and financial position of the business as interpreted above communicate to the interest parties at regular intervals to assist them to make their conclusions.

    Disadvantages or Limitations of Financial Accounting:

    The concerns with the preparation of final accounts. Also, the business has become so complex that mere final accounts are not sufficient for meeting financial needs. It is like a post-mortem report. At the most, it can reveal what has happened so far, but it cannot exercise any control over the past happenings.

    The disadvantages of financial accounting are as follows:-

    1. It records only quantitative information.
    2. Records only the historical cost. The impact of future uncertainties has no place in financial accounting.
    3. It does not take into account price level changes.
    4. It provides information about the whole concern. Product-wise, process-wise, department-wise, or information of any other line of activity cannot obtain separately from financial accounting.
    5. Cost figures do not know in advance. Therefore, it is not possible to fix the price in advance. It does not provide information to increase or reduce the selling price.
    6. As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate the performance of the business.
    7. It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.
    In other words;
    1. In case of loss, whether loss can reduce or convert into profit using cost control and cost reduction? It does not answer this question.
    2. Does it not reveal which departments are performing well? Which ones are incurring losses and how much is the loss in each case?
    3. It does not provide the cost of products manufactured
    4. There are no means provided by financial accounting to reduce the wastage.
    5. Can the expenses reduce which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.
    6. It is not helpful to the management in taking strategic decisions like a replacement of assets, an introduction of new products, discontinuation of an existing line, expansion of capacity, etc.
    7. It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces reliability.
    8. It’s technical. A person not conversant with accounting has little utility of the financial accounts.

    Financial Accounting Meaning Nature and Scope

  • Who are the Users of Accounting Information inside the Organization?

    Who are the Users of Accounting Information inside the Organization?

    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.

    Users of Accounting Information is Two types Internal & External:-

    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.

    Who are the Users of Accounting Information inside the Organization
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  • Explanation of Financial Statements: Objectives, Importance, and Limitations

    Explanation of Financial Statements: Objectives, Importance, and Limitations

    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:
    1. 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.
    2. 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.

    Objectives of financial statements are:

    • 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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  • Learn What? Study of Accounting Concept and Conventions!

    Learn What? Study of Accounting Concept and Conventions!

    Understanding and Learn What? Study of Accounting Concept and Conventions!

    Accounting in the past was mainly used to (1) keep control over property and assets of the business concerned and (2) ascertain and report about the profit or loss and the financial position relating to the various periods. But now a day’s accounting is used not only for the above-mentioned purposes but also for collecting, analyzing and reporting of information to the management and others at the required points of time to facilities rational decision making. Learn What? Study of Accounting Concept and Conventions!

    Moreover, the accounts in the past were prepared mainly for the use of proprietor. Today financial statements are required by the proprietors, creditors, potential investors, Government and many others. The proprietors study the financial statements to know about the profitability of their business. Creditors study them to ascertain the solvency of the business. Prospective investors are interested in them for the ascertainment of the correct earning potential of the business. The government makes use of these statements for finding out the net contribution that a business can make the economic well-being of the country.

    To satisfy the diverse and complex needs of those who use accounting, one needs something more than the clerical procedures, journalizing, posting, taking out trial balance and closing the books etc. The accountant should have ‘guides to action’ or ‘principles’ for completing his work of a wide dimension. The usefulness of accounting will be maximized only if there exist some generally accepted concepts regarding the nature and measurement of liabilities, assets, revenues, and expenses.

    There must also be some widely supported standards of disclosure and reporting. There will be widespread understanding of and reliance on accounting statements only if they are prepared in conformity with generally accepted accounting principles. If there is no common agreement on accounting matters then complete chaotic conditions prevail as in that case, every businessman and/or every accountant could follow his own definition of revenue and expense.

    Definition: The rules conventions of accounting are commonly referred to as ‘principles’. A universal definition of the ‘accounting principles’ is difficult to give. However, ‘accounting principles’ can be defined in the following two ways :

    1. Accounting Principle is a “General Truth” or ‘fundamental belief. This definition implies a scientific bias and therefore, its application in the face of ever-changing socioeconomic factors which affect the very basis of a business is doubtful.
    2. Accounting principle may be defined as a ‘rule of action or conduct’. This definition finds favor with the American Institute of Certified Public Accountants as it refers to the changing character of rules of action or conduct due to the changes in business practices etc. According to AICPA, accounting principle is a general law or rule adopted or processed as a guide to action. The accounting principles do not prescribe one way of doing things. They recognize that there are a number of ways in which one thing can be done. The accountant has considerable latitude and choice within the generally accepted accounting principles in which to express his own idea as to the best way of recording and reporting is specified account. The practice of recording and reporting may thus differ from company to company.
    3. It should be noted that it would be incorrect to suggest that accounting principles are a body of basic laws like those found in natural sciences like Physics and Chemistry. Accounting principles are manmade and hence are more properly associated with such items as concepts, conventions, and standards. Accounting principles were not deducted from basic atoms, not is their validity verifiable by observation and experiment in a laboratory. Accounting principles are constantly evolving, being influenced by business practices, the needs of statement users, legislation and governmental regulations the opinions and actions of shareholders, labor unions, creditors and management; and the logical reasoning of accountants. The sum total of all such influences finds its expression first in accounting theory. Some theories are accepted while some others are rejected. Theory becomes an accounting principle only when it is generally accepted.

    A distinction between Fundamental Accounting Assumptions and Accounting policies has been made by the International Accounting Standards Committee (1ASC). Fundamental Accounting assumptions or postulates according to the ISC underlie the preparation of financial statement. They need not be specifically stated on the face of such statements. Their acceptance and use is assumed in the preparation of financial statements.

    Disclosure with full reasons, however, must be made in case they are not followed- Accounting policies, on the other hand, encompass the principles, basis, conventions, rules, and procedures adopted by management in preparing and presenting financial statements. There are, as stated above, much different accounting and applying those which in the circumstances of the enterprise, are best suited to present properly its financial position and the results of its operations.

    Accounting Concepts:

    Following concept are:

    • Business Unit Concept: A business and its owner should be treated differently, as far as their financial transactions are concerned.
    • Money Measurement Concept: Only business transactions that can be expressed in terms of wealth are recorded in accounting, although records of other types of transactions can be kept separately.
    • Dual aspect concept: For each credit, a related debt is made. The recording of the transaction is completed only with a double aspect.
    • Concerns are going on the concept: In accounting, a business is expected to continue for a long time and fulfills its commitments and obligations. It assumes that the business will not be forced to stop working on “fire sale” prices and to eliminate their assets.
    • Cost concept: Fixed assets of a business are recorded based on their original cost in the first year of accounting. After this, these properties are recorded less depreciation. There is no increase or fall in market value. The concept applies only to certain assets.
    • Accounting year concept: Each business chooses a specific time period to complete the cycle of accounting process – for example, monthly, quarterly or yearly – according to a financial or calendar year.
    • Matching Concept: This theory states that for every entry of revenue recorded in a given accounting period, a uniform expense entry should be recorded to accurately calculate profit or loss in any period.
    • Acquisition concept: According to this concept, only after the profit is accrued. Payment of an advance or fee is not considered to be profitable unless the goods or services are distributed to the buyer.
    Accounting Conventions:

    The most commonly held convention is “historical cost convention”. For this, the cost of the transaction should be recorded on pricing at that time, and properties should be valued at their original cost. Following conventions are:

    There are four main conventions in practice in accounting: conservatism, consistency, full disclosure, and materiality.

    Conservatism is the convention by which, when two values of a transaction are available, the lower-value transaction is recorded. By this convention, profit should never be overestimated, and there should always be a provision for losses.

    Consistency prescribes the use of the same accounting principles from one period of an accounting cycle to the next so that the same standards are applied to calculate profit and loss.

    Materiality means that all material facts should be recorded in accounting. Accountants should record important data and leave out insignificant information. An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgment. Where decisions are required about the appropriateness of a particular accounting judgment, the “materiality” convention suggests that this should only be an issue if the judgment is “significant” or “material” to a user of the accounts. The concept of “materiality” is an important issue for auditors of financial accounts.

    Full disclosure entails the revelation of all information, both favorable and detrimental to a business enterprise, and which are of material value to creditors and debtors.

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  • Learn What? Basic of Accounting!

    Learn What? Basic of Accounting!

    Understanding and Learn What? Basic of Accounting!

    The business enterprises use accounting to calculate the profit from the business activities at the end of the given period. Accounting or accountancy is the measurement, processing, and communication of financial information about financial institutions like businesses and corporations. Also, Learn What? Basic of Accounting!

    There is two basis for calculating the profit, namely, the cash basis and accrual basis.

    1. Cash basis of accounting: In this basis of accounting, the income is calculated as the excess of actual cash receipts in respect of the sale of goods, services, properties, etc., over actual cash payments regarding the purchase of goods, expenses on rent, electricity, salaries, etc. Credit transactions are not considered at all including adjustments for outstanding expenses and accrued income items. This method is useful for professional people like doctors, engineers, advocates, chartered accountants, brokers and small traders. It is simple to adopt because there are no adjustment entries. But this basis does not disclose the true profits because it does not consider the income and expense items which relate to the accounting period but not paid in cash. Moreover, this method is not applicable where the number of transactions is very large and expenditure on fixed assets is high. The income or profit is calculated with the help of receipts and payments account.
    2. Accrual basis of accounting: Under this method, the items of income (revenue) are recognized when they are earned and not when the money is actually received later on. Similarly, expense items are recognized when incurred and not when actual payments are made for them. It means revenue and expenses are taken into consideration for the purpose of income determination on the basis of the accounting period to which they relate. The accrual basis makes a distinction between actual receipts of cash and the right to receive cash for revenues and the actual payments of cash and legal obligations to pay expenses. It means that income accrued in the current year becomes the income of current year whether the cash for that item of income is received in the current year or it was received in the previous year or it will be received in the next year. The same is true of expense items. Expense item is recorded if it becomes payable in the current year whether it is paid in the current year or it was paid in the previous year or it will be paid in the next year.

    The advantages of this system are:

    • It is based on all business transaction of the year and, therefore, discloses the current profit or loss.
    • The method is used in all types of business units.
    • It is more scientific and rational application, and.
    • It is most suitable for the application of matching principle.

    The disadvantages are: 

    • It is not the simple one and requires the use of estimates and personal judgment.
    • It fails to disclose the actual cash flows.

    The mixed or Hybrid basis of accounting: Under these method revenues (items of income) is recognized on the cash basis while the expenses are recorded on the accrual basis. The purpose is to remain cautious, safe and hundred percent certain for revenues items and make adequate provisions for expenses.

    Although not everyone has the opportunity to study accounting, a CEO needs to keep track of all aspects of successful business, even if a company is recruiting outsourced bookkeeping. Here are ten accounting term definitions to communicate effectively with your online accounting service provider. Ten-Key or Ten-Tips are:

    • Property: Property is the money that has been deposited by the business and is owned by no debt or debt. This can be things that are vulnerable to the time or goods sold to customers. This may include cash and investment, building and property, accounts receivable, warehouse inventory, equipment, and supplies.
    • Balance Sheet: Balance Sheet is an important aspect of the business. This assets/liabilities + stockholder records the original accounting formula of monthly, quarterly or annual at a certain point in time of equity/capital. With the balance sheet, the financial health of the business can be traced.
    • General Account holder: General account holder is the account holder’s account holder, with the balance sheet and income statement accounts. All business transactions are recorded here, including sales, credit purchase, office expenses and income loss.
    • Gross Margin: The total number of sales made from related costs like gross margin or profit, sale cost, wholesale cost, materials, and supply.
    • Loss: When a service or product sells it for less than the cost of supply or construction, or when the expenditure exceeds the revenue of a particular property, then it is called loss.
    • Credit/Account: On the credit/account it means that the products or services have been sold with credit or use. Payment for these items has not been provided immediately, and there may be accounts that result in interest charges.
    • Receipts: Receipts are the total amount of cash collected in business transactions for one day. Other revenue collected does not include it.
    • Revenue: Income and revenue are compromising on the aggregate amount of all the income collected on each other. It may include cash sales, credit purchases, membership fees and interest income. This is different from the receipts, as it can include money that cannot be collected at the time of delivery.
    • Business Discounts: Exemption from a trade discount purchase price is the percentage and is based on the number of items ordered at one point. With small discounts for short orders, higher discounts may apply to larger orders.
    • Trial Balance: The test balance is filed in the general account holder and it includes both a debit and a credit for a particular account. Sheets should be balanced with the equivalent debt.

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  • Creative Accounting: Methods, Techniques, and Prevention

    Creative Accounting: Methods, Techniques, and Prevention

    Definitions of Creative Accounting: The term ‘creative accounting’ can define in several ways. Initially, we will offer this definition; “A process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business”. The concept of Creative Accounting study: Methods of Creative Accounting, Techniques of Creative Accounting, and Prevention of Creative Accounting! Also learned, Definition, Motivation, and Ethical Considerations.

    Learn, Explain Creative Accounting: Methods, Techniques, and Prevention!

    They characterize by excessive complications and the use of novel ways of characterizing income, assets, or liabilities. This results in financial reports that are not at all dull; but have all the complications of a novel by James Joyce, hence the appellation “creative”. Sometimes the words “innovative” or “aggressive” use.

    Creative accounting, which generally involves the preparation of financial statements with the intention of misleading readers of those statements, is prima facie a form of lying. Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules.

    It examines and rejects the arguments for considering creative accounting, despite its deceptive intent, as not being a form of lying. It then examines the ethical issues raised by creative accounting, in the light of the literature on the ethics of lying.

    This literature includes the evaluation of various excuses and justifications for lying and this examines here about creative accounting. It concludes that even in circumstances in which creative accounting would arguably serve a worthy purpose; that purpose would be at least as well served by honest communication.

    Concept:

    Creative accounting also called aggressive accounting, is the manipulation of financial numbers; usually within the letter of the law and accounting standards; but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts suppose to:

    • A typical aim of creative accounting will be to inflate profit figures. Some companies may also reduce reported profits in good years to smooth results. Assets and liabilities may also manipulate, either to remain within limits such as debt covenant or to hide problems.
    • Typical creative accounting tricks include off-balance-sheet financing, over-optimistic revenue recognition, and the use of exaggerated non-recurring items.
    • Window Dressing has a similar meaning when applied to accounts; but is a broader term that can apply to other areas. In the US it is often used to describe the manipulation of investment portfolio performance numbers. In the context of accounts, “window dressing” is more likely than “creative accounting” to imply illegal or fraudulent practices, but it needs to do so.
    • The techniques of creative accounting change over time. As accounting standards change, the techniques that will work change. Many changes in accounting standards are meant to block particular ways of manipulating accounts; which means that intent on creative accounting needs to find new ways of doing things. At the same time, other, well-intentioned, changes in accounting standards open up new opportunities for creative accounting, and in the use of fair value is a good example of this.
    • Many creative accounting techniques change the main numbers shown in the financial statements but make themselves evident elsewhere, most often in the notes to the accounts. The market has been surprised before by bad news hidden in the notes, so a diligent approach can give you an edge.

    Methods of Creative Accounting:

    The following methods below are;

    1] First Methods:

    Although not technically wrong, many annual and quarterly reports and presentations dive heavily into theoretical scenarios where one-time “charges” to earnings are excluded. What this means is, for example, a lawsuit settlement amount would take out of the reported profit in one big chunk, even if its payout little by little over time.

    This practice call reserves. Often, when explaining the quarterly results, a CEO might say; “Well if we didn’t take this charge for the lawsuit, we would have made this much money”. Very often, the hypothetical situations proposed to get even more complicated. The main “creative” aspect to this is when a “one time” “exceptional” charge is very common to the business.

    2] Second Methods:

    Banks can lend out most of the money they receive in the deposit. The banks can also lend money they borrow from other banks. However, to protect against bad loans, banks must keep aside a stash of money called a “reserve”. The bank, within general guidelines, gets to set the size of this reserve to what it feels prudent compare to how risky its outstanding loans are. However, when the bank wants to make it look like it made more money this quarter than last; one way to do that is to make money from the reserve and call it is profit with the excuse that the loans are safer now than before and that amount was no longer needed.

    3] Third Methods:

    One of the main genres of “creative accounting” know as slush fund accounting; whereby some earnings from this quarter hideaway just in case the profit from next quarter is not enough for the management to make their bonuses. This happened most famously at Freddie Mac. As of 2004, there is a large investigation underway to see if retroactive insurance policies from insurers such as General Re of Berkshire Hathaway were used for slush fund accounting. The question is if these insurance policies truly transferred some risk or were merely a slush fund.

    Techniques of Creative Accounting:

    Creative accounting actively applies in six areas. The first area is regulatory flexibility, whereby changes in accounting policy permit by accounting regulation. For example, IAS permit carrying non-current assets can recover at either revalued amount or depreciated historical cost in asset valuation. Secondly, the dearth of regulation by which some accounting treatment might not be fully regulated as there are few mandatory requirements. The third area is management has a large extent of estimation in discretionary areas, such as assumption in bad debts provision. Fourthly, some transactions can time to show the desired appearance in accounts.

    For example, the manager is free to choose the timing to sell the investment just to increase earning in the accounts. Fifthly, to manipulate balance sheet amounts by using artificial transactions. Last but not least, by reclassification and presentation of financial amounts through balance sheet manipulation to smooth financial ratios; and, also based on the cognitive reference point in financial numbers’ presentation.

    Creative Accounting Methods Techniques and Prevention
    Creative Accounting: Methods, Techniques, and Prevention! #Pixabay.

    Prevention of Creative Accounting:

    Those companies most at risk for fraudulent financial reporting tend to be those that have one or more of the following attributes: weak internal control; no audit committee; a family relationship among directors and/or officers; assets and revenue less than $ 100 million; and/or a board of directors dominated by individuals with significant equity ownership; and, little experience serving as directors of other companies.

    To prevent creative accounting, the experts opine that accountants and managers should divide the duties of an internal control checklist. Furthermore, an independent audit committee should always have someone with a strong accounting background; and, audit experience who deals directly with outside auditors. The investors should diversify their investment portfolio to circumvent the problems related to creative accounting by a few unscrupulous companies.

    The company has to adhere strictly to the ethical values it has set itself in the long-run and the short-run of the life of the company. The accounting and accounting practices have to be consistent; and, show to the investors that it is following the ethical practices in all its financial dealing as well as reporting.

    How Enron Played the Game of Creative Accounting:

    According to Mulford, the expert in the field, the most common creative accounting practices include improper revenue recognition and misreporting expenses. However, Enron’s game, explains Mulford, involved special-purpose entities.

    “Enron conducted much of its business in these entities that they controlled. They transacted with themselves. That kind of self-dealing allowed them to report profits when they weren’t traditionally making a profit.”

    Though Mulford wrote the book before and published shortly after Enron’s dealings became public, the authors included a special note in the preface regarding the company’s accounting practices, noting that Enron’s “investors and creditors had not fully discounted the risk associated with the firm’s trading activities, its off-balance sheet liabilities, and its related-party transactions.” The authors add they believe careful attention to steps outlined in The Financial Numbers Game “would have provided an early alert to the possibility of developing problems.”

  • Creative Accounting: Definition, Motivation, and Ethical Considerations

    Creative Accounting: Definition, Motivation, and Ethical Considerations

    Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules. The Concept of Creative Accounting: Definition of Creative Accounting, Motivation for Creative Accounting, the existence of Creative Accounting, and Ethical Perspective of Creative Accounting! They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desire by the authors.

    Learn, Explain Creative Accounting: Definition, Motivation, and Ethical Considerations!

    The terms “innovative” or “aggressive” are also sometimes used. Other synonyms include Cooking the books and Enronomics. Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules – by Wikipedia.

    Definition of Creative Accounting:

    Creative accounts an accounting practice that falls outside the regulation and gives benefits to certain people. It can describe as a practice with a clear aim to interrupt the financial reporting process which affects reported income to make it looked normal; and, provides no true economic advantages to relevant parties like shareholders. Concisely, it is the transformation of financial accounting figures from what they are to what users desire by taking advantage of the accounting policies which permit by the accounting standard.

    Creative accounts a practice that potentially undertakes as a result of some individual care more on their interest and indirectly causes issues to arise in the ethical dimension of creative accounting. From the information perspective, agency theory gives a clear picture of the creative accounting scenario. Whereby managers misuse their privileged position in manipulating financial reporting in their interest which providing superior information content to the shareholder. Lack of personal skill or unwillingness to carry out detailed analysis making individual shareholders do not have a clear view of the effect of accounting manipulation gives a high possibility of the incidence of creative accounting.

    The motivation for Creative Accounting:

    Several motivations have to identify in stimulating the behavior of creative accounting in the organization. Firstly, the significant motivator for creative accounting is to report a decrease in business income to lower the tax paid. Second, to enable the company’s performance to appear better in the future; the company will maximize the reported loss to make a bad loss that year. This is calls ‘big bath’ accounting to smooth the income. Thirdly, to provide a positive view on expectations, securities valuation, and reduction on risk for analysts in anticipated capital market transactions; and, maintain the firm’s performance in analyst’s expectations.

    Other motivations are to manipulate profit to match the reported income to profit forecasts; and, to distract attention from negative news by boosting company profit figures through the change in accounting policies. Manager’s motivations in managing earning aim to report a stable growth in profit not only to reduce the perception of variability toward an organization’s earnings but also are about income measurement. To make the company faces less risk and gain more benefit in the aspect of raising funds; takeover bids as well as prevent the takeover by other companies.

    It is needed to maintain or promote the share price and create a good profit growth. To gain benefit from inside knowledge, the director of the company engages creative accounting to postpone the release of information to the market. Last but not least, many types of contractual rights, obligations, and constraints based on the amount reported in the accounts also motivate the company to apply creative accounts. What are the Role and Duties of the Management Accountant?

    The existence of Creative Accounting:

    Theoretically, the manager’s motivation in there is acceptable. However, certain companies apply a particular technique of creative accounting to some extent; for example, applied in the non-discretionary component of the bad debts provision. Other evidence is Classificatory smoothing by using the extraordinary items; such as pensions cost, dividends from unconsolidated subsidiaries, extraordinary charges and credits; and, research and development costs in manipulating the figure of income in financial statements.

    The behaviors can identify by having a thoughtful analysis of a financial statement or observe by the reasonably well-inform user of the financial statement. But, how clearness the users of statement observe creative accounting is questionable. Anyway, the value of the information contained in the financial statement is concerned even though financial statements give adequate information that enables users to adjust for them as certain investors rely on reported earning numbers in an income statement.

    Creative Accounting Definition Motivation and Ethical Considerations
    Creative Accounting: Definition, Motivation, and Ethical Considerations! #Pixabay.

    Ethical Perspective of Creative Accounting:

    There are some ethical issues concerning the exercise of creative accounting. Loopholes in accounting standards provide managers some spaces in the sense of manipulating the timing in income reporting. Accounting is a tool to supervise contracts between managers and financial groups, identify the possibility of accounting manipulation; and, how properly it reflected in pricing and contracting decisions. Ethics of bias in choosing accounting policy which implies in they can see through accounting regulators and management level.

    Managers tend to misapply accounting principles to give a better appearance in the financial statement to investors. Conflict of interest, client requests to alter account, and tax evasion are the most frequent ethical issues. Accountants’ attitudes toward creative accounting depend on whether it has arisen from the misuse of accounting principle and manipulation of transactions. Accountants more critical in the misuse of accounting principles as the accountant’s duty is rule-based; and, it falls within their expertise. Failure to act ethically may damage the reputation as an accountant unless he or she reports the abuse to the appropriate party. Slotting is not an acceptable accounting treatment in company practices.

    There is some action can take by accounting regulators to restrain creative accounting:
    • Decrease allowable accounting method or fixed method used in the different conditions so that the scope for choosing the accounting method can narrowly down. Companies should also be consistent in using the method chosen by them.
    • Some rules should establish to reduce the abuse of justice. For instance, International Accounting Standards presently have almost removed the “extraordinary item” from operating profit. Also, companies should be consistent in applying accounting policy to restrain the abuse of justice.
    • Implementation of “Substance over form” can decrease artificial transaction and this can make linked transactions become one as the whole.
    • To restrict the use of timing of the genuine transaction, item in the account should regularly evaluate. Also, the increases or decreases in value should state in the account each year the revaluation occurs. International Accounting Standards also tends to value items at fair value rather than historical cost.
    • Besides alteration in accounting regulations, ethical standards and governance codes must be properly executed to avoid individuals from performing creative accounts.
    How Enron Played the Game of Creative Accounting:

    According to Mulford, the expert in the field, the most common creative accounting practices include improper revenue recognition and misreporting expenses. However, Enron’s game, explains Mulford, involved special-purpose entities.

    “Enron conducted much of its business in these entities that they controlled. They transacted with themselves. That kind of self-dealing allowed them to report profits when they weren’t traditionally making a profit.”

    Though Mulford wrote the book before and published shortly after Enron’s dealings became public; the authors included a special note in the preface regarding the company’s accounting practices, noting that Enron’s; “investors and creditors had not fully discounted the risk associated with the firm’s trading activities; its off-balance sheet liabilities, and its related-party transactions”.

    The authors add they believe careful attention to steps outlined in The Financial Numbers Game; “would have provided an early alert to the possibility of developing problems”.