Tag: Accounting

  • 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”.

  • What is the Cost Accounting Information System?

    What is the Cost Accounting Information System?

    Cost Accounting Information System (CAIS) is an accounting information system that determines the costs of products manufactured or services provided and records these costs in the accounting records. Also, The concept of CAIS studying: Functions of Cost Accounting Information System, Technology of Cost Accounting Information System, and Development of Cost Accounting Information System! It is the key to management’s assessment of the company’s efforts to achieve profit. Since it is so important, the CAIS must be careful to design and properly maintains. Also learn, Financial Accounting, What is the Cost Accounting Information System?

    Learn, Explain What is the Cost Accounting Information System? Functions, Technology, and Development!

    An accounting information system (AIS) is a system of collecting, storing, and processing financial and accounting data that are used by decision-makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. Also, The resulting financial reports can uses internally by management or externally by other interested parties including investors, creditors, and tax authorities.

    Accounting information systems are designed to support all accounting functions and activities including auditing, financial accounting & reporting, managerial/ management accounting, and tax. Also, The most widely adopted accounting information systems are auditing and financial reporting modules.

    What is the Accounting Information System? Accounting Information System refers to the computer-based method used by the companies to collect, store and process the accounting and the financial data which is used by the internal users of the company to give a report regarding various information to the stakeholders of the company such as creditors, investors, tax authorities, etc.

    The cost accounting information system with its operating accounts must correspond to the organizational division of authority; so that the individual foreman, supervisor, department head, or manager can be held accountable for the costs incurred in his department. Also, The concept of authority and responsibility is closely allied with accountability; which recognizes the need for measuring a manager’s discharge of his responsibilities.

    Functions of Cost Accounting Information System:

    Generally, the purposes or functions of cost accounting information systems fall into four categories. These include providing information for:

    1. External financial statements,
    2. Planning and controlling activities or processes,
    3. Also, Short-term strategic decisions and
    4. Long-term strategic decisions.

    These four functions relate to different audiences, emphasize different types of information, require different reporting intervals, and involve different types of decisions.

    The technology of Cost Accounting Information System:

    They are below;

    Input:

    The input devices commonly associated with CAIS include standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. Also, many financial systems come “Web-enabled” to allow devices to connect to the World Wide Web.

    Process:

    Basic processing achieves through computer systems ranging from individual personal computers to large-scale enterprise servers. However, conceptually, the underlying processing model is still the “double-entry” accounting system initially introduced in the fifteenth century.

    Output:

    Output devices used include computer displays, impact and non-impact printers, and electronic communication devices for EDI and e-commerce. Also, The output content may encompass almost any type of financial report from budgets and tax reports to multinational financial statements.

    Development of Cost Accounting Information System:

    The development of a Cost Accounting Information System includes five basic phases: planning, analysis, design, implementation, and support.

    The period associated with each of these phases can be as short as a few weeks or as long as several years.

    Planning, project management objectives, and techniques: 

    Also, The first phase of systems development is the planning of the project. This entails the determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables.

    Analysis: 

    The analysis phase is using to both determine and document the cost accounting and business processes used by the organization. Such processes are redesign to take advantage of best practices or the operating characteristics of modern system solutions.

    Design:

    The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can implement in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Also, Inputs may be define using screen layout tools and application generators.

    Processing can show through the use of flowcharts or business process maps that define the system logic, operations, and workflow. Also, Logical data storage designs are identified by modeling the relationships among the organization’s resources, events, and agents through diagrams.

    Also, the entity-relationship diagram (ERD) modeling is using to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and online analytical processing tools. Also, all aspects of the design phase can perform with software toolsets provide by specific software manufacturers.

    Implementation:

    The implementation phase consists of two primary parts: construction and delivery. Also, Construction includes the selection of hardware, software, and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint.

    Delivery is the process of conducting the final system and user acceptance testing; preparing the conversion plan; installing the production database; Also, training the users, and converting all operations to the new system.

    Support:

    The support phase has two objectives. The first is to update and maintain the CAIS. Also, This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting.

    Also, The second objective of the support is to continue development by continuously improving the business through adjustments to the CAIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications.

    What is the Cost Accounting Information System Image
    What is the Cost Accounting Information System? Image from Pixabay.

  • What are the Role and Duties of the Management Accountant?

    Management Accountant is an officer who is entrusted with the Management Accounting function of an organization. He plays a significant role in the decision-making process of an organization. The organizational position of Management Accountant varies from concern to concern depending upon the pattern of the management system. He may be an executive in some concern, while a member of the Board of Directors in case of some other concern. However, he occupies a key position in the organization. In large concerns, he is responsible for the installation, development and efficient functioning of the management accounting system. He designs the framework of the financial and cost control reports that provide with the most useful data at the most appropriate time. Also Learned, Cost Accounting, What are the Role and Duties of the Management Accountant?

    Learn, Explain What are the Role and Duties of the Management Accountant?

    The Management Accountant sometimes describing as Chief Intelligence Officer because apart from top management, no one in the organization perhaps knows more about various functions of the organization than him. Tandon has explained the position of Management Accountant as follows: “The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes the information and then returns the processed information back to where it came from”.

    #Role of Management Accountant:

    Management Accountant otherwise calls Controller, is considering to be a part of the management team since he has the responsibility for collecting vital information. Both from within and outside the company. The functions of the controller have been laid down by the Controller’s Institute of America.

    These functions are:
    • To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operations. Such a plan would provide, to the extent required in the business cost standards, expense budgets, sales forecasts, profit planning, and program for capital investment and financing. Together with the necessary procedures to effectuate the plan.
    • To compare performance with operating plan and standards and to report and interpret the results of the operation to all levels of management, and to the owners of the business. This function includes the formulation and administration of accounting policy and the compilations of statistical records and special reposts as required.
    • To consult withal segments of management responsible for policy or action conserving any phase of the operations of the business. As, it relates to the attainment of the objective, and the effectiveness of policies, organization structures, procedures.
    • The administer tax policies and procedures.
    • To supervise and coordinate the preparation of reports to Government agencies.
    • The assured fiscal protection for the assets of the business through adequate internal; control and proper insurance coverage.
    • To continuously appraise economic and social forces and government influences, and interpret their effect upon business.

    #Duties and Responsibilities of Management Accountant:

    The primary duty of Management Accountant is to help management in taking correct policy-decisions and improving the efficiency of operations. He performs a staff function and also has line authority over the accountants. If the management accountant feels that a decision likely to take by the management based on the information tendered by him shall be detrimental to the interest of the concern. He should point out this fact to the concerned management, of course, with tact, patience, firmness, and politeness. On the other hand, if the decision was taken happens to be the wrong one on account of inaccuracy. Biased and fabricated data furnished by the management accountant. He shall be held responsible for the wrong decision takes by the management.

    Controllers Institute of America has defined the following duties of Management Accountant or controller:

    • The installation and interpretation of all accounting records of the Corporative.
    • The preparation and interpretation of the financial statements and reports of the corporation.
    • Continuous audit of all accounts and records of the corporation wherever located.
    • The compilation of costs of distribution.
    • The compilation of production costs.
    • The taking and costing of all physical inventories.
    • The preparation and filing of tax returns and to the supervision of all matters relating to taxes.
    • Preparation and interpretation of all statistical records and reports of the corporation.
    • The preparation as budget director, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation of submission to the Board of Directors prior to the beginning of the fiscal year. The authority of the Controller, with respect to the veto of commitments of expenditures not authorized by the budget, shall, from time to time, fix by the board of Directors.

    Continuously;

    • The ascertainment currently that the properties of the corporation are properly and adequately insured.
    • The initiation, preparation, and issuance of standard practices relating to all accounting. Matters and procedures and the coordination of the system throughout the corporation including clerical and office methods, records, reports, and procedures.
    • The maintenance of adequate records of authorizing appropriations and determination. That all sums expend pursuant there into properly accounts for.
    • The ascertainment currently that financial transactions cover by minutes of the Board of Directors and/ or the Executive committee are properly executing and recording.
    • The maintenance of adequate records of all contracts and leases.
    • The approval for payment(and/or countersigning ) of all Cheques, promissory notes and other negotiable instruments of the corporation. Which have to sign by the treasurer or such other officers as shall have to authorize by the by-laws of the corporation or from time to time designated by the Board of Directors.
    • The examination of all warrants for the withdrawal of securities from the vaults of the corporation and the determination. That such withdrawals are made in conformity with the by-laws and /or regulations establishing from time by the Board of Directors.
    • The preparation or approval of the regulations or standard practices. Required to assure compliance with orders or regulations issued by duly constituted governmental agencies.
  • Cost Accounting: Objectives, Nature, and Scope

    Cost Accounting: Objectives, Nature, and Scope

    Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a company’s activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage. Discuss the topic, the Concept of Cost Accounting: Meaning of Cost Accounting, Definition of Cost Accounting, Objectives of Cost Accounting, Nature and Scope of Cost Accounting, and Limitations of Cost Accounting! It is mostly concern with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future. Also learned, Management Accounting; Objectives, Nature, and Scope.

    Learn, Explain Cost Accounting: Objectives, Nature, and Scope.

    Cost accounting involves the techniques for as: 1) Determining the costs of products, processes, projects, etc. to report the correct amounts on the financial statements, and 2) Assisting management in making decisions and in the planning and control of an organization.

    For example, cost accounts used to compute the unit cost of a manufacturer’s products to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieving with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

    It assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more. They had their roots in manufacturing businesses, but today it extends to service businesses.

    For example, a bank will use cost accounting to determine the cost of processing a customer’s check and/or a deposit. This, in turn, may provide management with guidance in the pricing of these services.

    Key activities include:

    • Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs.
    • Assisting the engineering and procurement departments in generating standard costs, if a company uses a standard costing system.
    • Using an allocation methodology to assign all costs except period costs to products and services and other cost objects.
    • Defining the transfer prices at which components and parts are selling from one subsidiary of a parent company to another subsidiary.
    • Examining costs incurred about activities conducted, to see if the company is using its resources effectively.
    • Highlighting any changes in the trend of various costs incurred.
    • Analyzing costs that will change as the result of a business decision.
    • Evaluating the need for capital expenditures.
    • Building a budget model that forecasts changes in costs based on expected activity levels.
    • Determining whether costs can be reduced.
    • Providing cost reports to management, so they can better operate the business.
    • Participating in the calculation of costs that will require to manufacture a new product design, and.
    • Analyzing the system of production to understand where bottlenecks are position, and how they impact the throughput generate by the entire manufacturing system.

    Meaning of Cost Accounting:

    An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. The requirements of the majority of them are satisfied using financial accounting. However, the management requires far more detailed information than what conventional financial accounting can offer.

    The focus of the management lies not in the past but on the future. For a businessman who manufactures goods or renders services, cost accounts a useful tool. It was developed on account of limitations of financial accounting and is the extension of financial accounting. The advent of the factory system gave an impetus to the development of cost accounting.

    It is a method of accounting for cost. The process of recording and accounting for all the elements of the cost calls cost accounting.

    Definition of Cost Accounting:

    The Institute of Cost and Works Accountants, London defines costing as,

    “The process of accounting for cost from the point at which expenditure incur or commit to the establishment of its ultimate relationship with cost centers and cost units. In its wider usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carry out or plan.”

    The Institute of Cost and Works Accountants, India defines cost accounting as,

    “The technique and process of ascertainment of costs. Cost accounts the process of accounting for costs, which begins with the recording of expenses or the bases on which they are calculating and ends with the preparation of statistical data.”

    To put it simply, when the accounting process is applying to the elements of costs (i.e., Materials, Labor and Other expenses), it becomes Cost Accounting.

    Objectives of Cost Accounting:

    It was born to fulfill the needs of manufacturing companies. Its a mechanism of accounting through which costs of goods or services are ascertaining and control for different purposes. It helps to ascertain the true cost of every operation, through a close watch, say, cost analysis and allocation.

    The main objectives of cost accounting are as follows:-

    1] Cost Ascertainment: 

    The main objective of cost accounts to find out the cost of product, process, job, contract, service or any unit of production. It is done through various methods and techniques.

    2] Cost Control: 

    The very basic function of cost accounts to control costs. A comparison of actual costs with standards reveals the discrepancies (Variances). The variances reveal whether the cost is within the control or not. Remedial actions are suggesting to control the costs which are not within control.

    3] Cost Reduction: 

    Cost reduction refers to the real and permanent reduction in the unit cost of goods manufactured or services rendered without affecting the use intended. It can be done with the help of techniques called budgetary control, standard costing, material control, labor control, and overheads control.

    4] Fixation of Selling Price: 

    The price of any product consists of total cost and the margin required. Cost data are useful in the determination of selling price or quotations. It provides detailed information regarding various components of cost. It also provides information in terms of fixed cost and variable costs, so that the extent of price reduction can be decided.

    5] Framing business policy: 

    It helps management in formulating business policy and decision making. Break-even analysis, cost volume profit relationships, differential costing, etc help make decisions regarding key areas of the business.

    Nature and Scope of Cost Accounting:

    Cost accounts concerned with ascertainment and control of costs. The information provided by cost-accounting to the management is helpful for cost control and cost reduction through functions of planning, decision making, and control. Initially, they confined itself to cost ascertainment and presentation of the same mainly to find out product cost.

    With the introduction of large-scale production, the scope was widened and providing information for cost control and cost reduction has assuming equal significance along with finding out the cost of production. To start with cost-accounting was apply in manufacturing activities but now it applies in service organizations, government organizations, local authorities, agricultural farms, Extractive industries and so on.

    The guide for the ascertainment of the cost of production. It discloses as profitable and unprofitable activities. They help management to eliminate unprofitable activities. It provides information for estimates and tenders. They disclose the losses occurring in the form of idle time spoilage or scrap etc. It also provides a perpetual inventory system.

    It helps to make effective control over inventory and for the preparation of interim financial statements. They help in controlling the cost of production with the help of budgetary control and standard costing. They provide data for future production policies. It discloses the relative efficiencies of different workers and for the fixation of wages to workers.

    Cost Accounting Objectives Nature and Scope
    Cost Accounting: Objectives, Nature, and Scope! #Pixabay.

    Limitations of Cost Accounting:

    The following limitations below are;

    • It is based on estimation: as cost accounting relies heavily on predetermined data, it is not reliable.
    • No uniform procedure in cost accounting: as there is no uniform procedure, with the same information different results may be arrived by different cost accounts.
    • A large number of conventions and estimate: There are several conventions and estimates in preparing cost records such as materials are issuing on an average (or) standard price, overheads are charging on the percentage basis, Therefore, the profits arrive from the cost records are not true.
    • Formalities are more: Many formalities are to be observed to obtain the benefit of cost accounting. Therefore, it does not apply to small and medium firms.
    • Expensive: Cost accounts expensive and requires reconciliation with financial records.
    • It is unnecessary: Cost accounts of recent origin and an enterprise can survive even without cost accounting.
    • Secondary data: It depends on financial statements for a lot of information. Any errors or shortcomings in that information creep into cost accounts also.
  • Management Accounting: Objectives, Nature, and Scope

    Management Accounting: Objectives, Nature, and Scope

    What is the definition of management accounting? Management accountants (also called managerial accountants) look at the events that happen in and around a business while considering the needs of the business. Management Accounting is comprising of two words “Management” and “Accounting”. Discuss the topic, Management Accounting: Meaning of Management Accounting, Definition of Management Accounting, Objectives of Management Accounting, Nature and Scope of Management Accounting, and Limitations of Management Accounting! From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately use to guide decision-making.

    Learn, Explain Management Accounting: Objectives, Nature, and Scope!

    Management Accounts a tool to assist management in achieving better planning and control over the organization. It is relevant for all kinds of an organization including a not-for-profit organization, government, or Sole Proprietorship’s. It has a significant place in the businesses and widely used by management to achieve better control and quality decision making. Also Learned, In the Hindi language: प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा, Financial Accounting!

    Meaning of Management Accounting:

    Management Accounts not a specific system of accounting. It could be any form of accounting which enables a business to conduct more effectively and efficiently. It’s largely concerned with providing economic information to managers for achieving organizational goals. It is an extension of the horizon of cost accounting towards newer areas of management. Much management accounts information is financial but has been organizing in a manner relating directly to the decision at hand.

    Management Accounts comprised of two words ‘Management’ and ‘Accounting’. It means the study of the managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in the formation of policy, control of execution, and appreciation of effectiveness. Management Accounts of recent origin. This was first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American Council on Productivity.

    Definition of Management Accounting:

    Definition: It is, also called managerial accounting or cost accounting, is the process of analyzing business costs and operations to prepare the internal financial report, records, and account to aid managers’ decision making process in achieving business goals. In other words, it is the act of making sense of financial and cost data and translating that data into useful information for management and officers within an organization.

    “Management accounting is the practical science of value creation within organizations in both the private and public sectors. It combines accounting, finance, and management with the leading edge techniques needed to drive successful businesses.”

    More of it:

    Anglo-American Council on Productivity defines as:

    “The presentation of accounting information in such a way as to assist management in the creation of policy and the day to day operation of an undertaking.”

    The American Accounting Association defines as:

    “The methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”

    The Institute of Chartered Accountants of India defines as follows:

    “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively has come to be known as management accounting.”

    From these definitions, it is very clear that financial data is recorded, analyzed, and presented to the management in such a way that it becomes useful and helpful in planning and running business operations more systematically.

    Objectives of Management Accounting:

    The fundamental objectives of management accounting are to enable the management to maximize profits or minimize losses. The evolution of managerial accounting has given a new approach to the function of accounting.

    The main objectives of management accounting are as follows:

    Planning and policy formulation:

    Planning involves forecasting based on available information, setting goals; framing policies determining the alternative courses of action, and deciding on the program of activities. Management Accounts can help greatly in this direction. It facilitates the preparation of statements in light of past results and gives an estimation for the future.

    Interpretation process:

    Management Accounts to present financial information to the management. Financial information is technical. Therefore, it must present in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

    Assists in the Decision-making process: 

    With the help of various modern techniques management accounting makes the decision-making process more scientific. Data relating to cost, price, profit, and savings for each of the available alternatives are collected and analyzed and provides a base for making sound decisions.

    Controlling:

    It is useful for managerial control. Their tools like standard costing and budgetary control help control performance. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. The performance of every individual is controlled with the help of managerial accounting.

    Reporting:

    Management Accounts keeps the management fully informed about the latest position of concern through reporting. It helps management to take proper and quick decisions. The performance of various departments is regularly reported to the top management.

    Facilitates Organizing:

    “Return on Capital Employed” is one of the tools of Management Accounts. Since managerial accounting stresses more on Responsibility Centre’s to control costs and responsibilities, it also facilitates decentralization to a greater extent. Thus, it helps set up an effective and efficient organization framework.

    Facilitates Coordination of Operations:

    Management accounts provide tools for overall control and coordination of business operations. Budgets are an important means of coordination.

    Nature and Scope of Management Accounting:

    Managerial Accounting involves the furnishing of accounting data to the management for basing its decisions. It helps in improving efficiency and achieving organizational goals. You may know is that Comparative analysis is the scope of management accounting.

    The following paragraphs discuss the nature and scope of management accounting.

    Provides accounting information: 

    Management accounting is based on accounting information. It is a service function and it provides the necessary information to different levels of management. Managerial Accounting involves the presentation of information in a way it suits managerial needs. The accounting data collected by the accounting department is used for reviewing various policy decisions.

    Cause and effect analysis: 

    The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; Managerial Accounting goes a step further. Managerial Accounting discusses the cause and effect relationship. The reasons for the loss are probed and the factors directly influencing the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payable’s, share capital, etc.

    Use of special techniques and concepts:

    It uses special techniques and concepts according to the necessity to make accounting data more useful. The techniques usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.

    Taking important decisions: 

    It supplies the necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taking into account.

    Achieving objectives:

    It is uses accounting information in such a way that it helps in formatting plans and setting up objectives. Comparing actual performance with targeted figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can take at once with the help of budgetary control and standard costing.

    No fixed norms: 

    No specific rules are followed in Managerial Accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most.

    Increase in efficiency: 

    The purpose of using accounting information is to increase the efficiency of the concern. The performance appraisal will enable the management to pinpoint efficient and inefficient spots. An effort makes to take corrective measures so that efficiency improves. The constant review will make the staff cost-conscious.

    Supplies information and not the decision: 

    The management accountant is only to guide and not to supply decisions. The data is to use by the management for taking various decisions. “How is the data to utilize” will depend upon the caliber and efficiency of the management.

    Concerned with forecasting: 

    The management accounts concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan the future course of action. The information is supplied to the object to guide management in making future decisions.

    Techniques and Procedures Design and Installation:

    Management accounting is identifying with the most productive and monetary arrangement of accounting reasonable for any size and kind of embraced. Additionally, it utilizes the best utilization of mechanical and electronic gadgets. Maybe you got your answer; 10 points of Nature of Management Accounting with their scope.

    A portion of the Acts, which have their impact on management choices, are as per the following:

    The Companies Act, MRTP Act, FEMA, SEBI Regulations, and so forth.

    Inside Audit:

    This incorporates the improvement of an appropriate arrangement of inside reviews for inner control. An interior review is led by the business association with the assistance of a paid worker who has careful accounting information. All the significant records are kept up under the management accounting framework with the goal that the inner review is directed in a successful way.

    Inner Reporting:

    This incorporates the arrangement of quarterly, half-yearly, and other interval reports and pays articulations, income and assets stream explanations, scarp reports, and so on.

    Limitations of Management Accounting:

    Hence, it suffers from all the limitations of a new discipline. Some of these limitations are:

    Limitations of Accounting Records:

    Management accounting derives its information from financial accounting, cost accounting, and other records. It is concerned with the rearrangement or modification of data. The correctness or otherwise of the Managerial Accounting depends upon the correctness of these basic records.

    It is only a Tool: 

    Management accounts not alternate or substitute for management. It is a mere tool for management. Ultimate decisions are taking by management and not by management accounts.

    Heavy Cost of Installation: 

    The installation of the Managerial Accounting system needs a very elaborate organization. This results in heavy investment which can afford only by big concerns.

    Personal Bias: 

    The interpretation of financial information depends upon the capacity of the interpreter as one has to make a personal judgment. Personal prejudices and biases affect the objectivity of decisions.

    Psychological Resistance:

    The installation of Managerial Accounting involves the basic change in the organization set up. New rules and regulations are also required to frame which affects the number of personnel, and hence there is a possibility of resistance from some or the other.

    Evolutionary stage: 

    Management accounts only in a developmental stage. Its concepts and conventions are not as exact and established as those of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use.

    Provides only Data:

    Managerial Accounting provides data and not decisions. It only informs, not prescribes. This limitation should also keep in mind while using the techniques of management accounting.

    Broad-based Scope: 

    The scope of management accounts for wide and this creates many difficulties in the implementation process. Management requires information from both accounting as well as non-accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it. Also Learned, In the Hindi language: Management Accounting: Objectives, Nature, and Scope (प्रबंधन लेखांकन का उद्देश्य, प्रकृति, और दायरा).

    Management Accounting Objectives Nature and Scope
    Management Accounting: Objectives, Nature, and Scope, Image credit from @Pixabay.

  • What is the Concept of Accountability in Financial Management?

    Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes to making the realization of the image an individual perceives it. This perspective helps a person to polish his senses and action thereby improving his image that is noticed by others. The second view of accountability is the socializing form in which a person can improve its performance and efficiency by interacting with some of the experienced people in the organization. Accountability institutionalizes the use of accounting through which it operates in the organizations and firms. Also learned, Types of Product, What is the Concept of Accountability in Financial Management?

    Learn, Explain What is the Concept of Accountability in Financial Management?

    “Accountability breeds responsibility” This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization, the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analyzed.

    How Does Accountability work?

    Accountability within the organizations mainly works through three different levels of accounting. They are auditing, management accounting, and financial reporting. Financial reporting and management accounting aspect of accounting has been dealt with in detail in representation and control part respectively. The third and more applicative form in which accountability holds in the organizations is the auditing in which companies accounts are checked and verified by some agency or authority assigned for it is covered in detail here.

    When it comes to organizational perspective the application of accountability expands. From the past, there has been a practice in business and organizations to maintain the accounts of each and every transaction that takes place in the organization. In the modern era, this system has become more advanced and transparent. The organizations can be judged or held responsible economically on the grounds of the accounts or financial statements that they produce. This involves the concept of auditing of company accounts. Audit serves as a vital economic process and plays an important role in serving the public interest by strengthening the accountability and reinforcing the trust and confidence in financial reporting.

    Auditing of accounts are generally performed by the people employed by the owner of the company, these persons are called auditors, agents or stewards. They generally work in the interest of the company with the focus on the economic performance of the institution. This phenomenon is called an agency theory which suggests that because of the information asymmetries people employ agents or stewards who work for the benefit of the company. Auditing gives a clear idea of accounts and also imparts the correct information to the shareholders.

    The interplay between Accounting and Accountability:

    Accounting can be defined as the process of identifying, measuring and communicating the financial information about the entity to permit informed judgments and decisions by users of information. Initially, there were cruder forms of accounting first one was double entry system which was a binary system method used for recording the events in which all the debts and credits were represented in the tabular form and the second was bookkeeping which was the maintenance or the summary of all the financial transactions taken place. Accountability often comes to play where there is some accounting failures or discrepancies and the company or the person producing the account is held responsible.

  • Why is “The Language of Business” also called Accounting?

    Why is “The Language of Business” also called Accounting?

    Many famous writers of Accounting of the world have regarded Accounting as the language of business. Man expresses his feelings through language in written and verbal form, similarly, various information of the business organization are expressing and presenting through accounting statements. Also learn, What is Accounting? Why is “The Language of Business” also called Accounting?

    Here are explain, Why is “The Language of Business” also called Accounting?

    In language, efforts are made to express a particular feeling using words one after another. Similarly, in accounting, financial transactions are recorded in books of accounts and there from preparing financial statements various financial information are communicated to concerning the persons.

    Accounting furnishes all information about past events, current activities and future possibilities of a business. Recording and analyzing past and present financial events, Accounting presents and communicates various information in the form of statements and reports to the interested parties like owners, employees, management, investors, buyers, sellers, etc.

    These financial statements are meaningless to those who do not have knowledge of accounting, in the same way as the newspaper is a bundle of papers to an illiterate person. So, Accounting functions like a language. One may think it is not apt to compare Accounting with language but actually, it is not so.

    Shorthand is a language but the persons who are ignorant of it cannot understand this symbolic language. Similarly, it is not illogical to term accounting as a language of business. It is meaningless to those who are ignorant of this discipline. No language in the world is universal. Similarly, accounting language also is not understandable to all.

    With the changes in society and human life languages are changing. Similarly with the advancement and complexity of business accounting language is changing gradually. Therefore, it is apt to say, Accounting is the language of business.

    Accounting as the “Language of Business”!

    Accounting is the analysis and interpretation of book­keeping records. It includes not only maintenance of accounting records but also the preparation of financial and economic information which involves the measurement of the transaction and other events pertaining to a business.

    To operate a business profitably and to stay solvent, the profitability and solvency of a business should measure at regular intervals. For that, it is essential to know whether a business is earning sufficient profits or incurring losses and it has sufficient money to pay off debts. Accounting provides all these pieces of information which enable the management to guide the business on a profitable and solvent course.

    After analyzing properly the information supplied by the accounting statements, the users of the same take decisions for future activities. Since accounting supplies the necessary information, it performs, in fact, a service function and, at the same time, it is using to represent the economic position of an entity. Therefore, it becomes clear that keeping of accounts is not the primary objective of a person or an entity.

    On the contrary, the primary objective is to take a decision on the basis of financial facts presented by accounting statements. Thus, the understanding of accounts is not the basic objective; it only helps to realize a specific objective. As such, accounting is not an end in itself but a means to an end.

    We express ourselves through our language. Similarly, the results of the activities are expresses through accounting with the help of financial statements. Accounting measures the performances of the business, that is, profitability and financial position. Thus, the language of accounting expresses the whole story of the undertaking through the various processes of accounting. The progress of the firm can easily compare and seen with the help of various accounting data.

    Definition of “Language of Business”!

    Accounting is knowing as “The Language of business.” It is a means of communicating information about a business. Its responsibility is applying a thorough knowledge of the theory of accounting, that is, generally accepting principles of accounting to the practical field of business in order that income and financial position may state fairly.

    Yuji Ijiri, observes “As the language of business, accounting has many things in common with other languages. The various business activities of a firm are reports in accounting statements using accounting language, just as news events are reports in newspapers, in English or another Language”.

    From these accounts, statements, and reports, parties concerned can evaluate their success-failure, financial solvency -insolvency, etc. Of course, having sound command over accounting language one can understand this information.

    To express an event in accounting or in English we must follow certain rules. Without following certain rules diligently, not only does one run the risk of misunderstanding but also risks a penalty for misrepresentation, lying or perjury. Comparability of statements is essential to the effective functioning of a language whether it is in English or in accounting. At the same time, language has to be flexible to adapt to a changing environment.”

    Why is The Language of Business also called Accounting
    Why is “The Language of Business” also called Accounting?

    Reference

    1. Meaning – //iedunote.com/accounting-language-of-business
    2. Explain – //www.yourarticlelibrary.com/accounting/accounting-as-the-language-of-business/49981
    3. Photo Credit URL – //www.igeabanca.it/sites/default/files/2017-06/132483653_M_3.jpg

  • What is the Meaning and Objectives of Accounting?

    What is the Meaning and Objectives of Accounting?

    What is accounting? Meaning and Objectives of Accounting; Different scholars and Institutes have defined accounting differently. The important among them are as follows: According to Smith and Ashburne, “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating results to persons who must take decisions or form Judgement.” Also learn, The Difference between Revaluation and Realization Account.

    Understanding, learn Meaning and Objectives of Accounting. 

    The Committee on Terminology, appointed by the American Institute of Certified Public Accountants defined accounting as, “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof.”

    In fact, this is the popular definition of accounting that outlines fully the very nature and scope of accounting activity. The sum and substance of accounting, thus, is from the recording of transactions to communicating the results thereof to the concerned parties.

    Objectives of Accounting:

    The following are the main objectives of accounting:

    1. To maintain full and systematic records of business transactions:

    Accounting is the language of business transactions. Given the limitations of human memory, the main objective of accounting is to maintain ‘a full and systematic record of all business transactions.

    2. To ascertain profit or loss of the business:

    Business is run to earn profits. Whether the business earned the profit or incurred loss is ascertained by accounting by preparing Profit & Loss Account or Income Statement. A comparison of income and expenditure gives either profit or loss.

    3. To depict the financial position of the business:

    A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement call Balance Sheet is preparing in which assets and liabilities are shown.

    Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not, in the same way by looking at the Balance Sheet one will know the financial health of an enterprise. If the assets exceed liabilities, it is financially healthy, i.e., solvent. In the other case, it would be insolvent, i.e., financially weak.

    4. To provide accounting information to the interested parties:

    Apart from the owner of the business enterprise, there are various parties who are interested in accounting information. These are bankers, creditors, tax authorities, prospective investors, researchers, etc. Hence, one of the objectives of accounting is to make the accounting information available to these interest parties to enable them to take sound and realistic decisions. The accounting information is creating available to them in the form of an annual report.

    Also, These Objectives of Accounting is useful!

    Every activity that a business firm does must do for a reason and accounting is no exception. Accounting helps the company achieve a myriad of objectives. Here is the list of objectives that accounting helps the company to obtain.

    #Permanent Record

    Any business firm needs a permanent record of the transactions that it indulges in. These records could require for the internal purpose, for taxation purpose or for any other purpose. Accounting serves this function. Whenever the organization commits any resource of monetary value either within the firm or outside the firm, a record is creating. This permanent record is held on for years and can retrieve as and when need be.

    #Measurement of Outcome

    A business firm may indulge in numerous transactions every day. It may make the profit in some of these transactions while it may make losses in some other transactions. However, the effect of all these transactions needs to aggregate over a period of time. There must be daily, weekly and monthly reports which provide information to the organization about how well it is performing its activities. Accounting serves this purpose by providing periodic financial statements which help the firm adjust their operations accordingly.

    #Creditworthiness

    Firms need resources for their functioning. They do not have any capital stock at hand and need to obtain them from investors. Investors will give money to the firm only if they have reasonable assurance that the firm will able to generate enough profit. Past accounting records help a great deal in proving this. All kinds of investors from banks to shareholders ask for past accounting details before they trust the management with their money.

    #Efficient Use of Resources

    Firms can also conduct useful internal analysis with the help of accounting data. Accounting records tell the firm what resources were commits to what activity and what time. These records also summarize the return that was obtained from these activities. Management can then analyze past behavior and draw lessons about how they could have performed better and used resources more efficiently.

    #Projections

    Accounting helps management and investors look forward. Costs and revenue growths can project after substantial data has been accumulating. The assumption made is that the company is likely to behave exactly as it has done in the past. Thus, analysts can make reasonable assumptions about the future based on the past record.

    What is Meaning and Objectives of Accounting
    What is the Meaning and Objectives of Accounting?

    Reference

    1. Meaning and Objectives – //www.yourarticlelibrary.com/essay/accounting-meaning-and-objectives-of-accounting/41166
    2. Another Objectives – //www.managementstudyguide.com/accounting-objectives.htm
    3. Photo Credit URL – //paprika.com.uy/wp-content/uploads/2017/03/fabrica.jpg