Tag: Accounting

  • 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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  • 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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  • The similarity between Financial and Management Accounting!

    The similarity between Financial and Management Accounting!

    Financial and management accounting plays an important part in the accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information that management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise. Also learned, Creative Accounting, The similarity between Financial and Management Accounting!

    Learn, Explain The similarity between Financial and Management Accounting! 

    Management accounting is used primarily by those within a company or organization. Reports can generate for any period of time such as daily, weekly, or monthly. Reports are considering to be “future looking” and have forecasting value to those within the company. The main function of management accounting in the enterprise is to establish a variety of internal accounting control systems and provide internal management needs of a variety of data and information to improve operational efficiency and effectiveness.

    Financial accounting is used primarily by that outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. The reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.

    However, the reality is that financial and management accounting has been completely separated by an increasing number of companies, which according to their own accounting methods to double account the data at the aim of external reporting and internal management. It is hard to achieve information sharing between the two sets of data, resulting in the waste of resources and duplication of effort.

    Therefore, companies should integrate both accounting effectively together, and give full play to the function of the accounting information system to enable enterprises to obtain the dual needs of management and finance at the lowest financial cost.

    Similarities Between Financial and Management Accounting!

    What are the similarities? It is can be below are;

    Financial accounting:

    They focus on external services, but internal services are also including. The information which financial accounting provided on the funding, costs, profits, and other information is very important for business management. In particular, financial statements can comprehensive and reflect all aspects of the enterprise’s financial position and operating results. Study of the financial statements can grasp the overall situation of the enterprises, managers must first be aware of the overall situation, so that guide enterprises to continuously move forward.

    Therefore, managers must pay close attention, and be very concerned about the information providing by financial accounting. At the basis of the analysis of financial accounting, the plan could develop to enhance control and make a scientific decision, how to further improve management and increase economic efficiency could also study. So we can not say financial accounting is just the external services, not domestic services, we can only say that financial accounting focuses on external services.

    Management accounting:

    They focus on internal services, but it also contains external services. Investors and creditors concern about the enterprise’s financial position and operating results. To improve the enterprise’s financial position and operating results. Precondition can only base on strengthening internal management and improving. The work’s quality and effectiveness in the aspects of production and management. In this regard, management accounting contributes a lot to correct business decisions and the timely provision of useful information. At the same time, investors and creditors in their decision-making. Also, need to know several economic information provided by management accounting. Which has important reference value when they make the right judgments and policy decisions.

    Management accounting must obtain a variety of information from the different channels for planning and control of production and business activities. Such as financial information, statistics, business accounting information, and other relevant information. The most basic of which is financial information. Financial accounting has a fixed set of procedures and methods. Information will form according to some time production and business activities and their results through the registration books, weaving statements, etc. Which is not only for external use but also for internal use. Management accounting can develop base on financial information, making management accounting information to facilitate regulation, control, and decision making.

    The similarity between Financial and Management Accounting
    The similarity between Financial and Management Accounting, #Pixabay.
    Similarity:

    The functions of accounting are accounting and supervision. They have agreed to subordinate to the general requirements of a modern enterprise accounting. This means the users of accounting information provide relevant information, to achieve enterprise internal objectives and meet the requirements outside the enterprise. So the ultimate goal of accounting is the same.

    Both accounting is facing with self-improvement and development. They have to confront the reality of a common problem: how to use modern computer technology to collect, process, store, transmit, and report the accounting information; at the same time. They need to handle the demands of modern management properly according to the organization and implementation of accounting management.

  • Difference between Cost and Financial Accounting

    Difference between Cost and Financial Accounting

    Cost Accounting and Financial Accounting Difference: Cost Accounting refers to that branch of accounting that deals with costs incurred in the production of units of an organization. A common question asked around, What is the Difference between Cost Accounting and Financial Accounting? On the other hand, financial accounting refers to the accounting concerned with recording financial data of an organization, to exhibit the exact position of the business. Also, take look at the difference between Cost and Management Accounting.

    Learn, Explain the Difference between Cost and Financial Accounting!

    Cost accounting generates information to keep a check on operations, to maximize profit and efficiency of the concern. On the other hand, Financial accounting ascertains the financial results, for the accounting period and the position of the assets and liabilities on the last day of the period. There is no comparison between these two because they are equally important for the users. This article presents you with the difference between cost accounting and financial accounting in tabular form.

    Definition of Cost Accounting:

    Cost Accounting is the field of accounting that uses to record, summarise, and report the cost information on a periodical basis. Its primary function is to ascertain and control costs. It helps the users of cost data to make decisions regarding the determination of selling price, controlling costs, projecting plans and actions, efficiency measurement of the labor, etc. also, Cost Accounting adds to the effectiveness of financial accounting by providing relevant information which ultimately results in the good decision-making process of the organization. It traces the cost incurred at each level of production, i.e. right from the input of the material till the output produced, every cost records.

    There are two types of Cost Accounting systems, they are:

    • Non – Integrated Accounting System: The accounting system in which a separate set of books is maintaining for cost information.
    • Integrated Accounting System: The accounting system in which cost and financial data are maintaining in a single set of books.

    Definition of Financial Accounting:

    Financial Accounting is the branch of accounting, which keeps the complete record of all monetary transactions of the entity and reports them at the end of the financial period in proper formats that increases the readability of the financial statements among its users. Also, The users of financial information are many i.e. from internal management to outside parties. Preparation of financial statements is the major objective of financial accounting in a specified manner for a particular accounting period of an entity.

    It includes an Income Statement, Balance Sheet, and Cash Flow Statement which helps in, tracing out the performance, profitability, and financial status of an organization during a period. Also, the information provided by financial accounting is useful in making comparisons between different organizations and analyzing the results thereof, on various parameters. In addition to this, the performance and profitability of various financial periods can also be compared easily.

    Comparison of Cost and Financial Accounting:

    Basis For Comparison Cost Accounting Financial Accounting
    Meaning: Cost Accounting is an accounting system, through which an organization keeps the track of various costs incurred in the business in production activities. Financial Accounting is an accounting system that captures the records of financial information about the business to show the correct financial position of the company on a particular date.
    Information type: Also, Records the information related to material, labor, and overhead, which are used in the production process. Records the information which are in monetary terms.
    Which type of cost is used for recording? Both historical and pre-determined cost Only historical cost.
    Users: Information provided by the cost accounting uses only by the internal management of the organization like employees, directors, managers, supervisors, etc. Also, Users of the information provided by financial accounting are internal and external parties like creditors, shareholders, customers, etc.
    Valuation of Stock: At cost Cost or Net Realizable Value, whichever is less.
    Mandatory: No, except for manufacturing firms it is mandatory. Yes for all firms.
    Time of Reporting: Details provided by cost accounting are frequently prepared and reported to the management. Financial statements are reported at the end of the accounting period, which is normally 1 year.
    Profit Analysis: Generally, the profit is analyzed for a particular product, job, batch, or process. Income, expenditure, and profit are analyzed together for a particular period of the whole entity.
    Purpose: Reducing and controlling costs. Also, Keeping a complete record of the financial transactions.
    Forecasting: The forecasting is possible through budgeting techniques. The forecasting is not at all possible.

    The upcoming discussion will update you on the difference between cost and financial accounting.

    The Difference in Cost Accounting:

    The following difference below are;

    • Cost Accounting explains the prin­ciples, techniques, and methods for ascertaining the cost and to find out the variance in comparison with the standard and enquire reasons for such variation.
    • The objective of cost accounting is to ascertain the cost and allocates the same in respective places.
    • It applies to the manufacturing and service industries.
    • Also, Cost accounting supplies necessary information’s to the management for decision-making purposes.
    • Stocks are valued as per cost price in cost accounting.
    • Cost accounting determines the profit or loss of each item of product, process, etc.
    • There is no particular period for ascertaining the cost of a product.
    • Also, Cost accounting is based on the concept of costing principles.
    • They include data based on facts and figures and also on some estimates.
    • Also, Cost accounting considers the requirements of Sec. 209(1) of the Companies Act.
    • Cost accounting control, material labor and overhead costs with the help of Standard costing, Budgetary control, etc.
    • Usually, cost accounting provides services to internal management.
    The Difference in Financial Accounting:

    The following difference below are;

    • Financial accounting maintains records for keeping accounts rela­ting to all monetary transactions.
    • The objective of financial accoun­ting is to maintain records and to prepare final accounts.
    • It is applicable in all cases.
    • Also, Financial accounting supplies information’s to the management relating to profit or loss and financial positions.
    • In financial accounting, stocks are valued as per cost price or market price whichever is lower.
    • Financial accounting shows the profit or loss of a firm as a whole at a particular date.
    • In Financial Accounting, accounts are prepared periodically, usually at the end of the period.
    • Also, Financial accounting bases on the concept of GAAP.
    • Financial accounting takes data based on facts and figures only.
    • They meet the requirements of the Companies Act 1956, Sales Tax, Income-Tax, etc.
    • Financial accounting does not have any tool to control the financial tran­saction of the business.
    • Also, Financial accounting provides information to the internal as well as external users of accounting information.

    The Main point of Differences Between Cost and Financial Accounting:

    Difference between Cost and Financial Accounting
    Difference between Cost and Financial Accounting

    The following are the major differences between cost accounting and financial accounting:

    • Cost Accounting aims at maintaining the cost records of an organization. Also, Financial Accounting aims at maintaining all the financial data of an organization.
    • Cost Accounting Records both verifiable and pre-decided costs. On the other hand, Financial Accounting records just chronicled costs.
    • Also, Clients of Cost Accounting are restricted to interior administration of the element; though clients of Financial Accounting are inside just as outside gatherings.
    • In cost, accounting stock qualities at cost while in financial accounting, the stock qualities at the lower of the two for example cost or net feasible worth.
    • Cost Accounting is obligatory just for the association which participates in assembling and creative exercises. Then again, Financial Accounting is obligatory for all associations, just as consistent with the arrangements of the Companies Act and Income Tax Act, is additionally an unquestionable requirement.
    • Also, cost Accounting data reports intermittently at continuous spans; yet financial accounting data reports after the fruition of the financial year for example for the most part one year.
    • Cost Accounting data decide benefit identified with a specific item, work, or cycle. Instead of Financial Accounting, which decides the benefit for the entire association made during a specific period.
    • Also, the motivation behind Cost Accounting is to control costs; yet the reason for financial accounting is to keep total records of the financial data, in light of which detailing should be possible toward the finish of the accounting time frame.
  • Difference between Cost and Management Accounting

    Difference between Cost and Management Accounting

    Cost and Management Accounting Difference; Cost accounting is a branch of accounting that aims at generating information to control operations to maximize profits and the efficiency of the company, that is why it is also termed control accounting. A common question asked around, What is the difference between the Cost Accounting and Management Accounting? Conversely, management accounting is the type of accounting that assists management in planning and decision-making and is thus known as decision accounting. Also learned, Financial and Management Accounting.

    Learn, Explain the Difference between Cost and Management Accounting.

    The two accounting system plays a significant role, as the users are the internal management of the organization. While cost has a quantitative approach, i.e. it records data that is related to money, management emphasizes both quantitative and qualitative data. Now, let’s understand the difference between cost accounting and management accounting, with the help of the given article.

    Definition of Cost Accounting:

    They are a method of collecting, recording, classifying, and analyzing the information related to cost. Also, the information provided by it is helpful in the decision-making process of managers. There are three major elements of cost which are material, labor, and overhead. The main aim of cost accounting is to track the cost of production and fixed costs of the company. Also, this information is useful in reducing and controlling various costs. It is very similar to financial accounting, but it is not reported at the end of the financial year.

    Definition of Management Accounting:

    Management Accounting refers to the preparation of financial and non-financial information for the use of management of the company. It is also termed managerial accounting. Also, the information provided by it helps make policies and strategies, budget, forecasting plans, making comparisons, and evaluating the performance of the management. The reports produced by management accounting are used by the internal management of the organization, and so they are not reported at the end of the financial year.

    Comparison of Cost and Management Accounting:

    The Basis of Comparison Cost Accounting Management Accounting
    Meaning The recording, classifying, and summarizing of cost data of an organization is known as cost accounting. Also, the accounting in which both financial and non-financial information is provided to managers knows as Management Accounting.
    Information Type Quantitative. Quantitative and Qualitative.
    Objective Ascertainment of cost of production. Providing information to managers to set goals and forecast strategies.
    Scope Concerned with ascertainment, allocation, distribution, and accounting aspects of cost. Impart and effect aspect of costs.
    Specific Procedure Yes No
    Recording Records past and present data It gives more stress on the analysis of future projections.
    Planning Short-range planning Short-range and long-range planning
    Interdependency Can install without management accounting. Cannot install without cost accounting.

    The upcoming discussion will help you to differentiate between cost and management accounting.

    The main difference between Cost and Management Accounting:

    The following difference below are;

    Objective:

    The primary objective of Cost Accounting is to ascertain the cost of production as well as to control the same after careful analysis. On the other hand, the primary objective of Management Accounting is to supply the accounting information to the management for taking the proper decision.

    Method:

    In Cost, accounts are prepared according to predetermined standards and budgets. But in Management reports are submitted to the management after measuring the variance between the actual performances and the budgets. As a result, past errors and defects may rectify and, thereby, efficiency improves.

    Accounting System:

    The Double Entry System can apply in Cost Account, if necessary, whereas this is not adopting in the case of Management Account.

    Accounting Period:

    Normally, in Cost, statements of the current year’s activities are to prepare, i.e., importance is not according to future activities while, in Management, primarily future activities are considering.

    Management Accounting relates to the whole affair of the concern, the capacity for making profits or losses, and the expectation for the future. To discharge its duties properly, it has to depend on both Financial Accounting and Cost Accounting. Therefore, Management Accounting may regard as the expansion of these two forms of accounting, viz., Financial Account, and Cost Account.

    The main points of the difference between Cost and Management Accounting:

    • The accounting related to the recording and analyzing of cost data is cost account. Also, the accounting related to producing information which uses by the management of the company is management account.
    • Also, Cost provides quantitative information only. On the contrary, Management provides both quantitative and qualitative information.
    • Cost is a part of Management as the information uses by the managers for making decisions.
    • The primary objective of Cost Accounting is the ascertainment of the cost of producing a product but the main objective of management accounting is to provide information to managers for setting goals and future activity.
    • There are specific rules and procedure for preparing cost accounting information while there is no specific rules and procedures in case of management accounting information.
    • The scope of Cost Account limits to cost data however the Management Account has a wider area of operation like the tax, budgeting, planning and forecasting, analysis, etc.
    • Cost related to the ascertainment, allocation, distribution, and accounts face of cost. On the flip side, management associates with the impact and effect aspect of cost.
    • They stress short-range planning, but management accounting focuses on long and short-range planning, for which it uses high-level techniques such as probability structure, sensitivity analysis, etc.
    • While management accounting can’t install in the absence of cost accounting; Also, cost accounting has no such requirement, it can install without management accounting.
    Difference between Cost and Management Accounting
    Difference between Cost and Management Accounting.
  • Difference between the Financial and Management Accounting

    Difference between the Financial and Management Accounting

    Financial Accounting and Management Accounting are two interrelated facets of the accounting system. A common question asked around, What is the primary difference between the Financial and Management Accounting? Financial accounting provides the basic structure for collecting data. The data collection structure is suitably modifying or adjusts for accumulating information for management accounting purposes. They are not exclusive of each other; they are supplementary.

    What is the Difference between Financial and Management Accounting? Discussion.

    In a broader sense, management accounting includes financial accounting.  They differ in their emphasis and approaches.

    Difference between Financial and Management Accounting - Table
    Difference between Financial and Management Accounting – Table

    Basic Difference:

    They are as follows;

    1. Financial serves the interest of external users (i.e. investors etc.) while management caters to the needs of internal users (i.e. management).
    2. Financial accounts govern by the generally accepted accounting principles while management accounts no set principles.
    3. The Financial presents historical information while management represents predetermined as well as past information.
    4. Financial accounts statutory while management accounts optional.
    5. Financial accounting presents annual reports while management accounting reports are of both shorter and longer durations.
    6. The Financial reports cover the entire organization while management reports are prepared for the organization as well as its segments.
    7. The financial account emphasizes the accuracy of facts while the management account requires prompt and timely reporting of facts even if they are less precise.

    This article will explain to you the difference between financial accounting and management accounting.

    Focus:

    Financial accounting emphasized the external use of accounting data. Management accounting, on the other hand, utilizes accounting data for internal uses. The major objective of financial accounting is to prepare a balance sheet and profit and loss account to inform shareholders and others about the firm’s profitability and the state of its resources and obligations.  The purpose for which management accounting collects and reports relevant information is to make decisions to ensure optimum use of the firm’s resources.

    Principle: 

    The accounting profession has developed certain principles for preparing and presenting financial reports for external uses.  Financial accounting adheres to these generally accepted accounting principles. This introduces consistency and meaningfulness of data from the investors’ point of view. They can make inter-firm comparisons of performance and analyze performance trends over the years when some set of generally accepted principles are followed by all firms.

    Management accounting, in contrast, is not based on any set of accepted rules or principles. Every enterprise, depending on its requirements for facts, evolves its procedures and principles for preparing reports for internal uses.  The information should be relevant and aid management in making decisions.

    Information:

    Financial accounting accumulates and reports historical information to investors. Financial accounting reports tell what has happened in the past.  Through balance sheet and profit and loss account, to the investors is revealed how the resources entrusted by them to the firm have been utilized.  Management accounting being a decision-making process focuses on the future.  It analyses past data and adjusts them in the light of future expectations to make plans.

    Need:

    Financial accounting is an outcome of the statute.  For example, in India, it requires under the Companies Act, 1956 to prepare the balance sheet and profit and loss account for submission to shareholders and others.  The financial statements are generally required to prepare in the formats prescribed by the law.

    Management accounting is the result of the management’s need for information for making decisions.  It is, therefore, optional.  Management accounting functions would differ from firm to firm. A firm may have a sophisticated, elaborate, and comprehensive system while another may have a partial system only.

    Timing:

    Financial accounting adopts twelve months (one Year) period for reporting financial performance to shareholders and other investors.  In contrast, management accounting reports are for shorter durations.  Some companies in India prepare daily budgets.  Monthly and quarterly reports are quite common.  Management accounting information also collects for preparing long-term plans for five or more years.  Capital expenditure plans, for example, cover a longer duration.

    Coverage:

    While reporting the state of affairs of a company, financial accounting covers the entire organization.  Financial statements show revenues, expenses, assets, and equities of the firm as a whole.  For management accounting purposes, however, the organization is divided into smaller units or centers.  These centers may head by responsible persons.  Cost data and other information are collecting and reporting by these centers. Thus, the data requirements of management accounting are more specific.

    Reporting:

    Financial statements-balance sheet and profit and loss account – are subject to the verification of statutory audit.  Therefore, financial accounting stresses the accuracy and precision of accounting data.  Management accounting requires information promptly for decision-making.  The continuous and speedy flow of approximate information is more useful than the precise but delayed information.

    The above points of difference between Financial Accounting and Management Accounting (Hindi Medium) prove that Management Accounting is a flexible approach as compared to the rigid approach in the case of Financial Accounting. In brief, financial accounting simply shows how the business has moved in the past while management accounting shows how the business has to move in the future.

    Difference between Financial and Management Accounting
    Difference between Financial and Management 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.