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This subject guide is written for those of you who are studying Principles of Accounting. The unit is intended as a broad introduction to the subject, both for non-specialist students, and as a foundation for further study in the area.
From the outside, accounting can appear to be a purely practical subject. It would be very easy to focus on just the applications of techniques and procedures. But accounting is more than just a set of calculations; unless we can understand and interpret the ¬gures we produce, the calculations are pointless!
Accounting provides information for a wide variety of different users and purposes, and its practices can only be properly understood and assessed in relation to the economic and social environment in which they are applied. Therefore there are four aspects to this subject:
First of all Techniques for recording, calculation, classi¬cation and reporting of accounting information. An additional the legal and institutional background associated with accounting information. The economic and administrative problems which the information is required to solve. The interpretation of reports prepared using 1 in the light of 2 and 3. The accounting information referred to in 1 need not be ¬nancial, although for our purposes in this unit it will almost always be.
The aims of the unit are to; introduce you to the principles underlying accounting, enable you to apply, interpret and explain key accounting techniques, provide a broad understanding of the theory and practice of ¬nancial and management accounting.
Accounting principles is the measurement, disclosure or provision of assurance about information that helps managers and other people who make a business decision to make decisions about resource allocation. Financial accounting is one branch of basic accounting as it involves processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated.
There are five types of different users. That is managers, owner of the business, prospective buyer, tax inspector and investors. Firstly, the managers of the business will want to know how things are going. They need financial information in order to plan for the future; they then need more up-to-date information in order to check whether actual performance is on target. This process is known as controlling the costs and finances. In accounting it is known as management accounting. So, management accounting is done by the managers, for the managers, for the purposes of planning and control.
Company shareholders are the real owners of a business and needs information from those that manage the business on their behalf. Owner of the business it means the person in charge for the whole business or company.
An additional prospective buyers means financially buy the source from owner. For example normally prospective buyers will search and analysis the information of the product before buying something. Once the customer really satisfied on the things they bought they will buy again. Satisfied customer will but again.
Tax accounting encompasses two related functions: tax compliance and tax planning. Tax compliance refers to the calculation of a firm's tax liability. This process entails the completion of sometimes lengthy and complex tax forms. Tax compliance takes place after a year's transactions have been completed. In contrast, tax planning takes place before the fact. A business transaction can be structured in a variety of ways; a car can be purchased by securing a loan, for example, or it can be leased from the dealer. They are only concerned about the returns that come to them in the form of tax revenue.
At last, for potential investors to be in a position to make investment decision some analysis has to be made and this can only be made from accounting information. In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money. In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.
There are four regulatory characteristics of these financial statements that will provide useful information to the users. There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria. That is Understandability, Relevance, Reliability, and Comparability.
First of all Understandability, This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users that who are generally assumed to have a reasonable knowledge of business and economic activities. The information must be readily understandable to users of the financial statements.
Relevance means, the information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users.
From the aspect of reliability, the information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure.
Fourthly comparability, this implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.
INCOME STATEMENT AS AT 31 DEC 2010
Less cost of goods sold(COGS)
+proceed from disposal of vehicles (35000-3000)
Office electricity and water
Provision for depreciation
Provision for bad debts
Purchases and goods
BALANCE SHEET AS AT 31 DEC 2010
Office premises of cost
Vehicles of cost
Provision for bad debt
Accrue of sale commission
Percentage of gross profit on sales
= Gross profit x 100
= 175000 x 100
Percentage of operating profit on sales
= net profit x100
= 103500 x100
Return on capital employed (ROCE)
= net profit x100
= 103500 x100
= current asset
Stock turnover period
= cost of sale
= 96.6 days
Debtor collection period
Creditor collection period
The accounting boards that prepare accounting principles such as the Financial Accounting Standards Board are able to control preparation of financial statements. Control is essential because it prevents unethical accountants from preparing statements that do not reflect a true and fair view of the company's financial performance. Incorrect statements may lead the firm into financial distress and bankruptcy.
Accounting principles can be used in a variety of situations. For example, matching principle states that revenues and costs should be matched in the period in which they take place whether cash is received or not. This principle can be used in any type of business whether it is leasing or health care or banking because all firms incur expenditure and get revenues. Accounting principles can thus be used for unexpected transactions.
The use of principles in accounting leads to transactions that show the true financial substance of the firm. Some of the generally accepted accounting principles are foregone consideration, revenue recognition, matching, consistency and objectivity.