Characteristic Of Useful Financial Information Accounting Essay

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Accounting consists of many users and there is a lot of information they need and derive from accounts. There are internal users people within the organization and also external users (people outside the organization) who use accounts to derive financial information for their needs as there is such people like the manager, employees, shareholders and etc. Besides that, there are also characteristics of useful financial information. In addition, to satisfy the useful financial information, company need to fulfill the following criteria such as relevance, timeliness, accuracy, comparability and understandability. And lastly, accounting equation contains a concept which is called Dual Aspect Concept. Dual Aspect Concept states that there are two aspects of Accounting, out of which one aspect represents business assets and the other assets represent business owner's equity or capital plus liabilities. These two aspects of accounting have equal value that construct an accounting equation.

Introduction Question 2

The second question of the assignment is about a trial balance at 30 June 2012 that is already prepared by an accounting clerk. However, the trial balance is unequal due to errors of putting account balances and some transactions omitted or left out from the record. The question two requires us to redraft the trial balance after considering the errors and the omitted transaction.

Answer Question 1

State out five users of accounting and clearly explain the information that they need and derive from accounts.

The 5 users of accounting and the information they need :

Managers of the company:

These are people appointed by the company's owners to supervise the day to day activities of the company. They need accounting information about the company's financial situation as it is currently and as it is expected to be in the future to enable them to manage the business efficiently and to take effective control and planning decisions. Besides that, they also need to analyze the company's whole business in order to manage the profit and loss for the company. With complete accounting statistic for the company, the managers can manage the company much easier.

Shareholders or owners of the company:

These are business proprietors or the owners of the company. They need accounting information to assess how effectively the management of company is performing its stewardship function, how profitably the management is running company's operations and how much profit they can withdraw from their dividend pay. The shareholders or the owners need to know the accounting situation to ensure that they know how the company is running throughout the year. Besides that, they need to the profit of the company in order to get their dividend pay. The shareholder or the owner can't withdraw dividend pay without balancing the account of the company.

Providers of finance to the company such as banks and other financial institution:

They provide loan and overdrafts for the company to finance business activities. They need accounting information about the company's financial status to ensure that the company is able to keep up with interest payments and eventually repay the principal amount of loan advanced. The company has to hand up the account of their company when they are about the loan a sum of money. These providers of finance will analyze and make a conclusion to borrow or not to the company. Not all company is eligible to return the money after they loan it from the providers. Therefore, these providers of finance need to use the accounting.

Customers or debtors:

These are people who purchase goods or services provided by the company. They need accounting information about the company's financial stability status to ensure that the company is a secure source of supply and no danger to having close down. Customers and debtors need to know the financial stability if they would not want to buy items or services from a fraud company or a company which is about to go bankrupt. Besides that, debtors need to know the financial situation because if the company is not paying the debts then the debts will become bad debts and the debtors themselves will have to bear the loss themselves.

Employees of the company:

These are the people employed by the company to carry out business activities. They need accounting information about the company's financial situation because their future careers and the size of their wages and salaries depend on it. They have to manage the accounting information properly if they are looking forward for a raise or promotion for their future. The company advanced and this also benefits the employees.

Answer Question 1(b)

Explain in details about the characteristic of useful accounting information.

Characteristic of useful financial information:

For having financial statements and accounts to provide useful financial information to the account users, company should satisfy the following criteria in preparing its accounts : Relevance, Timeliness, Accuracy, Comparability, Understandability, and Reliability.

Relevance

The financial accounts prepared based on accounting concepts and policies should present relevant financial information which is capable of influencing the economic decisions of the users. Therefore, the information presented by the financial accounts should be relevant to the decision making of the users. The relevance of information provided is important as it will influence the decision making of the company.

Timeless

Whether the financial account information is relevant or not the decision making of users, it depends on whether the financial accounts are made to present information on time or not when it is needed for decision making. If the accounts are prepared to provide required information on time without delay, it is relevant to the decisions making of the user. If the accounts are not prepared to provide information on time because of delay, it is not relevant to the decision making of the users.

Accuracy

The financial accounts should provide accurate financial information to the users for decision making because the inaccurate account information will lead to inaccurate decision made by the user.

Comparability

The financial accounts made based on accounting concepts should be comparable with the previous year accounts and comparable with accounts of the other companies.

Understandability

The financial accounts prepared based on the accounting concepts should be capable of being understood by the users who have reasonable knowledge of business, economic activities and accounting.

Reliability

Financial accounts should present reliable information to the users for decision making. The financial account information is reliable if

It reflects the substance of transaction to present faithfully and truly what has already happened

It is free from bias and neutral.

It is free from error.

It is complete of required account information.

It is prudent and realistic where there is any uncertainty.

If the above stated points are not fulfilled, the financial account information is not reliable for the decision making user.

Answer Question 1(C).

Accounting Equation

Dual Aspect Concept states that there are two aspects of accounting, out of which one aspects represents business owner's equity or capital as follows:

Business owner's equity or Capital + Liabilities

Accounting equation is influenced by double entry when a pair of debit entry and credit is made simultaneously in two accounts for recording a business transaction. Thus, the record of a business transaction with double entry will cause changes in accounting equation as follows:

Assets

Owner's Equity or Capital

Liabilities

Increased by debit relevant asset account

Increased by credit capital or Profit / loss account

Unchanged

Increased by debit relevant asset account

Unchanged

Increased by credit relevant liability account

Decreased by credit relevant asset account

Decreased by debit Capital / Drawing account

Unchanged

Decreased by credit relevant asset account

Unchanged

Decreased by debit relevant liability account

Unchanged

Decreased by debit Profit /Loss account

Increased by credit relevant liability account

Unchanged

Increased by credit capital account

Decreased by debit relevant liability account

Example:

Assets:

Cash  RM2100

Bank RM9000

Debtors Premises RM80000

Office Equipment RM14680

RM124380

Less Liabilities:

Creditors RM36000

Mortgage Loan RM54000

Fixed Deposit RM15500

Capital RM109380

Assets RM124380- Liabilitties RM90000 = RM34380

Answer of Question 2:

Purchases Account

2012

30 June Balance b/d

Creditor

1July Balance b/d

$

151,200

2,800

154,000

154,000

2012

30 June Balance c/d

$

154,000

154,000

Creditors Account

2012

30 June Return Outwards

Balance c/d

$

600

62,680

63,280

2012

30 June Balance b/d

Purchase

1July Balance b/d

$

60,480

2,800

63,280

62,680

Return Outwards Account

2012

30 June Balance c/d

$

9,000

9000

2012

30 June Balance b/d

Creditor

1July Balance b/d

$

8,400

600

9000

9000

Sales Account

2012

30 June Balance c/d

$

222,000

222,000

2012

30 June Balance b/d

Debtor

1July Balance b/d

$

218,400

3,600

222,000

222,000

Cash in hand Account

2012

30 June Balance b/d

1July Balance b/d

$

25,200

25,200

24,980

2012

30 June Electricity and water

Balance c/d

$

220

24,980

25,200

Debtors Account

2012

30 June Balance b/d

Sales

1July Balance b/d

$

50,400

3,600

54,000

52,800

2012

30 June Return Inwards

Balance c/d

$

1,200

52,800

54,000

Return Inwards Account

2012

30 June Balance b/d

Debtor

1July Balance b/d

$

16,800

1,200

18,000

18,000

2012

30 June Balance c/d

$

18,000

18,000

Bank Account

2012

30 June Balance b/d

1July Balance b/d

$

42,000

42,000

39,600

2012

30 June Salary

Balance c/d

$

2,400

39,600

42,000

Wages and Salaries Account

2012

30 June Balance b/d

Bank

1July Balance b/d

$

151,200

2,400

17,520

17,520

2012

30 June Balance c/d

$

17,520

17,520

Electricity and water Account

2012

30 June Balance b/d

Cash in hand

1July Balance b/d

$

1,680

220

1,900

1,900

2012

30 June Balance c/d

$

1,900

1,900

Trial Balance as at 30th June 2012

DEBIT

CREDIT

Opening stock at 1st July 2012

Purchases

Sales

Return inwards

Return outwards

Wages and salaries

Rent paid

Electricity and water

Discount allowed

Discount received

Rent received

Land & building

Vehicles

Debtors

Bank

Cash in hand

Creditors

Loan

Drawings

Opening capital 1 July 2011

$

42,000

154,000

-

18,000

-

17,520

3,360

1,900

5,040

-

-

168,000

117,600

52,800

39,600

24,980

-

13,440

-

$

-

-

222,000

-

9,000

-

-

-

-

3,360

5,040

-

-

-

-

62,680

36,960

-

319,200

658,240

658,240

Conclusion Question 1

As for the conclusion for question 1, I have learned what type accounting users uses accounting information to help them in their field of work. There are various type of users and they use the accounting information for their business or company in order to advance. Besides that, I have also learned the characteristic of useful financial information. There are a few criteria to meet in order to produce proper decision making in accounting information. Other than that, I also learned the Dual Aspect Concept and the working to solve the equation.

Conclusion Question 2

As for the conclusion question 2, I have learned trial balance. There were unequal due to errors of putting account balances and some transaction. I have also redraft the trial balance after considering the errors and the omitted transaction.

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