Characteristics Of Useful Financial Information Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Accounting is a common language developed by accountants over time to define the principles, concepts, procedures and broad rules necessary for managements use in a viable accounting system in making decision and maintaining an efficient, effective and profitable business. An accounting system shows detailed information regarding assets, debts, ownership equity, revenue, operating expenses and governs recording, reporting and preparation of financial statements that show the financial health of a business entity. In the first question, I'm going to discuss about the accounting users and information they need and derive from accounts, characteristics of useful financial information and also the accounting equation.

In question 2, I'm going to further discuss about the trial balance. It is a statement containing the list of ledger accounts on a specific day. Trial balance is a table showing all debit and credit balances. The debit column and credit column of trial balance are then totaled up respectively. Trial balance is made at the end of every period to check whether the accounts entries are correct or not. If the account entries are correct and no mistakes, the debit total and credit total in trial balance are equal same. If the account entries are incorrect, the debt and credit totals in trial balance are not equal. In this condition, an investigation and a check must be carried out to find out any mistakes made in the account entries for doing correction.

2.0 Answer 1 (A) Accounting Users & 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. The more important the decision, the greater the need for accurate information. Basically, all businesses and most individuals keep accounting records to aid in making decisions. The accounting users and the information's that they need from accounts are as follows:

2.1.1 Taxing Authorities

Local, state and federal government levy taxes on individuals and businesses. They need accounting information to get to know about the profit earned by the company in order to assess the tax payable by the company. The amount of the tax is figured using accounting information. Businesses determine the amount of sales tax they owe from accounting records that show how much they have sold. Individuals and businesses compute the income tax they owe from their recorded earnings.

2.1.2 Investors and Creditors

These are people who provide trading goods or services to the company on credit. They need accounting information about the company's ability to pay its debts for ensuring their collection from the company. Meanwhile, they also need information to find out whether it is worth for them to invest their money in the business or buying shares of the company. Investors and creditors play a major role where they provide the modal that a business needs to begin operations. To decide whether to help to start a new venture, potential investors evaluate what income they can expect on their investment. These mean evaluating the financial statements of the business. This evaluation includes a projection of future operations and revenue, which is based on accounting information.

2.1.3 Businesses

Managers of businesses use accounting information to set goals for their organizations, to evaluate progress towards these goals, and to take corrective action if necessary. Decisions based on accounting information may include which building to purchase, how much merchandise inventory to keep on hand and how much cash to borrow. Accounting information affects the overall performance of the particular business.

2.1.4 Nonprofit Organizations

Nonprofit organization such as hospitals, churches, government agencies and colleges, which operate for purposes other than profit, uses accounting information in much the same way that profit-oriented businesses do. Both for profit organizations and nonprofit organizations deal with budgets, payrolls, rent payments and the all information that comes from the accounting system.

2.1.5 Managers of the Company

Managers are the people appointed by the owners of the company to supervise the day-to-day activities in the organization. They need information about the accounting information of 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. Without these information's, they will find it difficult to run the operation according to the goals of the organization. Thus, accounting information not only being useful to the finance department for the report but also for the management as well.

2.2 Answer 1(B) Characteristics of useful financial information

These are the characteristic of useful financial statements. These criteria's must be fulfilled to make the financial statements and accounts that are useful to users.

Relevance

The financial accounts prepared based on accounting concepts and policies should present relevant financial information which is capable of influencing the economic decision of the users. Therefore, the information presented by the financial accounts should be relevant to the decision making of the users.

Timeless

Whether the financial account information is relevant or not to the decision making of users, it depends on whether the financial accounts are made to present information in time or not when it is needed for decision making. If the accounts are prepared to provide required information in time, it is relevant to the decision making of the user.

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 accounts of other companies.

Understandability

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

2.3 Answer 1(C) Accounting Equation

Dual Aspect Concept states that there are two aspects of accounting. One is the aspect represents business assets and the other aspect represents business owner's equity or capita plus liabilities. These two aspects of accounting have equal values that construct an accounting equation as follows:

Assets = Business owner's equity or capital + Liabilities

This accounting equation can be modified to determine business owner's equity or capital as follows:

Business owner's equity or Capital = Assets - Liabilities

Assets are the economic resources of a business that are expected to be of benefit in the future. Cash, office supplies, merchandise, furniture, land and buildings are example of assets.

Claims to assets come from two sources. Liabilities are 'outsider claims'. They are economic obligation, debts payable to outsiders, called creditors. For example, a creditor who has loaned money to a business has a claim (a legal right) to a part of the company's assets until the business repays the debts. 'Insider claims' are called owner's equity or capital. These are the claims held by the owners of the business. An owner has a claim to the entity's assets because he or she has invested in the business.

Owner's equity is the amount of assets that remains after the liabilities are subtracted. For this reason, owner's equity is often referred to as net assets. We often write the accounting equation to show that the owner's claim to business assets as residual, something that is left over after a subtraction process.

Accounting equation is influenced by double entry when a pair of debit entry and credit entry 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

Use accounting equation to determine the owner's equity or capital in a business with particulars as follows:

Office equipment RM 14,680, Premises RM80,000, Mortgage loan RM54,000, Debtors RM3,600, Creditors RM36,000, Fixed Deposit RM15,000, Cash at bank RM9,000, Cash in hand RM2,100.

Assets

: Office Equipment RM14, 680

: Premises RM80, 000

: Debtors RM3, 600

: Fixed Deposits RM15, 000

: Cash at Bank RM 9,000

: Cash in Hand RM2, 100

RM124, 380

Liabilities

: Mortgage Loan RM54, 000

: Creditors RM36, 000

RM90, 000

Owner's equity or Capital RM34, 380

3.0 Question 2 Answers:

_______________________________Purchase Account________________________________

30 June 2012 Balance b/d 151200 30 June 2012 Balance c/d 154000

Account Payable __2800 ______

154000 154000

1 July 2012 Balance b/d 154000

__________________________________Sales Account________________________________

30 June 2012 Balance c/d 222000 30 June 2012 Balance b/d 218400

______ Accounts Receivable __3600

222000 222000

1 July 2012 Balance b/d 222000

_______________________________Return Inwards Account___________________________

30 June 2012 Balance b/d 16800 30 June 2012 Balance c/d 18000

Accounts Receivable _1200 ______

18000 18000

1 July 2012 Balance b/d 18000

___________________________Return Outward Account______________________________

30 June 2012 Balance c/d 9000 30 June 2012 Balance b/d 8400

____ Accounts Payable _600

9000 9000

1 July 2012 Balance b/d 9000

____________________________Wages & Salary Account_____________________________

30 June 2012 Balance b/d 15120 30 June 2012 Balance c/d 17520

Bank _2400 _____

17520 17520

1 July 2012 Balance b/d 17520

_______________________________Rent Paid Account_______________________________

30 June 2012 Balance b/d 3360

_______________________________Rent Received Account____________________________

30 June 2012 Balance b/d 5040

_______________________________Electricity & Water Account_______________________

30 June 2012 Balance b/d 1680 30 June 2012 Balance c/d 1900

Cash in hand _220 ____

1900 1900

1 July 2012 Balance b/d 1900

_______________________________Discount Allowed Account_________________________

30 June 2012 Balance b/d 5040

_______________________________Discount Received Account________________________

30 June 2012 Balance b/d 3360

____________________________ Account Receivable (Debtors)_________________________

30 June 2012 Balance b/d 50400 30 June 2012 Return Inwards 1200

Sales _3600 Balance c/d 52800

50400 50400

1 July 2012 Balance b/d 52800

___________________________Account Payable (Creditors)____________________________

30 June 2012 Return Outwards 600 30 June 2012 Balance b/d 60480

Balance c/d 62680 Purchases _2800

63280 63280

1 July 2012 Balance b/d 62680

_________________________________Bank Account________________________________

30 June 2012 Balance b/d 42000 30 June 2012 Wages & Salaries 2400

_____ Balance c/d 39600

42000 42000

1 July 2012 Balance b/d 39600

_______________________________Cash in Hand Account____________________________

30 June 2012 Balance b/d 25200 30 June 2012 Electricity & Water 220

_____ Balance c/d 24980

25200 25200

1 July 2012 Balance b/d 24980

_________________________________Loan Account________________________________

30 June 2012 Balance b/d 36960

_______________________________Drawings Account_______________________________

30 June 2012 Balance b/d 13440

_______________________Trial balance as at 30 June 2012_____________________________

Debit Credit

$ $

Opening stock at 1 July 2011 42000

Purchases 154000

Sales 222000

Return inwards 18000

Return outwards 9000

Wages and salaries 17520

Rent paid 3360

Electricity and water 1900

Discount allowed 5040

Discount received 3360

Rent received 5040

Land & buildings 168000

Vehicles 117600

Debtors 52800

Bank 39600

Cash in hand 24980

Creditors 62680

Loan 36960

Drawings 13440

Opening capital 1 July 2011 319200

658240 658240

4.0 Conclusion Question 1 and 2

As a conclusion, accounting is very much connected with each of us personal lives so do in business. By doing this question, I was able to learn and get to know about the accounting users and the information that they need to derive from accounts. It is important to know so that we can differentiate between the users and the information. Meanwhile, I was also able to get to know about the characteristics of useful financial information. These criteria's listed above explains that it must be fulfilled to make the financial statements and accounts that are useful to users. This question also makes me do more research on the accounting equation and the Dual Aspect Concept. It states that there are two aspects of accounting. One is the aspect represents business assets and the other aspect represents business owner's equity or capita plus liabilities. A good accounting helps an organization to avoid crisis like fraud and keeps the business records in order.

As for the second question, I was able to make sure that all the transactions had been recorded with similar debit and credit amounts and the balance of the accounts has been computed correctly. It is also functions to provide arithmetical accuracy of different ledger accounts and act as a base to prepare a final account. It checks for any arithmetical accuracy. If the trial balance does not tally, it is an indication that the book contains some errors. A trial balance is the connection between the ledger and the final accounts. Trial balance prepared at the end of the year contains a ready list of the closing balance of all ledger accounts. From the trial balance, the final accounts can be prepared without going through the ledger. After the trial balance, the final accounts made are tallied.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.