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Accounting records are very important documents to all business organization, because its carries vital financial transaction evidence on business performance. According to Frank Wood (2006)â€¦â€¦â€¦ . Accounting records is all documents used in preparation of financial statement, such as general ledger, subsidiary ledgers, sales invoices, checks, vouchers, and written agreements, and so on. Bintang Sdn. Bhd bills all customers rather than collecting in cash and cheques when services are rendered. However, According to the case scenario, Miss Joan, the assistant accountant of Bintang Sdn. Bhd, has committed criminal breach of trust and fake practices.
The purpose of the main financial statements for Bintang Sdn. Bhd is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance. Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.
Financial statements provide an overview of a business financial condition in both short term and long term. There are three basic financial statements which is balance sheet, profit and loss, and also cash flow. Balance sheet also referred to as statement of financial position or condition, reports on a company assets, liabilities, and net equity as of a given point in time. Profit and loss refer to report on a company income, expenses, and profit over a period of time. Meanwhile, cash flow is report on company cash flow activities, investing and financing activities.
A balance sheet used in order to helps a small business like Bintang Sdn Bhd owner quickly get a handle on the financial strength and capabilities of the business. According to balancesheet.org, (2009), The Balance Sheet also provides payroll and recordkeeping services for small business. The Balance Sheet is well known for its ability to provide key strategic resources for individuals and small business. A balance sheet includes assets, liabilities, and owner's or stakeholders' equity. The balance sheet is divided into two parts which are assets and liabilities and owner's equity based on the following equation, must equal each other, or balance each other out. This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.
What we understand, balance sheet is a statement of a business or organization that lists the assets, debts, and owners' investment as of a specified date. In financial statement, a balance sheet or statement of financial position is a summary of a person's or organization's balances.
Asset consists of current assets and non-current assets. Current assets have a life span of one year or less, meaning they can be converted easily into cash. Examples of current assets would be checking accounts receivable, and notes receivable that are due within one year's time. Meanwhile, non-current assets are assets that are not turned into cash easily,Â areÂ expected to be turned into cash within a year or have a life-span ofÂ more thanÂ a year. Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business.
1.1.2 Liabilities and owner's equity
Current liabilities are the company's liabilities which will come due, or must be paid, within one year. On the other hand, the total current liabilities is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame. This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners' equity. Owners' equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business.
1.1.3 Important of Balance Sheet
The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at that point in time. TheÂ income statement, on the other hand, shows how much revenue and profit a company has generated over a certain period.Â NeitherÂ statement is better than the other - rather, the financial statements areÂ built to be used together to present a complete position of a company's finances.
Having a solid business plan and a good balance sheet statement to work from is even more important with a brand new startup business. While the established business will most likely already have a credit rating of its own, it is often much more difficult to determine just how successful, or how credit worthy, the brand new startup business will be. That is why the balance sheet statement is such an important document, and it is the face of the new business to the world.
Profit and loss
Profit and loss is a one of the key financial reports which summarizes the business revenues, expenses, and net income over a specified period of time. On the other hand, it can define as a financial statement that lists the different types of revenues that a company has earned and the expenses that it has incurred.
1.2.1 Important of Profit and Loss
Profit has an important role in allocating resources. Put simply, falling profits signal that resources should be taken out of that business and put into another one which is rising profits signal that resources should be moved into this business. Without these signals we are left to guess as to what is the best use of society's limited resources.
Cash flow shows the amount of cash generated and used by a company in a given period, calculated by adding non-cash charges such as depreciation, to net income after taxes.
1.3.1 Important of Cash Flow
Cash flow is one common measure of a company's financial health. It is typically defined as cash receipts minus cash payments over a given period of time, or, the net profit minus the amounts charged-off for depreciation, depletion, and amortization.
In evaluating potential cash flow issues, it is important to look at all three categories and blend them correctly to get the clearest possible picture. This blending is usually done in a report called a "Cash Flow Statement" which is an important tool for measuring short-term and long-term profitability. Cash flow is an important factor that can keep businesses ahead of their competition and even a profitable business can suffer if it has cash flow issues.
The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time of the company's accounts which are covering its assets, liabilities and shareholders' equity. The purpose of the balance sheet is to give users an idea of the company's financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyze and read this document.
Task 2 (LOC 1: AC 2)
Accounting follows certain guidelines that govern how accountant to measure, process and communicate. The financial statement fall under the General accounting acceptable principles (GAAP) or also call Law of accounting. According to www.investopedia.com GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. General accounting acceptable principle (GAAP) are guided the accounting field and its profession. The characteristic of GAAP is such as relevance, reliability, consistency and so on.
Fundamental accounting concept
There are about three fundamental accounting concepts which are accruals concept, prudence concept, and consistency.
Accrual describes the concept that recognizes revenues and expenses when they are earned incurred or accumulated regardless of the actual cash payments or receipts. Actual payment of an item in a period is taken to matched against the revenue of the period that net profit is calculated. For example, Accrued revenue is revenue is recognized before cash is received. Accrued expense is an expense is recognized before cash is paid out. The effects of transaction and other events are recognized when they occur and they are recorded in the accounting records and reported in the financial statement of the periods to which they relate.
For example, Bintang Sdn Bhd has received cash RM 40,000 from his customers. However, the company actually has done all work satisfactorily and the customers have acknowledged the work done which can billed for another RM 20,000. Furthermore, the expenses for the RM 20,000 work done have been taken up into the books of account. So, based in this concept, the company has actually completed all work done, the work done also have being acknowledged by the customers, hence income RM 60,000 should be taken up and not just the cash received.
The importance of accrual concept blablabla..
Jim Co is a consulting company which has the following revenue and expenses for the month of October 2008
Net Profit or (Loss)
The company earned $10,000 but received only $8,000 in cash
Expenses were as follows
(i) Â Rent $2,000 which was paid
(ii) Wages expense:$1,600 of which only 3 /4 was paid
(iii) Utilities expense:$700 was paid
(iv) Repairs expenses:$500 was unpaid
(v)Â Stationery expenses:$200 was unpaid
(vi) Miscellaneous expenses:$100 was paid
Prudence concept is usually use by accountant has to use by his judgments to decide which figure he will take for item. The concept basically does not encourage the anticipation of recognizing income when it is not certain. It prefers that any expenses that can be reasonably ascertained should be taken up.
For the example, Bintang Sdn Bhd has completed 50% of a project. Based on its costing and other evidence, it knows that the project is going to incur losses. In this situation, using a prudence concept, the company should quickly in its financial year take up these losses instead of waiting for the 100% completion of the project. The prudence concepts means, normally accountant will take the figure which will rather understate the profit.
Prudence concept is observed when reporting all accounting information. It is careful accounting practices are observed so that assets or revenues in Bintang Sdn. Bhd. are not overstated and liabilities or expenses are not understated. This is explaining why closing stock is always valued at the lower of costs or market value so that profits are not overstated during the current period.
This concept advocates that there must be consistent treatment for similar items within each accounting period and from one period to the next. When a firm has once fixed a method for accounting treatment of an item, it will enter all similar items that follow in exactly the same way. However, it does not mean that has to follow the method until the business closed down. A firm can change the method used, but a such change is not made without a lot of consideration.
A change in accounting principle should not be made unless it can be justified as being preferable. An example of a change is switching from the Straight Line Depreciation method to the Sum-Of-The-Years'-Digits method. A lack in consistency over time distorts the earnings trend and creates uncertainty in evaluating a Bintang Sdn. Bhd. Consistency is observed to prevent misleading profits arising from differing accounting methods, from being reported.
If let say, Bintang Sdn. Bhd. has received annual rebates from its supplier approximately to RM 1 million. Every year, it is the company's accounting policy to net these rebates against the purchases from the suppliers. But for this year, this is taken up as income. Under the consistency concept, this is not correct as every year the company has been taking three rebates against the purchases but all of a sudden, it changes its accounting policy by taking up revenue.