Principles of accounting and purpose of financial information

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Table of contents

1.0 Introduction 2

2.0 Accounting environment 2,3

3.0 purpose of financial information 3

4.0 characteristics of financial information 4

5.0 Accounting cycle and double entry 5,6,7

6.0 Conclusion 8

7.0 Reference 8

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1.0 Introduction

Litus Maldives Pvt Ltd was established in 2012. The first core business of the company was logistics. Velaa private island resort was the first client of the litus Pvt Ltd. During the development of the velaa private island resort project, Litus Maldives Pvt Ltd handled hundreds of containers at zero demurrage. After being successful in logistic, the management decided to enter into the motorcycle industry. The core business named Litus entered into the motorcycle dealership in order to offer customer with different and more major automotive brands under one roof. Today the business stands as biggest motorcycle supplier in the Maldives with 18 different brands of motorcycle. As the company entered newly to the industry where there are strong rivals already existed, the marketing department of the company was forced to work at maximum speed. For that, one of the initial steps undertaken was to promote the business in the social media. Secondly, litus started undertaking sponsors for different events. Hopefully, these actions made their name recognizable amongst its competitors.

2.0 Accounting environment

Currently, there are well qualified accountants employed in the business. The accounts are managed by software called quick books. The accounting process is divided into 3 different tasks. One of them is responsible for data feeding. Another person controls and manages the quick books. The Third person is responsible for bank management and does payable accounts.

2.1 Users of accounting of information

1. Internal users

ï‚· Employees

Income statement are prepared at the end of every year to ensure that litus is performing at a profit or a loss. So that it would be helpful for the employees to determine the profitability of the business and therefore to ensure their job security and the remuneration level.

ï‚· Management and owners

As long as there is enough information available about the company’s financial status, it would be helpful for the management to take future actions if needed. 3

2. External users

ï‚· Tax authorities

As litus pays GST and BPT quarterly, the information about the total purchases and sales made in every four months are provided to the tax authority to identify input and output tax.

ï‚· Creditors

Cash flow statements and the information about bank balances are always prepared and available for the lenders. So that they would know that the company has enough cash to pay back.

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3.0 purpose of the financial information

ï‚· Accounting information is important for litus as it gives operation results, for instance sales, operation expenses, profit and loss for a particular period which evaluates the company’ income performance of the business.

ï‚· It also helps to attract investors. As the company is getting ready to take a long term loan from habib bank Lit, financial information will be vital for the investor to determine payback period for the investment.

ï‚· According to the financial information, customers also can determine the sustainability of the business. They would have guarantee about the availability of the motorcycles in the future.

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4.0 Characteristics of the financial information

ï‚· Reliability

Information in the Litus Maldives Pvt Ltd is very reliable and all the investors can depend it to be materially accurate because litus Maldives apply appropriate financial information. Moreover reliable information is the key factor for decision making. For these reasons litus believes that the information they prepare are reliable.

ï‚· comparability

As the accounts are prepared in IAS format, litus made it easy to compare the financial information with other big rivals. Moreover litus keeps financial information regularly at the end of every year which also would make comparing business performance from year to year easy.

ï‚· Faithful

Litus do not have any intention to represent manipulated and corrupted financial information to any third party to gain interest. Therefore, the information prepared is accurate and honest.

ï‚· Timeless

The accounts and information are recorded as soon as it has to be. From the time a transaction occurs the three staffs that are responsible for accounting process begins their works. In four years history, litus have never gone through a problem due to a delayed recording of a transaction. 5

5.0 Accounting Cycle Steps

1. Identifying and analyzing business transactions

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Not all the transactions are entered into the accounting system but all those events that affect the business entity will be included in the process of accounting cycle. Example: a short term loan by the owner of the Litus does not have any effect to the entity, so will not be entered.

2. Recording in the journals

It is recorded in the journal entries using the double entry bookkeeping system. So one will be credit and the other will be debited. Mostly they are sales and purchases receipts of litus automobiles. 6

3. Posting to the ledger

It is used to collection of accounts that shows the changes made to each accounts as a result of past transactions of litus and their current balances.

4. Unadjusted trial balance

This is prepared to test the equity of the debits and credits. In order to check it up all the debit and credit balances are added, these should tally. If they are not equal it indicates there is an error such as double posting or failure to record a transaction.

5. Adjusting entries

If debit and credit do not align, adjusting entries are provided on accrual basis. Normally some expenses are incurred at the end of the accounting period but may not record in the journals. There might be payment for motorcycle is gained but not entered in the system. The purpose of preparing is to update accounts before adding it to the financial statement.

6. Adjusted trial balance

Adjusted trial balance is prepared to make sure that adjusting entries are made before the preparation of financial statement. This step makes easy for litus to prepare financial statement. 7

7. Financial Statements

When all the accounts are ready and debits and credits are equal, financial statements are prepared. It is the end product of the counting system.

8. Closing Entries

All the temporary accounts such as income statement accounts are closed to prepare the system for the next accounting period. Also, these accounts are measured periodically. Some of the examples are income, expenses and withdrawal accounts.

9. Post -closing trial balance

This is the last step, and it is prepared to test the equity of debits and credits after closing entries are made. Since all the temporary accounts are already closed at the point, the post-closing trial balance contains real accounts only. 8

6.0 Conclusion

In summary, the business gives importance about keeping accounting information. Every transaction that occurred in the business is clearly recorded. From the above information, there is also an indication that in order to make accounting process clear, They have divided the tasks among three different professional accountants which means that they have an organized system of making and recording financial information.

7.0 Reference

1. ACC AF3

2. Interview with Sales executive of litus, Ahmed zahir

3. Introduction to accounting 3rd edition

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