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Departmental accounting is a system of financial accounting which is used in the organisation whose all works are done through their several departments and each department is prepared separate account. If an organisation consists of several independent activities it is suitable to divide into several departments such as five departments if there are five independent activities. This helps management of the organisation to find out working results of each department to ascertain their relative efficiencies. Departmental accounts are of great help and assistance to the managements as information for controlling the organisation more intelligently and effectively. The main advantages of departmental accounting are the performance of each department can be evaluated separately on the basis of trading results. Secondly, it can be evaluated the potential growth of a department as compared to others. Thirdly, it helps to calculate inventory turnover ratio of each department separately. Finally, it can be made to push up the sales of department which is earning maxim profit.
Departmental Income statement for the year ending 31 December 2011
Less cost of goods sold
Less closing inventory
General office salary
Lighting and air-condition
Accountancy and audit
General office expenses
(300) ( 11750 )
(150) ( 8350)
"Identify the four fundamental concepts of financial accounting to explain, using suitable examples".
Answers for question 3
Accounting concepts are used as rules and guidelines that guide accounting practise and direct accountants. All formal financial statements should be created, presented and preserved according to accounting concepts and conventions that generally accepted accounting principles, also known as (GAAP). There are many accounting concepts and conventions; however, some are more important than others. Here are four concepts which called fundamental accounting concepts; accounting without of these four concepts is like building without pillars. The concepts as follow
Going concern concept and
The accrual concept
Accrual concept is one of the fundamental of accounting concept which relies on the effect of transactions and others events are recognised at time they occur and also are recorded in the books and reported in the financial statements of a period which they relate to (F. wood & S alan).
The key application of the accruals concept is that the expenses and revenues incurred in a particular accounting period are taken as an income or expense for that period, regardless of whether or not it has been paid for or received. This is fundamental concept to the usefulness of financial accounting information in order to determine expenses used up to provide the revenues are matched expense against revenues (L.henry 2009)
Example, an audit firm has engaged audit services to the SEGi, although, the audit fee has not been collected yet cash from SEGi but it was earned. The audit firm has to recognise this transaction as revenue regardless when they collect cash from SEGi. Meanwhile, SEGi received audit services from audit firm and it has not yet been paid cash to the audit firm but SEGi has to recognise this transaction as expenses irrespective when they pay as cash.
The Prudence concept
Accountants when they are preparing financial statements there may face some uncertainties about transactions. Duty to measure financial statements, accountant should fallow certain principles of accounting guidelines that leads proper information when there are uncertainties. The prudence concept is one of fundamental concept of financial accounting that is applied when practising judgement about these uncertainties. The prudence concept addresses that accounting transactions and other events are sometimes uncertain but in order to be relevant we have to make judgment about the uncertainty. While making judgment we need to be cautious and prudent.
Basically, prudence concept implies that whenever there are alternative values, the accountant should choose the one those results in a lower profit, a lower asset value and a higher liability value rather than overstating net income, net assets and understating liabilities while we are dealing with measurement uncertainties.
As example, we are measuring uncertainties. If a purchases inventory for RM 1,200 but then because of a sudden drop in the market, it can only be sold for RM 900, then the stock should be valued at RM 900 in the accounts (therefore recognizing the RM300 immediately).
In addition to that the prudence Concept involves recognition of revenue and expense. Revenues are only recognised when they are reasonably certain and expenses are only recognised as soon as they are reasonably possible (Â© Duncan Williamson June 1999, revised September 2001).
The Going concern concept
The going concern concept underlies on assumption that entity will continue its operation in foreseeable future, "which is taken to be at least 1 year" (Henry 2009). This concept assumes that business will continue its business activities but will not wind up in the near future so that going concern concept disregard immediate liquidating values in presenting assets and liabilities in the statement of financial position.
For instance, an entity has purchased two-year insurance policy for RM40, 000. As we suppose entity will continue its operations for two-year or more than that. We will treat the RM40, 000 cost of the insurance which offers services to the entity's business operations along two-year time. Assume that the entity is likely to terminate its operations in the near future, RM.0,000 of insurance policy should be recorded its cancellation value amount of cash that can be obtain as refund from the insurance company which may be, say RM35000 or may say less than that.
While an entity going to liquidate its business performance the entity should report the value their assets in the current liquidation and liabilities at the amount required to clear up the debts.
The Consistency concept
Using different methods and procedures of accounting creates controversial financial statements time to time. The consistency concept expresses that once an entity has adopted one accounting method; the entity must use it from one period to next unless a note to the financial statements informs users of a change in procedure. When the entity changed its accounting procedure, it must be explained and disclosed its effect on income in the financial statements. The change should explain and justify clearly why the newly adopted accounting procedure is preferable to the entity.
As example, the effects on profit of charging depreciation at 15% this year on RM10, 000 worth of fixed assets and then charging depreciation at 10% next year on the same RM10, 000 worth of fixed assets. This year you would charge RM1, 500 against profits and next year it would be only RM1, 000, using the straight line method of providing for depreciation.
Consistency concept emphasises that when the entity adopted one method it should use from period to period. When the entity is valuing its non-current assets or inventories there are many methods. Assume that an entity has been using straight method to depreciation its noncurrent assets, to be consistent they should continue using this unless it is NECESSARY to change.
"Why non-compliance to the fundamental concepts would render the financial statements not to reflect a 'true and fair view'"
So far we discussed four fundamental of accounting concepts which are pillars of accounting. Let us discuss now affects of non-compliance to the fundamental of accounting concepts and how not reflect a true and fair to the financial statements absenteeism of fundamental of accounting concepts. Anything without principles and guidelines cannot present or reflect fair statements. The financial statements should present true and fair based on the state of an entity.
However, fundamental of accounting concepts is principle that guides effects of transactions and presentation of financial statements to the quality with "true and fair". Each concept bases a particular item(s) in the statement(s). In the absence or not comply these concepts there is no any reflection for "true and fairness" because it is violated fundamental premises of accounting.
Firstly, non-compliance of the accrual concept misleads the profit of an entity and it can shown "loss" while the entity is making "profit". Example, if an entity is non-compliance of accrual concept it recognises its revenues when it is received cash as Cash basis and recognises its expenses when it is paid. So, credits sales in 2012 may obtain as cash in 2013 and at that is time (2013) will e recognised as a revenues which totally misleads the entity performance.
Secondly, non-compliance of the prudence concept, an entity's assets, profit and liabilities can present value which is not reflecting the true value of assets, profit and liabilities. Example, suppose a month before, an entity purchased inventory costs RM 5,000 and it has been sold inventory that costs RM 4,000. Now the entity wants to prepare its financial statement. It is clear that closing inventory is RM 1, 000 but question is that it is worth this value in today. So, if net realisable value of the stock is RM 900 and the entity reports RM 1,000 which is not worth its inventory, this misleads inventory value as well as profit.
Thirdly, non-compliance of the going concern concept, the going concern concept assumes that the entity will continues its operations for the foreseeable future, which is at least 12 months from the financial statements date. If the entity is unable to continue its operations at least a year it considers to be not going concern. So, if the entity cannot continues and comply going concept it misleads how much the entity can liquidate its assets in today.
Finally, non-compliance of the consistency concept, the entity misrepresents its financial statements and also misleads comparability for period to period. Example, if the entity employed straight line method on its non-current assets for period and next period employed reducing balance method. It is sure it will affect the profit and different depreciation expenses will appears.
"Identify five users and uses (not including the community) of financial accounting information".
There are many users and uses of financial accounting information for different purposes. Before we discuss any further detailed about users and uses of financial accounting information let us identify major sources of financial accounting information. There are four main sources of financial accounting information these are income statement, statement of financial position, statement of retained earnings and statement of cash flows.
Income statement provides summary of financial accounting information of the entity's operating results during a specified period.
Statement of financial position presents a summary statement of the entity's financial position at a given point in time.
Statement of retained earnings is an abbreviated form of the statement of shareholders' equity.
Statement of cash flows is a summary of the cash inflows and outflows over the period of concern.
The users of financial accounting information contain direct users and indirect users or both. Here, we are not going to discuss all users and its uses of financial accounting information. We will discuss for users and their needs to financial accounting information that has been selected. Such as managers, creditors, investors, and government agencies.
For their needs to use to financial accounting information
Managers are those who involve business operations in day to day and they focus on maximisation of shareholders wealthy. Because of their close involvement with the business, they use a wide range of financial accounting information in order to measure performance of the entity and also look for financial accounting information in which is most relevant to their particular judgements and decision making. Managers' responsibility is to employ the resources of the business in an efficient way and meet the objectives of the entity.
For that reason managers use financial accounting information to carry out their responsibilities of business activities and other actions such as planning, making decision and controlling. It is very useful financial accounting information to managers to forecast direction of the entity is heading (growth or decline).
"Creditors are group which contain both existing and potential providers of secured or unsecured, long- term or short-term loan finance" (Lunt. H 2009). They use financial accounting information for concerning the ability of the organisation to pay back the interest on loans and principal amount as they fall due.
The financial accounting information is useful for them because it helps to predict the future capability of the borrowers to pay back the loan in term of analysing and interpreting financial accounting information. Usually, creditors forecast the entity's term long growth and stability of its performance.
Investors use financial accounting information to estimate how much amount of cash they can expect to obtain in while they invest in a business now. Financial accounting information, coupled with knowledge of business plans, market forecasts, and the character of management, can aid investors in assessing future cash flows (Lunt, H 2009).
Investors use financial accounting information about the entity's financial performance and financial position to evaluate and assessing effectiveness of the entity's financial objectives in order to avoid risk involves their capital they donated.
Government use financial accounting information for several purposes, the most apparently, it is the levying of taxes. For this reason, the government use financial accounting information of an entity to know much profit has been made. It is assessed the entity's profit for taxes purposes based on the application of the taxes rules and regulations ( Baszley, M et al 2004).
Other use of financial accounting information for the government is to produce industry statistics for some purposes or statistics based on the state economy growth.
Why is it that businesses are put on alert today when it comes to the community in which they operate?
ii) What do you understand by the term 'compliance to Corporate Social Responsibility (CSR).
5.1 Brief definition of community and business
Community is a social group who shared common interests and perspective, common values, or may have with diverse characteristics.
Business can be defined as, "The regular production or purchase and sale of goods services undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human needs and wants."(www.dictionary.com)
Since, community is collective broad group who have different perception, culture, values and beliefs. any action that business organisations take will affect them.
Recently community concerns and awareness about business practices are growing up with harmfulness to the society well being. It raises many advocacy groups which represent whole community and try to influences business practices of specific industries, businesses and professions. These groups may focus on fields such environment, health y and product and consumer boycott. Any action is taken to influence business practices will effect business performance. For reason businesses try focus on working with in the communities. Businesses try to avoid any conflict between its practices and society. So, they try to corporate with the society well being that referred to "corporate social responsibility", corporate social responsibility is not new subject to the business environment but it has been practising nearly a century. The concept of the corporate social responsibility started in the 1950s when Western corporations increased rapidly in size and power (virakul et al 2009).
However, businesses tend to practise corporate social responsibility to minimize any practices or actions that is harmful to the society well-being because nowadays society most of them are well educated, they know what is good and what is bad for them. So, there is high possibility that society will take consumer boycott if the organisations violate the right of society. we know that when organisations put allegation of violating labour law or environmental law it will difficult to them to operate their businesses and sell their product and services and also that will destroy corporate image of the organisation. There is much concern about social responsibility because of the success of the businesses or any other organisation which serves in the society. Society can demonstrate any harmful act which may harm their healthy life, environment and so on.
ii) What do you understand by the term 'compliance to Corporate Social Responsibility (CSR).
5.1.1 Corporate Social Responsibility (CSR)
Description of business social responsibility was written more than four decades ago by Friedman in1970s, the world renowned Nobel laureate economist. He argued that business social responsibility is to maximize profits with in the legal compliance boundaries. Since the begging of the last decades, there were rapid changes in world society, economy, technology, and environment; Corporate Social Responsibility has become vital popular among leaders and members of every members of society in the world.
Definition of corporate social responsibility underlies two broad categories: financial performance and moral driven (Virakul, et al 2009). According to Ghillyer(2008) Corporate Social Responsibility does not have a universally accepted definition. It relay on whether the approach is instrumental or ethical-responsibility. However there are many researchers and authors who have defined Corporate Social Responsibility.
Unlike Friedman, Ghillyer(2008) defined Corporate Social Responsibility as "actions of an organisations that are targeted toward the achievement of the social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations". Meanwhile, Schouton(2007) described as "the whole set of values, issues, and processes that companies must addresses in order to minimize any harm resulting from their activities and to create economic (profit), social (people), and environmental (planet) values."
Since there is no definition of Corporate Social Responsibility universally accepted but it seems that it is among major role players in today modern corporations. To my understanding of compliance Corporate Social Responsibility is crucial factor that enhance conducting business operations. CSR involves some elements that drive corporations. Firstly, there is responsibility upon corporations that go beyond the producing goods and services at level of making profits only, secondly, corporations have responsibility of solving important social problems, especially those they have help create. Thirdly, when corporations apply compliance of Corporate Social Responsibility they have a broader constituency than stockholders. Forth, there is responsibility on corporations to serve a wide range of human values than solely focus on economic values alone.