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David answered on
Dec 21 2021
Accounting concepts and Principles 17
Accounting Concepts and Principles
Introduction:
The accounting of a company is highly influenced by the environment in which it operates. Countries have different histories, values, cultures, and political and economic systems, and they are also in various stages of economic development, these are the factors which highly affects the development as well as the practice of the financial accounting practices of the country. With these differences the financial accounting standards that are being adopted by different nations vary significantly.
The financial report of the countries is generally prepared with a motive to help the primary users of the financial statements. In the past, most users were residents of the same country as the corporation issuing the financial statements. The emergence of multinational corporations and organizations such as the European Union (EU), the General Agreement on Tariffs and Trade (GATT), and the North American Free Trade Agreement (NAFTA) has made transnational financial reporting more commonplace. Transnational financial reporting requires users to understand the accounting practices employed by the company, the language of the country in which the company resides, and the cu
ency used by the corporation to prepare its financial statements. When an company was wanting to operate at an international level than then there were several issues that came up which resulted in harmonizing the accounting standards across the globe.
Application of Accounting in the business:
Accounting:
‘It is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events, which are in part at least, of a financial character and interpreting the results thereof’ (Horn, 1951). The accounting generally involves with three different stages i.e. recording, classifying and summarizing. Recording is the stage in which the transactions are recorded or entered in the journal books, the next step is classification in which the transactions entered in the books are classified on the basis of different accounts and are posted in different ledgers, which are used to summarize in the financial statements.
Objectives of Accounting:
There are different objectives of accounting that needs to be considered, the accounting helps in maintaining the records of the business in a systematic manner, it helps in analysing the profits and the performance of the organization which also helps in making different decisions in respect to different operational activities,
Principles of Accounting:
There are several principles and concepts that have been put forward by the governing authority for Accounting, the company needs to focus on recording their transactions as per the principles and the guidelines of the GAAP.
Principles:
Separate entity principle: Separate entity principal is the first principle, according to which the owner and the company are two different entities. All the economic activities needs to be distinct form the owners of the business.
Going concern: Under this concept the business or the company needs to have long and infinite life.
Monetary unit: Under this concept the company needs to follow appropriate accounting measurement and analysis by using money as the common denominator.
Periodicity assumption: Under this assumption the company needs to be divided in specific time periods which help in providing period reports on the economic activities.
Historical cost principle: Under this principal the company needs to report the value of the asset and liability on the basis of acquisition cost.
Revenue recognition principle: Under this principle a company can recognize revenue when it is realized or realizable and when it is earned.
Matching principle: According to this concept the expenses incu
ed should match up with the revenues earned during the period. This principle is based on the accrual basis of accounting.
Full disclosure principle is the principle which states that the company should include all the relevant information for the particular transaction which helps in permitting the user to analyse the performance and financial condition of the company.
Process of Accounting:
The three major steps that are included in accounting are: Recording, classifying and summarizing, on the basis of these the accounting transactions are recorded. The company needs to follow the accounting cycle to complete the process of the accounting. The accounting cycle starts with the recording of the transactions in the Journal book, all the transactions incu
ed are posted to the ledger and the company makes the trial balance of the accounts posted in the ledger, at the end of the period, the company focuses on doing different adjustments and the adjusting entries for the same is done, After the adjusting entries the company makes an adjusted trial balance which is considered to be the basis of preparing the financial statements. The three major financial statements to be made are Income statement which accounts for all the income and expenses of the company for a particular period, all the temporary accounts are posted in the income statement whereas all the assets, liabilities and shareholder’s equity are recorded in the balance sheet, these are the permanent accounts, The company closes all the temporary accounts and prepares the post-closing trial balance. The third important financial statement is statement of cash flows which shows all the cash inflows and outflows of different activities like operating, investing and financing.
Accounting helps the business to know its economic transactions with which the company is able to analyse its profits.
Accounting concepts and principles:
Objective of financial reporting:
The objective of financial reporting is the first concept statement presented by FASB which states that the objective of the financial statement is for general purpose external reporting i.e. the financial reporting concerns to the external users as well as internal users. The objective of the financial reporting goes from a general purpose to the more specific purpose.
General Purpose: Information useful in making decision
The general purpose of the financial reporting states the financial statements should provide relevant and useful information to its present as well as potential stakeholders which includes investors, creditors, customers and other external users to help them in making different decisions in respect to investment and other related decisions. (Gerhand, 1968)
Derived external user objective: Information relevant to the external users so as to assess future cash receipts:
The financial reports should focus on providing information to the stakeholders so as to access the amount, timings and uncertainty of the prospective cash receipts (like dividends, earnings, interest ) and the risk associated. This helps the stakeholders in interpreting the cash flows for lending and investing activities.
Derived Company objective: Information useful in accessing the cash flows of the company:
The third objective of the financial reporting is to provide information to the stakeholders in respect to assessing the amounts, timings and uncertainty in terms of the cash inflows. This aspect takes into consideration operating cash inflows.
Specific Objectives:
The specific objectives are the objectives specified in the bottom tier which takes into consideration:
Information about the economic resources and the obligations:
It is important for the company to specify the economic resources (assets) and obligations against the assets which takes into consideration liabilities and shareholder’s equity. This helps the stakeholders in identifying the financial health of the company on the basis of the liquidity, evaluating the performance of the company, analysing the potential cash flows of the company.
Information about comprehensive income and its components:
One of the objectives of financial reporting is to provide the information about the financial performance of the company. It helps in evaluating the performance of the company, estimating the earning power of the company, forecasting the income of the company and assessing the risk associated with the investment in the company.
Information about the cash...