- June 11, 2020
Credit for Life
CREDIT FOR LIFE 1
Generally Accepted Accounting Principles
In the accounting profession, there are various standards that governthe preparation and subsequent reporting of financial information.These have been provided to ensure that there is uniformity in theprovision of financial information to facilitate comparison analysis(Beyersdorf, 2013). The generally accepted accounting principles havetherefore been established to provide a common set of procedures thatis expected of all companies to adhere to. As such, the regulatoryauthorities focus on the provision of such information in thefinancial statements for the purpose of conducting audits andfacilitating the effectiveness of the reporting process (EveringhamKleynhans & Posthumus, 2007).
Therefore, the generally accepted accounting principles includeconventions and rules that all the accounting professionals arerequired to follow in their preparation of the financial reports(Beyersdorf, 2013). However, it should be noted that most businessorganizations opt for the cash basis of operations rather than theaccrual basis. Countries have also established distinct standardsthat must be used in the preparation of such statements and should bechecked over time to ensure strict adherence to the system.
The International Financial Reporting Standards (IFRS) is a set ofguidelines that determine the process of reporting all forms offinancial information within an organization. This is done to ensurethat the business organizations from across the globe can have acommon means of presenting their financial information (Beyersdorf,2013). In China, the Chinese Accounting Standards are used in thepreparation of financial reports. On the other hand, France utilizesthe Plan Comptable Général, also known as the Generally AcceptedAccounting Practices whereas Germany employs the Grundsätzeordnungsmäßiger Buchführung (Generally Accepted AccountingPractice).
The Generally Accepted Accounting Principles (GAAP) is just a set ofstandards. As such, they do not offer any guarantee that thefinancial statements and reports prepared by the businessorganizations are free from errors (Beyersdorf, 2013). Additionally,various forms of omissions that are aimed at misleading the investorsneither are nor identified by the principles. It is for this reasonthat some unscrupulous accountants have been able to distort figuresin order to meet their primary objectives of misleading theinvestors.
The Accounting Cycle
This refers to the accounting process and it is composed of sixstages. In the preparation of financial reports, the accountingofficer has to undergo all the process. One should be able toidentify the accounting period under consideration in order toidentify the transactions that occurred within the given time period(Beyersdorf, 2013). This is to ensure that only transactions relevantto that specific period are included in the books of accounting.
The accounting cycle has a set of methodological rules that determinethe accuracy as well as the conformity of the financial statements(Flood, 2015). Over the years, computerized accounting systems havebeen established and have a gone a long way in minimizing any formsof errors that may exist. The entries are made using specific modulesafter which the software performs the balancing checks therebyavoiding challenges associated with the manual preparation of thefinancial reports (Everingham Kleynhans & Posthumus, 2007).
The first step in the accounting cycle is the identification andanalysis of business transactions. The accountant needs to establishthe type of transaction and how it is to be recorded in the originalbooks of accounting (Flood, 2015). The next phase involves recordingthe transaction into a journal detailing the existing forms oftransactions before ensuring that details are included in theledgers. The next phase involves recording the details of thetransactions in a trial balance before adjusting them to determinethe effectiveness of the accounting process (Everingham Kleynhans &Posthumus, 2007). The last two processes involve the preparation ofthe financial statements based on the adjusted entries and closingthe temporary by balancing each of them. This leads to thecalculation of the balances brought forward and those that arecarried forward to the next financial period.
Accounting Information in Business Situations
There are various scenarios that business organizations have tocontend with at all times. As a result, the accountants must be in aposition to deal with each whenever they fall due. Such informationshould be classified as being assets or liabilities. Moreover, itshould establish whether such form of transactions translate toexpenses or incomes for the business entity. The use of accountinginformation depends on the existing scenario as well as the need forsuch data.
There are various users of financial information, and as such,conclusions are made depending on the specific needs of theindividuals (Flood, 2015). The management uses the information fromthe accounting transactions and statements to evaluate theperformances of the organization and identify the most appropriateposition that should be taken by the organization in order to improvethe performance of the firm. Additionally, such information enablesthe management to establish their position within the economy anddetermine the areas that need massive improvements in order to ensureprofitability of the business organization.
Employees also utilize the accounting information to establish theprofitability of the business organization and its impact on theirjob security and remuneration in the future. In cases where the firmsare profitable, then the employees will have a higher bargainingpower in terms of better remunerations. Finally, the owners of thebusiness organization use accounting information in the analysis ofviability and profitability of their investments. This will enablethem to make a decision regarding further investment in the businessorganization and the existing returns.
There are various external users of accounting information. They arealso known as the secondary users of financial information and theyinclude creditors, tax authorities, investors, customers and theregulatory authorities. The creditors utilize the financialinformation to determine the creditworthiness of a businessorganization. As such, they are in a position to set terms of creditthat will limit losses in case the corporation defaults in therepayment of its obligations. The creditors in this case include thesuppliers and lenders of financial products such as banks and otherfinancial institutions.
Tax authority on the other hand uses the financial information of thebusiness entity to determine the credibility of the tax returns thathave been filed by the firms. As such, any form of defaulting towardsthe payment of taxes by a company is determined through the financialreports that they present to the relevant regulatory authority.Investors are the other external users of accounting information.They require such data to evaluate the feasibility of makinginvestment in a given company. A decision to invest in a firm will bebased on the expected returns as well as the risks that areassociated with such transactions.
The customers of a company will utilize the accounting information toevaluate the financial positions of the suppliers. This is necessarysince from the data available, they will be in a position todetermine whether the firm is able to maintain a continuous supply ofcommodities in the long term. Finally, the regulatory authoritiesscrutinize the accounting information to establish whether a firm hasadhered to the disclosure agreements as contained in the regulatoryframeworks. There are basic statutory provisions that require firmsto disclose a certain degree of information to the investors,customers, and government administrations. This is aimed atprotecting the interest of the stakeholders that massively rely onsuch information in order to facilitate the decision making process.
Major Financial Statements
There are four major financial statements. These include incomestatement statement of retained earnings, balance sheet andstatement of cash flows (Alvarez & Fridson, 2002). The statementof financial information is also known as the balance sheet andprovides data relating to the position of a given businessorganization in terms of the financial capacity. It includes theassets, liabilities and equity. The assets define property owned by acorporation or those that they control. These include cash,inventory, and plant and machinery (Alvarez & Fridson, 2002).
Liabilities define the amount owed by a business firm to othersentities (Alvarez & Fridson, 2002). It therefore defines thefinancial obligation that a business organization has towards others.They include creditors such as banks and suppliers and the providersof other services (Alvarez & Fridson, 2002). Equity defines theamount that business organizations owe to their owners. In otherwords, it is the capital that has been invested by the owners inorder in order to facilitate its operations or expand its activities.
On the other hand, the income statement, also known as the profit andloss statement, identifies the profitability of a firm as well as theloss making issues that exist in a business. As such, it identifiesthe profit or losses that have been incurred by a businessorganization over a given period. It is composed of the expenses andincomes (Alvarez & Fridson, 2002). The latter defines theearnings of a business organization over a given period and includessales revenue and dividend income. Expenses include the costs thatthe business has incurred over a given period. Examples are salaries,wages and depreciation (Alvarez & Fridson, 2002).
The cash flow statement represents the movement of cash and bankbalances over a specific period. The cash portfolio of the financialstatement is divided into three sections namely operating activities,investing activities, and financing activities (Alvarez &Fridson, 2002). Cash flows to facilitate the primary activities of abusiness are known as the operating activities whereas the purchaseand sale of assets are classified as investing activities. Finally,cash that has been generated or spent in the process of paying debtsis part of the financing activities (Alvarez & Fridson, 2002).Statement of retained earnings is also referred to as the retainedearnings statement and gives an account of the movement of theowners’ equity over time. It is determined by incorporating variouscomponents such as the net profit/loss, dividend, share capital, andgains and losses in equity (Alvarez & Fridson, 2002).
Relationship between Accounting and other Disciplines
There are various linkages between various departments of a businessorganization. For example, through accounting information, themarketing department can monitor its revenue projections and identifyways to increase the company’s sales (Bowlin, 2016). Additionally,costs such as advertising and product promotion require the input ofboth the marketing and accounting experts. On the other hand,financial ratios are used by the management to determine thefinancial performance of an organization (Bowlin, 2016).
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Alvarez, F. & Fridson, M. (2002). Financial statement analysis :a practitioner`s guide. New York : John Wiley & Sons
Beyersdorf, M. (2013). International GAAP 2013: Generallyaccepted accounting principles under International FinancialReporting Standards. Hoboken, N.J: John Wiley & Sons.
Bowlin, K. (2016). Relationship Between Accounting & Marketing.Chron
Everingham, G., Kleynhans, J. & Posthumus, L. (2007). Principlesof GAAP. Cape Town, South Africa : Juta
Flood, J. (2015). Wiley GAAP 2015 : Interpretation and Application ofGenerally Accepted Accounting Principles. Chichester, U.K. : Wiley
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