A Basic Element Of Business Management Accounting Essay

Category: Accounting

Accounting is widely known as a basic element of business management. Accounting is the means that the financial status, financial stability and the progress of the company which informed by the manager of the company. Thus, it contributing to continue the process of planning, control of operations, and decision making. Accounting provides a way of systematically recording, summarizing, reporting, and evaluating business activities in a company. Therefore, accountants are responsible for determine an organization's overall wealth, profit, and liquidity. Without accounting, organizations do not have basis or foundation upon daily and long-term decisions making. Besides that, it is a process of communicating financial information concerning a business substance to users. There are two types of users which are internal users and external users. Internal users are the users in the company do have the accounting information in form management budgets, forecast, and financial stability whereas the external users will be communicated in form of financial statements. In addition to that, most of the information that a business manager demand is derived from accounting data. This helps the managers have the ability to analyze and use these data to accomplish their objectives. No matter profit seeking organizations or non-profit organizations still have to records the financial statements because it is requires by law.

2.0 Answer question 1a

ACCOUNTING USERS

There are two types of accounting users which is internal users and external users. Internal users are the people working in an organization that uses accounting information as a reference to continue the process of planning, control of operations, and decision making whereas external users uses the accounting information to make their unlimited of choices such as to sell, buy, hold, lend, or make an agreement. Below are five of the accounting users and the information that they need and derive from accounts.

Managers of the company:

Managers is the person who appointed by the company's owner to manage, plan, and supervise the daily activities of the company. They need the effective accounting information about financial situation of the company as it is current and as it is expected to be in future in order to enable them to manage the business of the company efficient and to take effective control and decisions making.

Employees of the company:

These are the people who are employed by the company to run out the business activities. They need accounting information about the company's financial situation because their future careers and the size of their wages and salaries depend on it. Employees are the people who payed to work in the company and help the company to gain profit so that in order to have a stable employment. Besides that, they are interested in information concern about the maintenance of pension funding and retirement benefits. In addition to that, they are also interested in the pay and benefits received by senior management

Sole Traders:

A sole trader can known as proprietorship or sole proprietorship. Sole traders are both internal and external users. A sole trader who is a general manager has to be decision maker and be good at planning, including financial planning. If the sole traders do not have this kind of knowledge then they should call in or hired a professional to fill the gap. These professional may be accountants, investment expert, lawyers, or marketers. These people will use the internal and external information about the business. Sole traders need information on whether they have contributed enough personal capital and have initial capital cash to keep to their business running. A sole trader must decide whether it is financially more beneficial to the business to purchase or lease fixed assets.

Suppliers or Creditors

These are people who provide trading goods or services to the company on credit. They need accounting information about the company's ability to pay its debt for ensuring their collection from the company. Suppliers or creditors are the people who offer services, money or goods to the company on credit. Besides that, suppliers or creditors are the most important users of financial statements because many of the organizations will borrow a large amount of money as well as receive credit to finance their activities. No matter suppliers or creditors are bankers or other money lenders, providers of services or products, these people also needs the financial stability and future planning. Furthermore, suppliers or creditors also interested in the amount of security that appears to protect the advances which they have prepared to the organization.

Customers or Debtors

These are the people who purchase goods or services provided by the company. They need accounting information about the company's stability to ensure that the company is a secure source of supply and no danger of having to close down. For examples, some customers are into long-term contract with the business for purchase the goods and services before they sign a contract the most important thing is that the purchaser have to be alert with the supplier company and the ability of the business. Everything has to be concerned before signing a contract such as the goods they provide are in good quality and quantity. In addition to that, customers want to know that the business has the financial productive and strength ability to complete the agreement. In order to avoid dangers when purchasing goods, have to be very concern about the company accounting information and the financial stability and the ability.

Shareholders or the owner of the company

These are the business proprietors or the owners of company. They need accounting information to assess how effectively the management of the company is performing its stewardship function, how profitably the management is running company's operations and how much profit they can withdraw from the business for their dividend payment.

2.1 Answer question 1b

Characteristics of useful financial information

For having financial statements and accounts to provide useful financial information to the account users, company should satisfy following criteria in preparing its accounts relevance, timeliness, comparability, understandability, and reliability.

Relevance:

Information is relevant when it influences economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their pas evaluations. The financial accounts prepared based on accounting concepts and policies should present relevant financial information which is capable of influencing the economic decisions of the users as just mentioned. Therefore, the information presented by the financial accounts should be relevant to the decision making of the users. The information must have feedback value that explains what happened in the current period, includes comparisons with previous period and explains the actual results and different expected results. Besides that, information such as predictive value it must be possible for it to contribute to future and be used to estimate future results.

Timeliness

Whether the financial account information is relevant or not to the decision making of users, it depends on whether the financial account are made to present information on time or not when it is needed for decision making. If the accounts are prepared to provide required information on time without delay, it is relevant to the decision making of the user. If the accounts are not prepared to provide information on time because of delay, it is not relevant to the decision making of the users. Information have to be available when it is needed to influence economic decisions.

Comparability:

Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises in order to evaluate their related and policies consistently over time. Moreover, accounting policies employed in preparation of financial statements and changes in those policies and their effects should be disclosed prominently to enable users to identify differences among accounting policies being used by different enterprise. The financial accounts made based on accounting concepts should be comparable with the previous year accounts and comparable with the accounts of other company.

Understandability:

An essential quality of the information provided in financial statements is that it be readily understandable by users. For this intention, users are assumed to have a wise knowledge of business, economic activities and accounting. Besides that, it is acknowledge that financial reports may have issues that maybe too difficult to understand therefore in this kind of cases they will need to find a professional to explain.

Reliability:

Reliability implies that users of financial information can depend on the information when the make economic decisions. Unreliable financial information will mislead the users. For example, the investment for the property might be not relevant, and it is so unreliable that will mislead the users, therefore better not to disclose the fair value. Information have representational faithfulness when a user can depend on an entity's reported transactions and events because they actually happened. Events can be independently verified and are free from bias. Information is verifiable when the transaction and events of an entity can be supported with evidence. Furthermore, the information is neutral when it is free from bias. If financial statements are deliberately prepared in a way which in an increase in share prices, or which disguises management inefficiencies.

2.2 Answer question 1c

Accounting Equation:

Assets = Business owner's equity or capital + Liabilities

Dual aspect concept states that there are two aspects of Accounting, out of which one aspect represent business assets and the other aspect represents business owner's equity or capital plus liabilities. Accounting Equation are all the assets are neither financed by lending money nor paying with the money of shareholders of the company. Accounting equation are the systematic steps or the formula that representing the relationship between net worth, assets, and liabilities. The accounting equation is calculated as follow:

Accounting equation is influenced by double entry when a pair of debit entry and credit entry is made simultaneously in two accounts for recording a business transaction. Thus, the record of a business transaction with double entry will cause changes in accounting equation. Therefore, business transaction's record with double entry will cause the changing in the accounting equation as follow:

Assets

Owner's Equity or Capital

Liabilities

Increased by debit relevant assets account

Increased by credit capital or Profit/ loss account

Unchanged

Increased by debit relevant assets account

Unchanged

Increased by credit relevant liability account

Decreased by credit relevant liability account

Decreased by debit Capital/ Drawing account

Unchanged

Decreased by credit relevant liability account

Unchanged

Decreased by debit relevant liability account

Unchanged

Decreased by debit Profit/ loss account

Increased by credit relevant liability account

Unchanged

Increased by credit capital account

Decreased by debit relevant liability account

3.0 Answer question 2

Purchases Account

Balance b/d

Creditor

Balance b/d

151,200

2,800

154,000

154,000

Balance c/d

154,000

154,000

Creditors Account

Return Outwards

Balance c/d

600

62,680

63,280

Balance b/d

Purchase

Balance b/d

60,480

2,800

63,280

62,680

Return Outwards Account

Balance c/d

9,000

9000

Balance b/d

Creditor

Balance b/d

8,400

600

9000

9000

Sales Account

Balance c/d

222,000

222,000

Balance b/d

Debtor

Balance b/d

218,400

3,600

222,000

222,000

Cash Account

Balance b/d

Balance b/d

25,200

25,200

24,980

Electricity

Balance c/d

220

24,980

25,200

Debtors Account

Balance b/d

Sales

Balance b/d

50,400

3,600

54,000

52,800

Return Inwards

Balance c/d

1,200

52,800

54,000

Return Inwards Account

Balance b/d

Debtor

Balance b/d

16,800

1,200

18,000

18,000

Balance c/d

18,000

18,000

Bank Account

Balance b/d

Balance b/d

42,000

42,000

39,600

Salary

Balance c/d

2,400

39,600

42,000

Salary Account

Balance b/d

Bank

Balance b/d

151,200

2,400

17,520

17,520

Balance c/d

17,520

17,520

Electricity Account

Balance b/d

Cash

Balance b/d

1,680

220

1,900

1,900

Balance c/d

1,900

1,900

Trial balance as at 30th June 2012

DEBIT

CREDIT

Opening stock at 1st July 2012

Purchases

Sales

Return Inwards

Return Outwards

Salaries

Rent Paid

Electricity

Discount Allowed

Discount Received

Rent Received

Land & building

Vehicles

Debtors

Creditors

Bank

Cash

Loan

Drawings

Opening Capital 1 July 2011

$

42,000

154,000

-

18,000

-

17,520

3,360

1,900

5,040

-

-

168,000

117,600

52,800

-

39,600

24,980

-

13,440

-

$

-

-

222,000

-

9,000

-

-

-

-

3,360

5,040

-

-

-

62,680

-

-

36,960

-

319,200

658,240

658,240

4.0 Conclusion

After finish this assignment, I have learn what is accouting for in an organisations. Although, it is a little bit complicated but I believe that do more practice it will be better. Therefore, when comes to do the accounting statement or the information have to be alert because to avoid mislead the company's futher planning and decisions making. Besides that, I also learn who is the accounting users and their characteristics. In addition, the accounting equation is the concept of counting the financial statements of the company.