A Study On The Principles Of Accounting Accounting Essay

Category: Accounting

This subject guide is written for those of you who are studying Principles of Accounting. The unit is intended as a broad introduction to the subject, both for non-specialist students, and as a foundation for further study in the area.

From the outside, accounting can appear to be a purely practical subject. It would be very easy to focus on just the applications of techniques and procedures. But accounting is more than just a set of calculations; unless we can understand and interpret the figures we produce, the calculations are pointless!

Accounting provides information for a wide variety of different users and purposes, and its practices can only be properly understood and assessed in relation to the economic and social environment in which they are applied. Therefore there are four aspects to this subject:

First of all Techniques for recording, calculation, classification and reporting of accounting information. An additional the legal and institutional background associated with accounting information. The economic and administrative problems which the information is required to solve. The interpretation of reports prepared using 1 in the light of 2 and 3. The accounting information referred to in 1 need not be financial, although for our purposes in this unit it will almost always be.

The aims of the unit are to; introduce you to the principles underlying accounting, enable you to apply, interpret and explain key accounting techniques, provide a broad understanding of the theory and practice of financial and management accounting.

MAIN BODY

TASK 1

Accounting principles is the measurement, disclosure or provision of assurance about information that helps managers and other people who make a business decision to make decisions about resource allocation. Financial accounting is one branch of basic accounting as it involves processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated.

There are five types of different users. That is managers, owner of the business, prospective buyer, tax inspector and investors. Firstly, the managers of the business will want to know how things are going. They need financial information in order to plan for the future; they then need more up-to-date information in order to check whether actual performance is on target. This process is known as controlling the costs and finances. In accounting it is known as management accounting. So, management accounting is done by the managers, for the managers, for the purposes of planning and control.

Company shareholders are the real owners of a business and needs information from those that manage the business on their behalf. Owner of the business it means the person in charge for the whole business or company.

An additional prospective buyers means financially buy the source from owner. For example normally prospective buyers will search and analysis the information of the product before buying something. Once the customer really satisfied on the things they bought they will buy again. Satisfied customer will but again.

Tax accounting encompasses two related functions: tax compliance and tax planning. Tax compliance refers to the calculation of a firm's tax liability. This process entails the completion of sometimes lengthy and complex tax forms. Tax compliance takes place after a year's transactions have been completed. In contrast, tax planning takes place before the fact. A business transaction can be structured in a variety of ways; a car can be purchased by securing a loan, for example, or it can be leased from the dealer. They are only concerned about the returns that come to them in the form of tax revenue.

At last, for potential investors to be in a position to make investment decision some analysis has to be made and this can only be made from accounting information. In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money. In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.

There are four regulatory characteristics of these financial statements that will provide useful information to the users. There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria. That is Understandability, Relevance, Reliability, and Comparability.

First of all Understandability, This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users that who are generally assumed to have a reasonable knowledge of business and economic activities. The information must be readily understandable to users of the financial statements.

Relevance means, the information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users.

From the aspect of reliability, the information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure.

Fourthly comparability, this implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.

TASK 2

CONTINENTAL LIMITED

INCOME STATEMENT AS AT 31 DEC 2010

Sales

360000

-return inwards

(10000)

350000

Less cost of goods sold(COGS)

+opening stock

+50000

+purchases

+200000

+carriage inwards

+5000

-closing stock

-65000

-return outwards

-15000

(175000)

Gross profit

175000

+dividend receive

+5000

+proceed from disposal of vehicles (35000-3000)

+32000

+37000

212000

Less Expenses

Office salaries

(28000-2000)

26000

Office electricity and water

7000

Sales commission

(18000+1500)

19500

Vehicles expenses

12000

Interest changes

3000

Provision for depreciation

:office premises

14000

:vehicles

15000

Stationery

700

Bill

300

Provision for bad debts

7000

Purchases and goods

4000

(108500)

Net profit

103500

CONTINENTAL LIMITED

BALANCE SHEET AS AT 31 DEC 2010

Fixed asset

Office premises of cost

(35000-54000)

296000

Vehicles of cost

(300000-75000)

225000

521000

Current asset

Trade debtor

70000

Bank

39000

Closing stock

65000

prepayment

2000

Provision for bad debt

(12000)

+164000

Total asset

685000

Current liability

Trade creditor

25000

Loan

55000

Accrue of sale commission

1500

(81500)

Net asset

603500

+capital

500000

+net profit

103500

603500

TASK 3

Percentage of gross profit on sales

= Gross profit x 100

Sales

= 175000 x 100

300000

= 48.61%

Percentage of operating profit on sales

= net profit x100

Sales

= 103500 x100

360000

= 28.75%

(EXPLAIN)

Return on capital employed (ROCE)

= net profit x100

Capital employed

= 103500 x100

1103500

= 9.38%

(EXPLAIN)

Current ratio

= current asset

Current liability

= 174000

25000

= 6.96

(EXPLAIN)

Stock turnover period

= cost of sale

Average stock

= 185000

57500

= 3.22

= 96.6 days

(EXPLAIN)

Debtor collection period

= debtor

Sales

= 70000

360000

= 0.19

= 70.97

(EXPLAIN)

Creditor collection period

= creditor

Purchases

= 25000

200000

= 0.125

= 45.63

(EXPLAIN)

CONCLUSION

The accounting boards that prepare accounting principles such as the Financial Accounting Standards Board are able to control preparation of financial statements. Control is essential because it prevents unethical accountants from preparing statements that do not reflect a true and fair view of the company's financial performance. Incorrect statements may lead the firm into financial distress and bankruptcy.

Accounting principles can be used in a variety of situations. For example, matching principle states that revenues and costs should be matched in the period in which they take place whether cash is received or not. This principle can be used in any type of business whether it is leasing or health care or banking because all firms incur expenditure and get revenues. Accounting principles can thus be used for unexpected transactions.

The use of principles in accounting leads to transactions that show the true financial substance of the firm. Some of the generally accepted accounting principles are foregone consideration, revenue recognition, matching, consistency and objectivity.