The paid amount for employees for their services. This transaction goes into the income statement report and it comes from the Human Resources Department. Operating Expense. It is the total amount that is spent to run a firm in a specific period of time. This transaction goes into the income statement report and it comes from the Operational Department.
Are assets that the business will use in several years to produce their products. This transaction could be in the income statement report and the balance sheet report and it is generated by the operational Department.
It is the amount that is owed by the company and legal documents have to be formalized to ensure that the company will pay the owed amount in the future and this document is called a note. Also, note payable is a long-term liability. This transaction goes into the balance sheet and it comes from the Finance Department.
The amount that has not been paid yet to customers and it is still owed at the end of a period. This transaction goes into the balance sheet and it comes from the Finance Department.
Money that is owned to an organization by customers which is on credit, Account Receivable is considered a short-term debt. This transaction goes into the balance sheet and it comes from the Sales Department.
The Accounting Process and Financial Information
A comprehensive system that identifies, measures and communicates the financial information about economic entities to make better decisions.
The Importance of Accounting
Accounting is an important for the society, this career is for the ones who want to occupy a top position in industries, government and general businesses. Also, it is every businessman's need because non of the business organization in the world can function properly without it. for example, Accounting records can be done using pen and skills for the small organizations, while they use modern accounting machines in large organizations. Non accountants can benefit of accounting by calculating their rate for their car payments. While, the professionals can do it in more depth.
Accounting records how the business has grown and after that it analyzes the figures and suggest what best to do in the future. So it is vital field in our life.
Financial accounting objectives
The main objective of accounting is to determine the business outcome of profit or loss in a certain period of time and determine the financial status in this time. In addition, there are other objective of financial accounting which is providing the necessary information to tighten control over the business and maintain their property from loss, manipulation and embezzlement.
Financial reports are written reports of the business finances and they are important because it's the way that the accountants communicate with the users and who benefits from them and they are the final reports that are produced in a specific period of time. There are many types of financial reports such as:
This statement summarizes the revenue and the expenses of the organization for a period of time and it shows if the organization is operating success if the revenue is more than the expenses which is the Net Income.
The balance sheet reflects the financial position of the organization.
It comprised with three main points which are:
Assets which are owned by the organization such as inventory, equipment and cars
Liabilities which created by borrowing such as loans
Shareholders' equity such as the capital
Cash flow statement
This statement shows where the cash came from and how it went out in a period o time and it has three main categories which are
Operating activities net cash
Financing activities net cash
Investing activities net cash
The final result in cash flow statement must be the same as the cash balance in the balance sheet statement.
Retained Earnings is the company's retained portion of net income because they want to invest them in something that will make the company grow such as spending on research and development which will create more growth opportunity. By doing that dividends are not paid to its owners.
It is considered the utmost level of financial statements. The Securities and Exchange Commission requires the public companies to have audit statements and private companies as well if they have a large number of shareholders. But most companies don't use this statement as it is take a long time to be prepared where the accountant must go through all the financial reports and look for example at the receipt of earned money or invested and compare all entries and make sure that they are matched so it requires more time and work. Also, it is expensive. Thus, not all companies make the audit statement but is must be reviewed annually to insure that the quality audit meets the accounting standards.
This reports controls and monitors the firm's activities through comparing the actual performances of sales or costs with the budgeted performances of sales or costs. The budget report has a column for budget and a column for the actual amounts and the variance is the difference between them.
It shows the total assets in the balance sheet and the total sales in the income statement as percentages in one term which make it easier to compare values for each and trends. Thus it will be easier to review the annual changes in a business. Also it's known as vertical analysis and one hundred percent statement.
Accounting Concept and Conventions
Financial accounting depends a lot on concepts and principles that arisen and evolved over the historical development of accounting. And these concepts and principles are called Generally Accepted Accounting Principles (GAAP). Briefly, GAAP are the rules to prepare the financial statements. Here are some of these concept and conventions with examples from Best Buy's Financial Report.
The business entity principle
All the activates in a specific company is separated from its owners and other business
The going concern principle
This principle states that the business will follow-up its activities for a long term and unspecified period because they want to achieve their plans and fulfill their commitments
Accountants should provide the financial statements of the firm based on reliable and objective evidence.
Assumes that the company will keep applying the same accounting principles and methods from year to year. For instance, Best Buy uses the straight line method for the estimated useful life of the assets to figure out the depreciation.
Materiality in an important issue for financial statement auditors. In some organizations, small values are ignored as they don effect that much on the financial statements.
This principle assumes that the expenses should be matched with revenues when ever it is logical and feasible. As commissions are considered expenses and at the time of sale, commission expense is recognized in revenue.
All transactions are recorded at the purchase cost and not at its market value
This principle means that when the accountant prepare the financial statements it must be done in public which mean there must be no hidden information or data that might harm the users who benefits from the financial reports and make decisions. The accountant must be committed to neutrality when he is making these reports by full disclosure of the needed information in spite of the impact of these reports.
Monetary states that money is considered as a measurement unit that is easier to identify. An example from Best Buy, that they convert foreign currencies to USD.
This principle means that the firm will not record and recognize any revenue in their books unless it has already incurred and this happens when sales is incurred and the goods or services have been delivered. Best Buy follows this principle, they recognize the revenue when the customers purchase and deliver their
Limitations of Accounting
Financial accounting ignores non-monetary information
Financial accounting doesn't look at the non-monetary transactions. For instance, business competitions, technical innovations owned by the business and employees efficiency and loyalty are essential issues to the management of a business but accounting can not obtain theses issues, so the financial information users don't have any information about these non-monetary characters.
Financial Statements based on historical cost
Financial accounting shows historical costs, which means that the assets in the balance sheet are recorded on their purchase value rather than its value at present. For instance, a company purchased a piece of land 5 years ago at a cost of AED 1,000,000 but at present time this piece of land worth AED 3,000,000. Though, in the balance sheet it will only show the purchase price which is the AED 1,000,000. Briefly, the piece of land value has been understated.
The Choice of Calculating depreciation expense method
Depreciation expense can be calculated in many ways but the most common methods are the straight-line method and declining balance method.
It means that the value of an asset is decreased the same every year which helps the company to get equal advantage of an asset. Briefly, the cost of an asset is distributed equally over its lifetime.
Declining balance method
This method states that in the first years deprecation is very high then it decreases in the coming years. For example, if the company have an asset that costs AED 10,000 and depreciated at 25% for each year so the deduction for the first year is AED2,500 (10,000*25%), and AED1,875 (7,500*25%) for the second year and so on.
Declining balance method could be used by the accountants because in the first years the asset could be used a lot but the value will drop during that time. As the years passes by, the asset is more likely to crumble so it is more realistic when calculating the deprecation in the first year which high then decreases later.
Inventory Valuation methods
This limitation includes the First In -First Out (FIFO) and Last In-First Out (LIFO). In times of increasing prices:
The cost of goods sold will be smaller so the reported Net Income will be greater. Furthermore, the ending inventory will have a greater value so the total assets value will be greater too
The cost of goods sold will be greater thus the reported Net Income will be smaller. Moreover, the ending inventory lower value so the total assets value will be lower
Triple bottom line article
To define Triple bottom practically, it means to widen the traditional framework of reporting to take into consideration the ecological, social and financial performance. Freer Sperckley stated the TBL in a publication called "Social Audit- A Management Tool for Co-operative Working'" and described what should the Social Enterprises add in their performance measurement.
Also, the TBL requires that the company lies with the stakeholder instead of shareholders. Accordant to stakeholders' theory, the business entity should be used as a way to meet with stakeholders' interests, rather than increasing shareholders profits.
The TBL comprise of "social, economic and environmental". However, the "people, planet and profit" is phrased for Shell by Sustainability. It had an impact from the 20th century Patrick Geddes's notion who stated "folk, work and place" as a TBL. However, "people, planet and profit" succinctly the purpose of sustainability.
The bottom lines
"People": which means human capital belongs to fair business activities and beneficial practices toward the labour, community and region that the corporation runs it business. The TBL have a correlative social structure that makes the corporate, labour and other stakeholder's interests interdependent. TBL seeks to help many constituencies without exposing them to any kind of exploits. The "up streaming" of part of the profits that gained from marketing of the finished goods back to the raw materials' original manufacturer. In addition, TBL business never uses child labour and do not support the contracted companies to use it. TBL would pay decent salaries to its employees, also provide a safe healthy environment and flexible working hours, TBL would not abuse the community or their workers. Moreover, TBL seeks to "give back" by participating in strengthen the community and develop it through the health care and education.
"Planet": which means natural capital that indicates that TBL Company seeks to be environmentally friendly and get benefit from the natural order without harming the environment. Also, TBL tries to decrease it's ecological footprint by lessen the consumption of the energy and non-renewable wisely, beside reduce manufacturing waste such as the level of toxic as much as possible and then dispose it in legal manners. The most manufacturing business that in TBL thoughts is the "Cradle to Grave" which means conduct the life cycle assessment of product to set the real environmental cost of raw material growth and harvesting, include manufacturing and distribution till it reaches the end users. Moreover, TBL company never manufacture dangerous or destructive for example, weapons and toxic chemical. In TBL thinking any enterprise that may cause pollution for the society must take the responsibility of disposing the waste because neither government nor community can afford the disposal.
"Profit" which refers to the economic value gained by the organization after deducting the cost of all inputs including the cost of capital. It is different than the traditional accounting concept of profit, TBL cannot interpret the traditional accounting definition in the company unless the profits of other entities are considered as a social benefits.
There are some business based arguments that agree with the TBL concept:
Achieve to the untapped market: TBL company can find financially profitable fields that are missed when the money was the most important factor in the business such as:
Having an ecotourism and geotourism to the countries that are famous of tourism such as the Dominican Republic.
Use different methods to develop some NGOs to raise their funds, reaching clients or have different communications with other NGO.
Provide beneficial products and services for underserved populations and/or the financially profitable environment.
Adapt with the new business sectors:
Since the businesses opportunities are developing in the realm of social entrepreneurialism, these businesses try their best to expand their market by trying to gain financial profits, and to be socially beneficial and ecologically sustainable, otherwise they will fail in competing other companies. Fiscal policy governments are concerned with the social and natural deficits. However, some choices may be guided by ideology more than economics. The direct benefit of having one approach to measure these deficits would be to conduct monetary policy to deduct them, to accomplish a global monetary reform. The argument for that is that the earth cannot stand over capacity and to avoid having breakdown such as climate and nature services.
While there is many supporters of TBL and the importance of having good social life and being environmentally friendly, there are opponents that disagree with these conditions listing these arguments:
Division of labour is one of the rich society features and it is the contributor of their wealth. This leads to contribute the organization welfare of society in all aspects to focus on the best thing that they do to the benefit of all society. so the TBL is harmful for this condition.
Effectiveness: Poor societies do not care about the social and environmental matters as much as the richer society which they demand for clean environment and protected wildlife. to support the TBL concept itself is an example of the choices on hand to the wealthy society that became rich by practicing business.
Nationalism: some countries realize that they must take care of their citizens as a first priority. This point of view is not confined by on sector of society.
Libertarian: if there is a socially responsible person that believe that TBL is not good for the society the libertarian would force them to support his/her believe may or may not be the best available.
Inertia: it is hard to achieve a one policy agreement that measures the best advisory.
Application: one of the weaknesses of TBL system is the framework because there are no monetary terms to measure the benefits to the society and environment so it is hard to recognize the TBL benefits.
Criticism from the Left: TBL might be an exploiting corporation because it avoids legislation and taxation. It claims to be eco-friendly and people friendly for PR purposes.
In conclusion, Accounting is the backbone of business, regardless of what major are you specialized in, you have to have some knowledge about accounting. It is very helpful for the organizing the company's financial incomes and outcomes, and it is needed for day to day business. Also, it is important especially for the managers to make decisions, keep investors updated with their investments and to make the business profitable. Having many terms in this field is helpful because each concept do a specific financial job so it is easy to know what you are looking at whether it is balance sheet or income statement. So we can say that fortunes are gambled on the advice of accountants.