Importance of Accounting
Analysis and financial decision making reasons
Financial statements produced in accounting helps businesses and make economically informed decisions since lack of accounting will result to poor decisions from business executives. Also accounting is vital since existing and potential investors of a businesses will making rely on accounting information to make investment analysis (Wild, 2007).
A business cannot operate effectively if accounting records are not well kept and executed. Accounting is one of the main drivers of record keeping. Organizational data is collected from different sources, systematized, scrutinized, interpreted and then communicated to the final users.
Fraud scrutiny and prevention
Fraud scrutiny and prevention is highly dependent on accounting due to booking keeping and record tracking. Accounting and accounting information system is the solitary way of keeping track of fraud (Hoggett, 2012).
Obtaining funds and loans
Most financial institutions ask for financial statement of the borrower before giving loans. Accounting is used as a communication tool since it avails the accepted format that lending institutions use to measure the risk of the borrowing institution.
Users of Accounting Information
Shareholders are the owners of a company and thus they need to know how their business is performing. They therefore require accounting information to know whether their investment is being managed according to their expectations (Wild, 2007).
The government use accounting information provided by the accounting department of a company to impose taxes on the profits. Also the information from government in form of financial statements is vital since it helps government formulate its strategic plans (Wild, 2007).
Suppliers and creditors
Suppliers need accounting information of the company since they need to be assured that the company liquid enough to pay its obligation after maturity of such obligations.
Accounting information of a company is needed by the public since they need to know the position of the company so as to protect their interest.
Employees are interested in the financial statements of a company since they need to know about the safety of their jobs. Employees also use financial statements of a company when lobbying for a pay rise.
Management of an organization needs financial information to make economic decisions that will ensure smooth running of business
Trade unions are responsible for seeking fair wages of employees hence they need to know the performance of a company so as to get an insight of what to lobby as fair wages .
Opportunities in Accounting
People with accounting knowledge stand a chance of being bookkeepers, accounting clerks, accountants and Certified Public Accountants. They may therefore secure jobs in public accounting firms as well as internal audit departments of companies and corporations. Also, the federal and local government agencies offer employment opportunities for people with accounting knowledge (Wild, 2007).
Ethics in Accounting
The required ethics and ethical practices are extremely vital in accounting field due to the following reasons.
Accountants are regularly privy to sensitivity personal information regarding their clients. This information includes social security and bank account numbers. Possession of this information offers accounts a favorable deal of power relating to their clients and it is therefore necessary to there is maintenance of trust between clients and the clients (Wild, 2007). Therefore accountants should have the six principles of professional code of conduct which entail:
- Exercising sensitive professional and moral judgment when carrying out their duties
- Accountants must accept the duty of acting in a way which serves public interest, respect the trust of public and show professional commitment
- Accountants must execute all their professional duties with the highest degree of sensitivity
- Accountants should not have a conflict of interest when carrying out their duties
- Accountants should observe the accounting technical and ethical standards
Generally Accepted Accounting Principles
Generally accepted accounting standards are the financial accounting standard framework guidelines which are used in any particular jurisdiction, normally referred to as accounting standards. GAAP entail the standards, convention as well as rules, which accountants follow when recording, doing summary and in financial statement preparation (Wild, 2007).
International standards are globally known standards that direct how a particular thing or transaction works. In accounting field they are normally known as I international accounting standards. International accounting standards are used to regulate how a certain transactions should be reflected in the financial statements. IAS were formed by the international accounting standards committee board although the IAS were modified in 2001 and replaced with IFRS (Wild, 2007).
The Accounting Equation
Businesses own resources which are normally known as assets. Assets enable a business to carry out trading activities. Assets of a business are financed by businesses owners. The funds including assets that business owners invest in business are termed as capital. Also other people who are not business owners may finance assets. Funding from these people who are not the business owners are referred to as liabilities. In accounting equation the total business assets must be equal to the funding from business owners and other people who are not business owners (Wild, 2007). Therefore the need to have an accounting equation which is stated as:
Asset=capital + liabilities
Conceptual Framework and Convergence
A conceptual framework refers to system of objectives that are inter-related as well as fundamentals, which should result into consistent standards. These standards should outline the nature, the functions as well as the limitations of both the financial statements and financial accounting. A conceptual framework should be agreeable across the block since it provides a yardstick through which accounting standards are set. In addition it provides fundamental principles as well as a platform for resolution of accounting disputes (Hogget, 2012).
On the other hand, convergence as used in accounting refers to the harmonization of accounting standards into standards that are internationally accepted. Convergence principle aims at reducing the difference between the International Financial Reporting Standards (IFRS) and the United States Generally Accepted Accounting Principles (US GAAP) (Wild, 2007).
Sarbanes- Oxley Act
This is a federal law that was enacted in the United States. The purpose of that Act was to set as well to enhance accounting standards all over the US. As a result of its enactment, a company’s top management was required to certify their company’s financial information accuracy individually. This Act also increased the severity of penalties due fraudulent activities as well as increasing the independence of external auditors. This Act consequently improved the role of the board of directors in overseeing the company’s activities (Wild, 2007). This Act came into force to counter major accounting and corporate scandals that were very costly to the investors. The scandals had led to the collapsing of companies as well as decreasing investor confidence.
This is a federal regulation that was passed by US government in 2010 with the intention of militating against a financial crisis like the 2008 financial crisis. It was a combination of two Acts namely, the Dodd- Frank Wall Street Reform and the Consumer Protection Act. These Acts intentions were to protect the financial institutions’ customers as well protecting financial institutions from liquidation (Wild, 2007).
This refers to the process undertaken to reconcile the differences occurring in the accounting equation. It involves four major steps that is; identification of the transaction, identification of the journal entries to be made, making the journal entries and the balancing of the accounting equation (Hogget, 2012).
This can also be referred to as the profit and loss account or an operating statement. An income statement shows the difference between a company’s revenues and expenses. An income statement is normally for a particular financial period. For instance the income statement for the year ended June 2013. The difference between the revenues and the expenses give a company’s net income. Revenues include cash inflows while expenses include cash outflows from the business. However some cash outflows such as the purchase of fixed assets is not an expense to the business. Some items such as amortization and depreciation are included in the expenses section. Income statements vary from one business to the other (Wild, 2007).
Statement of Retained Earnings
This is a US GAAP requirement that compares the information in the balance sheet to that in the income statement. It may occur in the statement of changes in retained earnings, in a combined income statement, balance sheet, or as a separate schedule. It therefore uses the income statement information to provide balance sheet information. In the balance sheet it is located under the shareholders equity where it is equal to net income less paid out dividends (Lashner, 2013).
This is also referred to as the statement of financial position. It includes a summary of a company’s financial balances as at a specific date. A standard balance sheet has the assets, liabilities and owners equity sections. For a balance sheet to be balanced the accounting equation must be balanced. That is capital or the net worth must be equal to assets minus the liabilities (Wild, 2007).
The assets section has two parts that is the fixed assets and current assets. Fixed assets comprises of plants, machinery, vehicles etc. Current assets include; inventory, cash in hand and at bank, debtors etc. Similarly, the liabilities section also has two parts that is long term liabilities and current liabilities (Wild, 2007).
Statement of Cash Flows
This is a financial statement indicating the income effect on cash and cash equivalents as well as the changes in the balance sheet. It breaks down the analysis to financing, operating and investing activities. Its main concern is the inflow and the outflow of cash. Statement of cash flows provides financial information to potential investors, accounting personnel, potential lenders, shareholders and potential employees.
The purpose of the statement of cash flows is provision of information on the solvency and the liquidity of a firm; enable the comparison of different firms and prediction of future cash flows (Wild, 2007).
Hoggett, J. (2012). Accounting. Milton, Qld: John Wiley and Sons Australia, Ltd.
Wild, J. J., & Chiappetta, B. (2007). Financial and managerial accounting: Information for decisions. Boston, Mass: McGraw-Hill.