Companies today use different accounting methods to produce
financial statements, two of those methods used are single entry and double
entry accounting. There are differences between the two in that accounts are logged
in two different ways, one account being less accurate with the use of single
entry however the more accurate and used today being double entry. The majority
of companies use double-entry accounting because of the accuracy it provides.
Having the expertise to produce a set of accounts as a
financial manager is necessary to fully understand the company. These
statements can be prepared quickly and efficiently through the use of up to date
software programs which result in money being saved as less time is consumed. These
programs therefore provide an accurate report of accounts which includes the
balance sheet, cash flow statement and income statement. The financial
statements are analysed by the manager providing valuable information about
what is going wrong and what needs to be changed to improve the financial health
of the company.
A main advantage of double-entry accounting is the way it
records assets and liabilities unlike single-entry which only records
transactions as either a revenue or expense. An organisation can produce a balance sheet showing a company’s
assets, liabilities and shareholders equity through the use of this concept. This
is possible because all the information is gathered and saved onto a database
then the financial manager can see clearly what resources are owned and what
financial obligations need to be met.
Check and balances of accounts improve the arithmetical
accuracy of the information and makes fraud easier to identify. The reason for
this is that if a financial accountant uses the double entry system then
problems can be spotted by comparing previous journal entries to current. The
problems are easily viewed by the accountant as both sides need to balance
otherwise there is a mistake, a trial balance should be added after to correct
Complete records are kept of every transaction which in the
future can be a big advantage if the customer decides to take you to court for
a disagreement then you can justify your innocence through the information saved.
Also keeping a clear and up to date record will make it easier to find important
information for future projects.
certain principles that help accountants and one of those are the matching
principle, stating that for every transaction recorded there must be a
corresponding expense in the same period of time. Profits and losses can be
more accurately shown because of this. Subtracting expenses from the revenue will
produce the net income. It is important that this information is kept clear and
logged as a financial accountant so it can be forwarded to investors or the
government when needed to prove the operations being carried out are legit and
taxes are being paid.
b/There are many
accounting concepts and principles that are important but accrual accounting is
one of the most common because of its benefits. Accrual accounting allows companies
to recognise revenue and expenses as they incur. Instead of waiting for a cash
transaction accrual accounting can provide the financial accountant with an
idea of how well the company is performing.
Accrual accounting is very effective in monitoring activities
and financial management. Part of the accounting system involves giving
companies an accurate and more immediate reflection of money coming in and an
expectation of what expenses will be coming out in the future. Financial trends
can be analysed by business analysts using this information allowing them to
produce up-to-date cash flow statements enabling the company to recognise and adjust
any problems that arise.
Income and debts in accrual accounting are very accurate as
it shows companies clearly their financial responsibilities and resources
available. This is a big advantage to businesses because it provides good
management of the flow of financial activity.
According to World Bank, Accrual accounting aids financial
managers to plan the future. Managers do not have to wait for cash to be
received to see their profits allowing them to create a strategy to maximise
sales or increase revenue. This will keep the organisation forward thinking and
progressive. Assets such as equipment are better managed under accrual
accounting as it becomes easier to know when an asset has reached the end of its
life and when to start looking for a replacement.
Businesses enter financial transactions that do not
physically materialise until a date in the future. An example is credit
transactions for raw materials are sometimes repaid over years not months, these
materials might generate their own revenue streams. Accrual accounting ensures
both transactions are recorded when they occur which allows the manager to
determine if the product was worth producing after working out the net effect
GAAP (generally accepted accounting principles) is responsible
for issuing accounting standards. Companies in the United States with over one million
in inventory sales and 5 million in annual sales are forced to use the accrual accounting
method for the preparation of income tax and other financial information. Meeting GAAP will provide financial institutions
and investors easier access to important information as a result improving the
image and legitimacy of the business in the eye of the public. SOURCE
C) The way in which an organisation accounts for a
transaction can depend on the materiality of the information provided. The
information is considered material if it influences the judgement of anyone who
depends on the information provided in the financial statement. There are three
main influence the materiality of information and those are the monetary size
of each influence, the company’s operations and the nature of the item.
Under the materiality concept if the transacted pound amount
is insignificant or sufficiently small in relation to the business operations
then this can be considered immaterial and not cost effective to process. Companies
can continue using the accounting method appropriate for the organisation but
instead use a cheaper method for the transaction. Most decisions on the
materiality of the product are subjective although accountants consider anything
material to be over 5% of the net profit.
Materiality can describe the significance of an item compared
to other items on the financial statement and this varies depending on the size
of the business. An example of this might be if a smaller organisation has an
expenditure of 300 pounds then this would normally be material whereas a larger
organisation such as Apple or Samsung would consider this immaterial because of
the small significance it holds on their financial statement.
The materiality concept allows accountants to disregard
other accounting concepts if the action has no consequence on the financial
statement. An example of this is if a company charges its electricity and
heating in the period of time it is paid instead of when it was used. This
action would be wrong in regard to the matching principle although accounting
for electricity and heating would be more convenient on a cash basis because
the bill is not known until it is received. With this approach the electricity
and heating charged in expenses will belong in the month before but the mistake
in the financial statement because of this change will most likely be
immaterial depending on the organisations threshold.