Accounting of finances is a process which includes recording of companys transactions which are summarised and then reported through a financial statement. You are working in an accountancy firm a s a junior accountant. You are assigned to prepare report stating firms awareness of accountancy regulations for which you are required to answer the below mentioned questions.
- What is meant by financial accounting? Explain its purpose.
- Explain financial accountancy regulations?
- Explain 10 different rules of accounting and principles that helps in governing preparations and presentation of the statements of finance.
- Explain different concepts and conventions that relates to consistency and disclosure of material.
Financial accounting is very vital for every organization along with its industry. The present report is giving brief discussion about accounting rules and regulations along with its basic principles. In the same series it had specified various financial statements which are very important for extracting financial performance and stability.
P1. Financial accounting and its purposes
It is a branch of accounting that keeps track of company's financial statements. The organization's transactions are collected, measured, recorded, and reported to the shareholder, investors through financial accounting. It is an important source to know the financial performance and position of the company, so it is very important that financial statements show the fairly and consistently report, the statement should be made according to the financial standard by IFRS and GAAP (generally accepted accounting principle) (Warren and Jones, 2018.)
The main purpose and objective of financial accounting are:
- Relevance: the information provided by financial statements must be relevant to be useful for the final user. The financial statement should be easy to understand and make decisions about the financial performance of the company to the readers of financial statements. The most recent information is more relevant, for this the company's financial result should give on quarterly and annual basis.
- Reliability: The financial information given by financial statements must be reliable. If the investors will unable to gain reliable information it would be difficult for them to make decisions. Reliable information must not be misleading and free of bias, which should be easy to verified.
- Comparability: The financial statement must be easy to compare, with other company's statement or with the past statements of the company. For this there is an established system of recording and reporting financial system are made. Comparable date would be easy for investors to make relative judgment to make decision on when and where to invest.
- Consistency: Because of the change in standards and business, making a consistent statement will not always be possible. when accounting statements is not consistent, the standard asked for the reason of inconsistency. The end users of statements having consistent data is must to compare the data and for decision making. (Financial Accounts Purpose. 2018.)
P2. Regulation in Financial accounting.
Every user of financial information wants the information to be fair, accurate, unbiased, understandable and comparable. To this the board of regulation has been set to develop the preparation and presentation of financial statements. All the companies in U.K which is listed under the FTSC has to follow the regulation sets by the GAAP. All the companies required to make their financial statements in accordance to principles framed by GAAP. With the expansion of companies in global market international accounting boards are set to follow the accounting regulation like IFRS and IASB. Different accounting regulation boards are:
- GAAP (General accounting Accepted Practice): GAAP is a commonly followed accounting rules and standards for financial reporting. The main purpose of GAAP is to ensure that financial reporting is transparent and consistent. In 2015 the UK's Financial Reporting Council published new reporting standards know as new U.K GAAP. Its aim is to make financial reporting easier and cheaper. For micro-entity a simpler accounting standard has developed. The non listed company in U.K can follow either UK GAAP or IFRS (Kwok, 2017).
- IFRS (International Financial Reporting Standards): IFRS have been a part of financial reporting in United Kingdom since 2005. the IFRS is designed to provide some global standards on how company should prepare and disclose their financial statements. Adopting a single set of accounting standard for international countries to provide investors for comparable and consistent financial information. IFRS provides general guidance for financial reporting rather than just setting of regulation. (Tsalavoutas, André and Evans, 2012.)
P3.10 Accounting roles and principles for preparation of financial statements.
There is a widely accepted the set of rules, concepts, and principles that govern the application of accounting. (Collins, Pasewark and Riley., 2012) The basic accounting rules and concepts are:
- Business Entity: Any personal transaction of owner would not be recorded in financial statements as the business is considered as different entity from the owner.
- Going Concern: It is assuming that the business entity will continue to work in indefinite time period. On the basis of this the assets value are recorded in the financial statements.
- Monetary Unit: The information which cannot be measured in monetary basis will not be included in financial statements. The monetary unit are US Dollar, Euro, Rupees etc.
- Historical Cost: All the asset value is to be mentioned in financial statement on their original value and not on the current market value.
- Matching: the revenue and the expenses mention in the given accounting period should be same to ascertain the true profit.
- Accounting Period: The business has to complete its accounting process in a specific time period like quarterly, half yearly or in a fiscal year.
- Conservatism: if there are two options of amount in a business transaction, the lower amount will be recorded in the statements.
- Consistency: The accounting process used by the business should be similar and consistent, unless change is necessary.
- Materiality: any error in the accounting process which can affect the decision of user are considered important or material and need to be reported properly.
- Objectivity: The recorded amount in financial statement should have some form impartial supporting evidence. (Concepts of Accounting Principles, 2018)
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P4. Materiality, disclosure and consistency concepts of accounting.
- Consistency Concept: The method applied for the accounting process must applied consistently from one financial period to another. For any reason if the accounting techniques has to be changed a proper disclosure of the change and an explanation of its effect on the financial statements is made. Consistency concept is important for comparability, it enables investors and other user of financial statements to compare the financial statements of the company with past financial statements. The company can change its accounting policies and techniques only if there are more than pone reasonable grounds to do so, and the change should reflect more accurate picture of financial performance of the company.
- Materiality Concept: this concept states that the company should disclose everything which important for end users. The items in accounting that are very much important is material item. Some information is important to one company but not much important to another company, this information can only be avoided if there is little or no impact on the financial statements of the entity. Materiality is the important concept in accounting which helps accountants and auditors to decide which amount is material or which is immaterial.
- Full-Disclosure Concept: This concept is related to the materiality concept, it required to disclose every financial detail like accounting policies in financial statement or in note of financial statements, so that the investors and creditors have full knowledge of relevant information about the company's operations and the basis of accounting. The principle states that any information which can change the decision of external user about the company must be disclose in the financial statements. This is to ensure that the user of financial statements is not misleading by any lack of information.