The objective of this report is to evaluate requirements of financial accounting practices and its principles in managing business activities effectively. All these practices will help in managing financial activities of business by considering:
- Evaluate business transactions by using double entry book-keeping and extract a trail balance.
- Determine final accounts for sole-traders, limited companies or partnerships accordance to effective standards, conventions and principles.
- Provide bank reconciliations to analyze that bank and company records are correct.
- Rectify control accounts and shift recorded transactions from suspense to right account.
Financial accounting is the process of accounting which deals with recording and summarising of financial transactions which helps in the formulating the financial strategies and plans. The finance related accounting is the process of recording the transactions in such a manner that is understandable for the managers and other users of the organisations. The main purpose is to bring the financial stability in the business. The information’s related to financial accounting is presented in financial statements such as profit and loss account, balance sheet and cash flow statement which are prepared in this report ( Motherly and Burney, 2013.) This report includes two broad parts, one consists of business report that includes rules and principles and another one includes statements of financial position such as profit and loss statement, balance sheet, bank reconciliation statement etc.
1.Define Financial accounting
Finance accounting is the most common form of accounting that deals with the preparation of financial statements of the company such as balance sheet, profit and loss statement and cash flow statement. The financial accounting process starts with the recording, classifying and summarising the financial transactions of the business. These transactions are recorded in the journal of the companies, then they are posted into ledger and then trial balance is formulated. After the proper recording of all the transactions the financial managers prepare the financials of the company. The duty of the financial managers is to prepare these financial statements with reliable and accurate information so that the users of the financial statements can entrust on the statements in taking important decisions regarding the investing in company's projects. And therefore it is the responsibility of the financial managers of the company to prepare the financials using information which is reliable such that the statements reflect the true and fair view of the company (Rankin, and et. al. 2012)
Financial accounting in the companies uses certain pre-determined standards that are formulated by the regulatory bodies such as IASB and FASB. Various companies use different accounting standards as suitable to the accountants and owners of the companies. The companies in US generally uses US-GAAP standards in preparing their financial statements, the IFRS financial reporting standards are also recognized in the companies all over the world and are adopted by many big companies. The main purpose behind the adoption of these standards are that these standards ensure that the prepared financial statements of the company are reliable and that it shows the true and fair view of the companies because of certain regulations of doing accounting imposed by the bodies.
2. Regulations relating to financial accounting
Financial accounting deals with the preparations of financial statements and its most important objective is to prepare those financial with utmost care and using reliable information such that it shows the correct financial position and health of the company. For solving the purpose, there are various regulations that are imposed by the regulatory bodies that are created for this purpose only. The most famous regulatory bodies in the world are FASB and IASB, most of the companies uses the financial reporting standards that are offered by these bodies. The name of accounting standards that are prepared by these bodies are US-GAAP (FASB) and IFRS (by IASB). The reporting standards provided by these informs the managers and accountants that they should keep a record of the financial transactions of the company. Using reporting standards provided by regulatory bodies declines the chances of abuse and discrepancies in the recording of the financial transactions. Every user of financial statements require that the statements are reliable, accurate, fair, true, understandable and comparable information about the financial position and health of the companies. The principles and accounting standards are different in every country but the source of regulation is same in every country (Norton, 2012)
3. Various accounting rules and principles applicable in the organisation
- Debit the receiver and credit the giver: This rule of accounting is applicable in all the personal accounts that are dealing with the business directly or indirectly. The personal accounts of the company include individuals that can be natural or legal body. If the person receives anything from the organisation, then his account is debited in the company's account. And if the person provides anything to the company then his account is credited in the company's account.
- Credit what goes out and debit what comes in: This accounting rule is applicable on the real accounts of the company, the real accounts of company includes fixed assets of the company. When the company purchases the assets the real account of asset is debited in the company account and when the company discards the asset, that account is credited in the company's books according to the rule.
- Credit all incomes and gains and debit all losses and expenses: this accounting rule is applicable on all the nominal accounts of the company. Nominal accounts include the expenses, losses, income and gains of the company. Let’s take an example of salaries account, when the company pays salaries to its employees the salaries account is debited and the bank account is credited according to the rule of debit all expense and losses. ( Chea, 2011)
- Going concern principle: this principle states and assumes that the company will continue to do its operation for the coming future period and attain the objectives with the view that company will continue to exist and it will not shut down in near future. In cases when the accountant of company feels that it will not exist in future then he has to inform to all the stakeholders of the company.
- Matching Principle: This accounting principle needs organisation to follow accrual accounting system, as per accounting principles, accountant must try to match revenues according to its expenses.
- Revenue recognition principles: This kind of accounting principle simply said that the organisation must need to implement accrual basis of accounting instead of cash basis accounting that simply means that the organisation must need to identify the income when product is sold and not if the amount is achieved from consumers and within the same time goes with the expenditure (Wilson, and et. al. 2010)
4. Conventions and concepts related to the material disclosure and consistency:
Material Disclosure: This can be rightly said that the accounting conventions simply suggest that the accounting must concentrates on the recording of transactions that are important and whole of the abnormal things is ignored. However, this is crucial as normal minutes’ transactions overburden the accounts of the organisation. There is various pre-determined formula for opting material transactions or events, this decision is entirely relied upon skills and knowledge of the accountant to judge about the transactions are crucial to be recorded in books of accounts and which are not. (Brown, 2011). This must be adopted that transactions which is material for one organisation might be immaterial for other one, and items that are material in existing year could be immaterial for the another one, and items that are material in the existing year could be immaterial in the next year.
Consistency: This consistency convention of accounts implies that the accounting practices that are applicable in the existing yeas which must remain unchanged for diverse periods. This simply says that the rules and policies which considered by the business must remain stable for the organisation for the longer period and must also varied in case of changes the policies as the urgent needs, organisation must need to have adequate steps in using of those changes. Stakeholders and various employees who needs consistency in the policies henceforth they could be convenient in working with the organisation (Balakrishnan and Cohen, 2011).