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Importance and the Scope of Accounting in Organisation

University: California Institute of Technology

  • Unit No: 8
  • Level: High school
  • Pages: 27 / Words 6630
  • Paper Type: Assignment
  • Course Code: BFA312
  • Downloads: 451
Question :

 This assessment will cover following questions:

  • Discuss the importance of Accounting and also evaluates the Scope of Accounting.
  • Explain the significance of breakeven analysis. What are its benefits and limitations?
  • Highlights the main components which are considered while preparing a budget in an organisation. What are the main considerations business owners should make as they budget and forecast?
Answer :

QUESTION 1

Accounting is the procedure within that financial transactions are recorded which are pertaining to a business (Kieso, Weygandt and Warfield, 2019). This question of report will going to cover significan of accounting as well as also explain scope of the same. In addition to this, income and balance sheet statements of Potus Corporation has been prepared.

a) Significance of Accounting and also explain the Scope of Accounting.

Accounting is the procedure within that financial transactions are recorded which are pertaining to a business. Respective process involves summarizing, analysing as well as reporting these transactions for oversight regulators, agencies as well as tax collection entities. In addition to this, financial statement utilise within accounting is concise summary of financial transactions over an accounting period, financial position, cash flows and summarizing also summarised operations of business firm. Apart from this, there are several significance of accounting explanation of these are as follows :-

  • Analysis purpose/decision making– In an organisation decision making is based on sound analysis of financial statements which is product of accounting information system (Libby, 2017). If accounts are not kept properly it may be difficult to make decision in effective manner as well as business executives will be acting in blindness. Moreover, investors both current and potential investing activity is based on analysing accounting information. Information related to profitability, liquidity, efficiency and many more obtained by the information which has been provided by accounting information system.
  • Record Keeping– Account play important or primary role in keeping records. Data as well as information has been gathered from several sources, collated, analysed, organised, commincated to its end users for informed economic decision making which is work as positive factors in long run yield.
  • Help in evaluating business performance– Accounting record reflect outcomes of operations and also the statements of financial position. In addition to this, various profit & loss accounts ratio and balance sheet are calculated that assist user of financial statements for analysing performance of an business organisation (Smith, 2019). For instance, turnover ratio, debt equity ratio. Current ratio etc.. Although, for analysing variance manager of company can compare previous period accounting data with current and budgeted figures.
  • Helps to manage and monitor cash flow– By accounting system working capital and cash requirement of an organisation has been taken care properly. In simple term it can be said that, through accounting system an organisation can manage its cash inflow and outflow in effective manner.

Scope of accounting – Accounting have its wide scope as well as area of application and its utilisation is not limited for business world alone. But also spread over in all the spheres of society and also in professions (Li and Sloan, 2017). In addition to this, within any social institution or professional activity whether they are earning profit or not financial transactions take place in it. Thus, there arises required to record as well as summarising transaction at the time of their occurance and also necessity of finding net outcomes for same after expiry of specific fixed period. Apart from this, thwere is requirement for communication and interpretation of such information to the appropriate person. Only when accounting utilisation can assist to overcome such issues.

Within modern world, practices related to accounting system is not only in every business institution but also take place in several non-trading institutions such as Colleges, School, charitable trust clubs, Co-operative society and many more. Along with this, professional such as practicing lawyers, medical practitioners, Chartered Accountants and many more also adopt suitable type of accounting methods within their working. In simple term it can be said that accounting method utilise by each and everyone who involved within series of financial transactions (Shipman, JSwanquist and Whited, 2016). Apart from this, accounting is dynamic subject so, its scope and area of operation is getting enhnace with the modification in socio-economic changes. As result of continous reaserch in the new area application of accounting principles as well as policies are emerged. Social accounting, national accounting and human resources accounting are illustration of new area of application of accounting system.

b) Prepare an Income statement and Balance sheet of Potus Corporation as at 30.06.19

Income statement – It is one of three essential financial statements utilise for reporting an organisation's financial performance within specific accounting period, with other key statements being balance sheet as well as cash flow. It is also known as profit and loss statements as well as statements for revenue and expense. In addition to this, income statements of an organisation primarily focus on revenue and expenses of business firm during specific time period.

Balance sheet – It is an financial statements of an organisation's assets, liabilities as well as shareholder's equity within specific time duration. Along with this, it provide basis for computing rate of return as well as evaluating its capital structure. Balance sheet is financial statements which provides snapshot of what an business firm owns and owes as well as also the amount invested by shareholders. Formula which utilise for a balance sheet is Assets = Liabilities – Shareholder's equity.

Income statement of Potus Corporation as at 30.6.19

Revenues

37436

Cost of goods sold

26980

Gross profit

10456

Operating expenses

 

Selling & administrative expenses

3624

Non operating expenses

 

Research & development expenses

1982

Operating profit

4850

Interest Expenses

450

Earning before tax

4400

Tax expenses

1100

Net income

3300

As per the above table it is calculate that from the sales amount less amounts of cost of goods sold which is (37436- 56980) to get amount of the gross profit. There is getting amount of gross profit about 10456. After that calculate the amount of net profit and for this follow the procedure in systematic manner like less amount of operating expenses such as selling & administrative expenses and non operating expenses like R&D expenses. After deduct the amount get operating profit which is 4850 then less amount of the interest expenses and get amount of earning before tax then deduct amount of the tax expenses and at the end get amount of the net income which is 3300.

Balance sheet of Potus Corporation as at 30.6.19

Assets

('000)

Current assets

 

Cash

4895

Inventory

8517

Accounts receivable

5714

Total Current assets

19126

   

Fixed assets

 

Land

981

Plant & Machinery

7154

Total fixed assets

8135

Other Assets

3300

Total Assets

30561

   

Liabilities

 

Current liabilities

 

Accounts payable

7156

Long term liabilities

20105

Net income

3300

Total Liabilities

30561

From the above table it has been analysed that company's total assets and liabilities are equal. Assets section classified into different subheading like current assets, fixed assets and other assets. In fixed assets consist of Land and plant & machinery like 981, 7154 respectively. In current assets consist of cash, inventory and accounts receivable so total current assets is 19126. So company have total assets are 30561 and current liabilities have accounts payable which is 7156 and long term liabilities and net income. So company have total current liabilities are 30561.

QUESTION 2

This question is based on the break even point analysis where company get no profit and no loss. For this require to know importance of this point and how to beneficial when Robert industries applied this method (Lara, Josma and Penalva, 2016). Along with also mentioned about the advantages and drawbacks of this analysis. There are some figure that use to calculate the contribution per unit and sales value due to change of profit.

a) Breakeven point analysis is an important financial analysis tool used by business owners.

 Break even Analysis: It is a technique which is applied by most of the companies in broad manner to manage production activities as well as accounts management. This analysis depended on classifying in production cost in between those which are known as variables. A break even point analysis is utilised to analysis the number of units or dollars of revenue required to cover total cost (Loughran and McDonald, 2016).

(1) Importance of Break even point analysis:

It is important aspect to run business activities effectively and for good business plan. It supports to organisation to analysis the cost framework and the number of units that required to be sold in respect to cover the cost or generate income.

  • Cost control and monitoring: sine managers analysis the fixed and the variable costs that impact on the profitability of an organisation. They can analysis the impact of the changes to costs that supports in break even analysis (Maskell, Baggaley and Grasso, 2017). It supports to analysis the extent of flexibility in the cost that impact in the profitability of break even point.
  • Help devise a pricing strategy: Changes in selling price can impact on the break even point. Such as, selling price is deducted that time a firm required to sell more break even. Hence, with the help of analysis a manager of organisation decide whether they required to changes in the selling price and according to that devise a pricing strategy for the same.
  • Determine the number of units to be sold: To calculate the point require to analysis how many units sold by the marketing department so it helps to owner to know selling quantity. The selling price of every product, the variable cost of every item and total fixed costs is needed to analysis of break even.

2) Advantages and disadvantages of break even point analysis

There are defined different advantages of the Break even point analysis in context of Robert industries such as:

  • Make or buy decision: The break even analysis is assist in making a choice between two courses of activities to make versus to buy (leGivoly, Hayn and Katz, 2017). When variable cost is lesser than the price that has to be paid top an outside supplier, it may be better to produce than to buy.
  • Financial Structure: Break even analysis is supplying an understanding of the nature of profits in relation to results. This understanding is essential in preparing the financial framework of an organisation.
  • Relation between fixed and variable cost:This analysis can help to know identify the relation in between fixed and variable cost that helps to calculate contribution cost and conduct further activities of the business.
  • Measure the profit: Through the analysis an organisation calculate all the units and their price after that know that how much profit or loss (Mi and et. al., 2016). According to that they set production quantity and apply different strategy to enhance the profitability of business.

Every technique have good and bad side so as usual this techniques have some disadvantages that impact on the business in negative manner such as:

  • Based on assumption: The break even point analysis mainly based on the assumption because there are predicting sales price are constant at all the stages of results. As well as sales also assume the production quantity and according to that apply all the strategies to get set result for the business entity.
  • Time consuming: It may take lot of time to prepare chart of break even point and require to have proper knowledge of the all activities to prepare the chart effectively (Cameran, Campa and Francis, 2018). If there is not focusing on every part so result will be wrong so there is required to more attention on all the activities which is considering in the chart.
  • Single product:This analysis is applied by the organisation on only single product not on double product. So organisation is dealing into single product and single mix of products so easily applied by them.

b) Robert Industries produces a single product. The following are the financial numbers related to this product.

Selling Price

$250 per unit

Variable Cost

$100 per unit

Fixed Cost

56000

QUESTION 3

This question defined about the different material and labour analysis which is changes as per the price and rate of price (Otley, 2016). There is analysing of the variance analysis which is utilised for the individual variances and compute all the activities. Along with mentioned limitation and advantages of variance analysis in broad manner.

a) The Walter Group provides the following data for June 2019 when 15,000 units were manufactured.

Standard

Actual

Standard Quantity

8.50

Actual Quantity

6.75

Standard Price

7.50

Actual Price

13.5

 

63.75

 

91.125

Direct material Price variance: (Actual units produced * act material/unit) x (Actual price – standard price)

= (7.50 – 13.50) * 6.75

= (6) * 6.75

= (40.5)

Standard

Actual

Revised Standard Quantity

6.74

Actual Quantity

6.75

Standard Price

7.50

Actual Price

13.5

 

50.55

 

91.125

Direct material quantity/ Usage variance: Standard Price x [(Actual Units produced x Act Mat/unit) – (Actual units produced x Standard Mat/unit)]

= (6.74 – 6.75) * 7.50

= 0.075 (A)

Total material cost variance: (Total standard cost – Total actual cost)

= [( Standard quantity * Standard price) – (Actual quantity – Actual cost)]

= ( 8.50 * 7.50) - ( 6.75 * 13.5)

= 63.75 – 91.125

= 27.375 (A)

Standard

Actual

Standard Labour Hour

5.5

Actual Labour Hour

6.5

Standard Cost

15

Actual Cost

12.2

 

82.5

 

79.3

Direct labour rate variance: (Act units produced x Actual Lab hrs/unit) x (Actual Price – Standard Price)

= ( 15 – 12.2 ) * 6.5

= 2.8 * 6.5

= 18.2

Particulars

Revised Std

Actual

Input

 4.36

15

6.5

12.2

Loss

0

   

0

Output

18889

 

15000

 

Direct labour efficiency variance: Std Price x [(Act units produced x Act Lab hrs) – (Act units produced x Std Lab hrs/unit)]

= (5.5 – 6.5) * 15

= (1) * 15

= (15)

Total labour cost variance: Labour rate variance + Labour efficiency variance

= ( Standard hour * Standard rate) - (Actual hour * Actual rate)

= (5.5 * 15) – (6.5 * 12.2)

= 82.5 – 79.3

= 3.2

b) variable overhead spending variance

Standard rate = $10.40

Actual Rate = $9.30

Labour hours = 260

Variance analysis: (Standard rate - Actual Rate ) - Actual hours

= (10.40 – 9.30) * 260

= 1.1 * 260

= 286 (F)

From the analysis it is getting that is is favourable.

c) Variance Analysis and highlight its Advantages and Disadvantages.

It is the study of deviations of actual behaviour versus forecasted or set nature in budgeting or management accounting. Variance analysis is mainly related with a producing production cost (Wildavsky, Lockhart and Coughlin, 2018). It is selected by company to recognise the reason of differences between manufacturing of standard or set costs of the input that should have happened for the actual products produced and the actual cost of the inputs utilised for the actual products manufactured. Variance analysis can be defined into two steps such as:

  • Computing and recording individual variances
  • Understanding the reason of every variance

There are defined advantages and disadvantages of the variance analysis to good and bad part of this technique:

Advantages - It is significant control tool due to it draws attention to areas where actual performance is different from the planned activities (Karabarbounis and Neiman, 2019). The other benefit of this analysis that it can help to recognising different areas where assets are not effectively used and field where adjust all the requirement. It mainly promotes the performance of the business with different business management. Variance analysis can also be utilised to analysis areas where cost over run and recognition whether standard cost set up as per the reason.

Disadvantage - Variance analysis have broad drawback in that it takes a long period of time to investigate the impact of the variance and hence corrective actions are delayed. The observing tool results in large lag time and however application of control measures in significant manner. It is sensitive analysis for the efficiency measurement that analysis that variation in output can be attributed to variation in input. Sensitivity analysis examine the impact of the actual results if it different from the planned operations.

QUESTION 4

Budget is estimation of revenue as well as expenses over specified future time period and it is usually compiled as well as re-evaluated on specific period basis (Biddle, Ma and Song, 2016). This question of report will going to elaborate budget as well as components which company have to consider while preparing budget. In addition to this, cash budget will be prepared for quarter April to June.

a) Components considered while preparing budget in company. Major consideration business owners should have to consider while making budget and forecast.

Budget is an estimation of expenses as well as revenue of specified time period and it is generally re-evaluated and complied on periodic basis. In addition to this, budget can be design for a family, person, group of people, government, country, multinational organisation and many more who else spending money (Hall and O'Dwyer, 2017). Moreover, within an organisation or company budget is internal tool which utilise by management as well as not needed for reporting external parties. Furthermore, there are numerous components of budget which an business firm have to consider while preparing it. Explanation of these are as

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