Discuss About The Finance And Accounting Nonfinancial Managers.
According to Bowlin, Hobson and Piercey (2015), the purpose of this statement is to provide business-related financial performance to the users over the accounting year. Since there is relation of financial performance with business profitability, it is necessary for the users to gain information for evaluating the potential variations in economic resources and ability of generating cash from resources. Moreover, the users require information for evaluating the technique of using additional resources.
The conceptual framework defines income as the rise in economic benefits in the accounting year as inflows or enhancements of assets or fall in liabilities that lead to increase in equity. The only exemption is the contribution from equity participants (Collier 2015). For instance, income includes revenue earned from selling products and services, interest received on bank deposit and others.
Income covers both revenue and gains; however, there is significant difference between the two. Revenue is the income earned in the ordinary course of business activities of the organisation, while gain is the income, which is not generated from the core business operations. Revenue might be in the form of interest earned, while gain might take the form of income made on revaluation of business assets. The recognition of income in the income statement is made at the time rise in future economic benefits associated with a rise in asset or fall in liability has taken place, which could be gauged reliably.
According to the conceptual framework, expenses are fall in economic benefits during the accounting year as depletions of assets or outflows or happening of liabilities resulting in fall in equity except those related to equity participant distributions. For instance, expenses that arise in the normal course of the business operations include cost of goods sold, wages and depreciation. On the other hand, losses are those expenses that do not occur in the ordinary course of business activities of the organisation. The recognition of expenses in the income statement is made at the time fall in future economic benefits associated with a fall in asset or increase in liability has taken place, which could be gauged reliably.
Money measurement concept and historical cost:
According to the money measurement concept, all the events or transactions are recorded in monetary terms. Any fact or incident that could not be recorded in terms of money is not recorded in the books of accounts of the organisation (Fields 2016). One of the primary principles in historical cost accounting is the principle of measuring unit. It assumes that the unit of measure is fixed and this implies that variations in general buying power are not considered significant to need adjustments to the primary financial statements. The inflation is not taken into account as well.
Statement of financial position:
The major purpose of the statement of financial position is to depict the fair values of the assets of an organisation in an accounting year, the asset status in case of forced liquidation, the success of business operations and items of debt, value and net worth (Hartley 2014). Thus, it informs the intended users about the financial position of an organisation and its capability in meeting the stakeholder needs. Thus, it helps in making decisions for the stakeholders.
Assets are those resources that an organisation controls arising out of past events and due to which the future economic benefits are estimated to flow to the organisation. Assets are of two types, which include both current assets and non-current assets. Current assets are those having lives of less than a year, while non-current assets are those that would fetch benefits to the organisation for above one year (Keune and Keune 2016). Current assets include cash at bank and inventories, while non-current assets comprise of plant and machinery, land and motor vehicles. For an asset to be realised in the statement of financial position, the flow future economic benefits to the corporation is likely and it has a value or cost, which could be gauged with reliability.
Liabilities are termed as the financial obligations or debt arising during the course of business operations. These are settled over time by transferring economic benefits like money, products and services. Liabilities could be categorised into current liabilities and non-current liabilities. Current liabilities are expected to be settled within a year, while non-current liabilities could be settled after one year or more. Current liabilities include accounts payable and payroll expenses, while non-current liabilities include deferred tax and long-term debt. Liabilities are realised in the statement of financial position when there is a probability of resource outflows arising from the settlement of current obligation and the measurement of the settled amount could be carried out accurately (Kim, Schmidgall and Damitio 2017).
Equity could be termed as the residual interest in the assets of an organisation after subtraction of all the liabilities. The equity in a private limited company mainly comprises of share capital, while in case of listed entities, it constitutes of share capital, retained earnings, treasury stock, reserves and capital surplus. These equity accounts depict the financial representation of the business ownership. The type of capital accounts in the sole traders comprise of owners’ capital and drawings. In case of partnership, the type of capital accounts includes allocations, contributions and distributions (Kim, Schmidgall and Damitio 2017).
Measurement of assets and liabilities:
Under monetary concept, the assets and liabilities could be gauged, if their costs or values are measured with adequate reliability. In historical cost concept, the assets and liabilities are recorded at the actual price and their price remains the same in the balance sheet even after depreciation. Under fair value, the assets and liabilities are recorded at the current market value or fair price, whichever is lower
Accrual basis and cash basis:
Under the accrual accounting basis, the matching of expenses is carried out with the associated revenues and it is reported at the time expense is incurred and not at the time of cash payment. Cash basis is a technique to record transactions for expenses and revenues at the time of receipt of corresponding cash and payment for expenses (Lev and Gu 2016).
Difference between accrual basis and cash basis:
Revenue is accounted in cash basis at the time of receipt of revenue and the time of paying money for expenses. On the other hand, revenue is accounted in accrual basis at the time it is earned and products and services are expensed at the time they are incurred. Cash basis is used mostly in small organisations, while accrual basis is widely used in medium and large-sized businesses (Nobes and Stadler 2015).
Matching concept could be defined as the practice in accounting, in which the organisations realise revenue and associated expenses in the identical accounting year.
Four underlying principles of accrual basis:
Time period (Financial period):
This principle allows the accountants in gauging the overall business performance. In case, there is no segregation of time into distinct periods, it is not possible for the accountants to record distinct transactions in different timeframes.
Historical costs (Original cost):
Historical costs under accrual basis assume that the unit of measure is fixed and this implies that variations in general buying power are not considered significant to need adjustments to the primary financial statements (Sohn 2016).
Revenue is accounted in accrual basis at the time it is earned and not when the amount is already received.
Expense is recognised in accrual basis at the time products and services are expensed at the time they are incurred and not at the time of making payment.
Cost of sales adjustment:
It is assumed that XYZ Limited is a manufacturing organisation, which purchases raw material for preparing its steel products. The opening inventory was $480,000; additional purchases amounted to $50,000 and the closing inventory was $30,000. In this case, the cost of goods sold would be $500,000 ($480,000 + $50,000 - $30,000). It is assumed that there is absence of indirect cost. However, the organisation had wrongly recorded the cost of goods purchased as the cost of goods sold. As a result, it had lead to increase in gross income, operating income and net income. The additional amount of $20,000 was transferred to retained earnings in the balance sheet statement of the organisation. For fixing up this error, inventory account could be debited, while crediting the cash at bank account of the organisation (Tinkelman 2015)
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