The usage of fundamental accounting concepts in preparation of financial statements

This essay is about the fundamental concepts of accounting. These are important rules for knowing about the condition of organization no meter what kind of organization is it. Usually Accounting keeps organisation under control.

In this assignment, I’m going to show the importance of accounting, explain how the fundamental accounting concepts are used in preparation of financial statements and the role of Financial Accounting in Decision Making and discuss Stakeholders. Nowadays, most accounting operation are doing buy the computer technology but, for the managers of the company and the owners should know or just have a basic knowledge in accounting, otherwise both can loose many.

The unreadable process of growing business around the world, accounting has a huge influence on the world economy in whole and accounting rules are becoming more important and inseparable part of future development of the organization and for batter and affective control from the side of the government of the countries. The accounting is all about the performances of the businesses during the historical accounting year (normally one year) based on transactions summarized in accounting documents.

The companies, organizations are required to carry out the accountancy for every historical accounting year, which is based on fundamental accounting concepts. There are main four concepts in accounting, such as:. Going concern concept; Accruals concept; Consistency concept; Prudence concep

“Going Concern Concept”-assumes that an enterprise will continue its activities for the foreseeable future; where this is not the case, particular care will be needed in the valuation of assets, where stocks and fixed assets may not be realisable at their book values, and liabilities, where provisions may be needed for closure costs or redundancies. This concept normally only has relevance for Trading Activities.

This concept is important in preparation of the Profit and Loss Account and the Balance Sheet. There are many factors which cause an enterprise to close, the two most frequent being lack of money and lack of management, though others as diverse as road diversions, changes in law, opening of competing businesses can have the same.

Let assume, if by reason of trading losses being sustained, such as a business has lost so much money that it is going to be difficult to carry out its trade, it may means that normal trading must cease. In this event, stock may be disposed of in the trade or at greatly reduced prices. Similarly, fixed assets having a special purpose (e.g. computer controlled milling machines) may no longer have a useful function and may be worth only scrap value. So, if business closes there is a burden of redundancy payments to staff.

The success of the business can be measured by the difference between output values and input values. Therefore all resources not yet used can be reported at cost rather than at market value. If it is believed that a business is not a going concern in the long term, then accounts must be drawn up on the basis of current or exit values of the assets/liabilities. This would probably give very different results than if the going concern is used.

By having this as one of our fundamental concepts, it becomes implicit that any set of financial statements relates to a company, which will continue in operational existence for the foreseeable future, unless the contrary is stated.

“Accruals Concept” – Also known as the matching concept, because of the way it strives to match costs against the revenues generated by incurring those costs, the accruals concept is in many ways the most significant of all. “Its basic tenet is that revenues should be recognised (i.e. included in the Profit & Loss Account) in the period in which they are earned, not necessarily when they are received in cash.” (Ref: 3) it means that a sale made to a customer on credit just before the year-end would be included in that year’s Profit & Loss Account, even though the cash may not be received until the following year.

There are very few businesses where all trading is conducted for cash. Most high Street shops insist on cash (or plastic cards, the modern form of cash) and do not give credit to customers, but they seldom have to pay for their purchases instantly on receipt, nor do they pay their expenses daily: such services as gas, electricity and telephone are all on the usual quarterly accounts, and even their staff do not get paid more often than once a week or month.

If one attempted to measure profit or less merely by looking at the cash transactions, one would never see a true picture, for one would not bring to the estimate any expenses which had not yet been paid for, and one might well include cash payment for benefits which had all been received in the previous accounting period.

“The Consistency Concept” – Traditionally the preparations of accounting statements need the individual judgment about which basic rules should be applied in the accounting documents to obtain equality it is important to use consistence law. Which claims that accounting policy which was adopted ones should be used in another accounting years.

From the ethical point of view it is not frank to change at ones adopted policy because alternative one has a better outcome. Sometimes when the entity of the firm is changing it can be allowed to change the accounting policy but it should be done in exceptional circumstances.

The consistency concept is that the accounting treatment of like items should be consistently applied from one accounting period to the next.

Without consistency we cannot have comparability; and without comparability, financial reporting is rather meaningless. For example, a profit for the year of ?100m may initially be perceived as good, but can only really be assessed by comparison with last year and/or budget for this year.

Finally, it must be noted that the consistency concept does not preclude changes being made. Clearly, as time goes by, new accounting practices will develop. However, as these are adopted two things must happen. First, they must be fully disclosed as a change in accounting policy. And second, the comparative figures for the previous year must be restated under the new policy so as to facilitate comparison.

“Prudence concept” – One of the most vital concepts of accounting is prudence. In accountancy it is often used another term for prudence which is conservatism. The prudence concept is all about the managers and owners over-optimistic decisions during the operation of the firm. In the company there is a tendency about confidence in the future and the managers are not pragmatic about the future prospects. For example: a lot of managers are making fundamental mistakes when they are discussing the creditor worthiness of the particular debtor. They are not looking realistically on the consumers ability to payback there liabilities to the company and in such way the companies current assets are not determined in correct way. Simultaneously this might have the affect of overstating profit in one period and understating in another period.

2) The role of financial accounting in decision making processes of 4 different non-management stakeholders group

Share holders are called investors in a company and their need is to get as much return on their investments and growth of the organization. They require only profit and loss account to see the profitability of the business.

Lenders are bank and other financial organizations which provide loans and other facilities. They look on the profit and loss accounts as well as on the balance sheet in regards to see he ability of making repayments of capital and interest as well as security in the event of non-payments.

The suppliers of goods and other trade creditors require balance sheet statement to see the credit worthiness of the organization, time typically taken to pay suppliers.

Government is also one of the users of the financial statements for any business. They require profit ad loss account statement for the tax assessments and trade statistics

For the purposes of management and decision-making, the sociologist will often need to identify “primary” and “secondary” stakeholders. Primary stakeholders can be defined as those with a direct interest in the resource, either because they depend on it for their livelihoods or they are directly involved in its exploitation in some way. Secondary stakeholders would be those with a more indirect interest, such as those involved in institutions or agencies concerned with managing the resource or those who depend at least partially on wealth or business generated by the resource.

The concept of the stakeholder does not extend merely to those directly involved in the exploitation of a resource but extends to all those deriving some form of benefit from the resource or the area in which it is found. In the case of marine resources, this can include fishers, all those involved in the processing and sale of fish, fish consumers, tourists in the area, transport operators and their passengers, industries using water or polluting it, people involved in forestry in mangrove areas, and any number of other groups or individuals with more marginal interests. At least for those groups identified as having significant interests or deriving important benefits, sociological analysis has to look at their priorities and motivations, decision-making processes and institutions, and understand the social, economic and cultural links between each group and the resource.

At least initially, the term “stakeholder” needs to be interpreted in the broadest possible sense. The five levels of analysis already discussed all need to be considered as possible factors determining stakeholder groups or influencing the characteristics of those groups. Gender, age, community affiliation, household-level relations and the structure of production-units are all likely to influence involvement in or degree of dependence on a particular fishery.

As in the case of some caste fishers in South Asia, entire communities may be dependent on particular fisheries to the near exclusion of any other source of livelihood. In such case relatively homogeneous groups of stakeholders with more or less uniform “stakes” in the resource may be easily identifiable. But, more commonly, a wide range of social, cultural and economic factors are liable to determine a more complex pattern of stakeholding with factors such as religious denomination, ethnic background, social and economic status, professional activity, length of residence and migratory or refugee status all playing a role.

Within the household, other issues are liable to be at stake – the role of women, their degree of mobility and the stage in the household development cycle can all be relevant.

Different members of production units will also have different interests and stakes in the resource according to the benefits they derive from its use. The owner of fishing gear and craft which represent a major investment aimed at exploiting a specific fishery will have a different stake in the resource compared to crew members who may only work seasonally in the fishery and be able to move into other fisheries or other sectors relatively easily.

Beyond the basic identification of primary and secondary stakeholders, some kind of ranking of the relative “stakes” of different groups needs to be carried out to try and clarify which groups are most concerned with particular sets of issues. This is necessary as, when looking at environmental and resource management in an integrated fashion, the interactions are likely to become so complex and far-reaching that almost everyone in a particular area may seem to be a “stakeholder” of some kind in all sectors and sub-sectors

This complex set of stakeholder groups would need to be further broken down into sub-groups with clearly different sets of interests. Coastal inshore fishers may include a wide range of operators using many different gears, all giving them a slightly different interest in the resources of the area. Similarly the stakes in coastal zone management of the owner of a large palmnut plantation which is polluting local mangroves with pesticide run-off and of plantation workers who engage in occasional fishing in the off-season are quite different.

In many cases, groups of stakeholders will overlap and be dynamic with the same person or group having different stakes at different times of the year or at different stages of their life.

The variety of stakeholders and their often conflicting interests in the resource will often mean that managers have to prioritise levels of interest of different groups in different resources. It will rarely be possible to accommodate all interests. However, sociologists can assist in identifying key or primary stakeholders and those with less direct or secondary interests. After analysis and investigation, some stakeholders might be felt to have only minor or very indirect interest in the management of mangrove areas and therefore not need to be directly involved in the decision-making process, although their concerns might be registered more indirectly.

The question of who continues to have access to fisheries resources, who receives compensation for loss of livelihood because of management and for whose benefit resources are being managed in the first place is a frequent source of conflict. Often, failure to resolve these issues of distribution can lead to the breakdown of attempts to manage resources as consensus over the need for management can be lost where some are perceived to be unfairly benefiting at the expense of others.

Sociological analysis can contribute by indicating how current access is distributed and why, including the historical roots of the existing situation and the relative dependence of different groups on the fishery. This analysis can then be combined with biologists’ estimates of catch quotas or licensing limitations to enable fisheries managers to determine what constitutes a “fair share” of a fishery and who should obtain those shares.

To conclude this assignment we should pay attention to the four concepts which is the base of creation of organisation. These four concepts are corporate entity and limited liabilities. One of the most important concept which should be always consider by the company is prudence law which is the base of every organisation’s legal operation. On the other hand for every company it is very important to evaluate relationship whith investors, employees, suppliers and customers. Investors are one of the most important circle of the chain. Shareholders are taking decisions how to govern the profit of the firm and in such way they have a huge influence on the managerial level of the company.

To sum up, all these separate non-management stakeholder groups with operation together are creating the profit of the company and each of them has a decisive role in profitable operation of every organization.