Types of Accounting Information & How They Are Recorded - Coursework Example

THE NEED FOR RULES IN PREPARATION OF ACCOUNTING INFORMATION By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Introduction Business organisations use distinctive accounting systems in order to record accounting information in the best manner possible. Even though there are a number of an underlying financial record like invoices and journals; the fundamental accounting record is fairly defined by the different types of financial statements that help to evaluate and summarise the financial status of a given entity. Subsequently, the need for accounting rules and regulations has grown over the years with simple and complex modifications being affected in order to summarise these financial record types in ways that users of accounting information can easily understand (Labardin & Nikitin, 2009). Thus, the focus of this paper is to examine the importance of adhering to rules whenever conducting preparing financial information especially end-year financial statements. Types of Accounting Information & How They Are Recorded It is important to note that each type of accounting information is recorded in a unique manner but are always related in one way or another. The income statement is a distinctive form of accounting information that helps to ascertain, list and record all incomes and expenses transactions that have occurred within a given operational year. It is specifically utilised measure the profitability levels of an entity and it is recorded in a daily, monthly, quarterly as well as annual basis from such other accounts as sales and purchases ledgers (Danos, Holt & Imhoff.Jr, 1989). These records enable the owner of a business to understand whether or not the operations are resulting to high incurrence of expenses or even the generation of additional income. The balance sheet is a form of accounting information platform that records both assets and liabilities of an entity within a specified period of time. The preparation of this form of accounting information takes from such accounts as the accounts receivables and payables for that matter (Danos, Holt & Imhoff.Jr, 1989). It is mainly used for the purpose of assessing the potential financial health of an entity within a given period. The statement of cash flows is yet another important form of accounting information that is recorded and presented using such accounts as cash books. It showcases the in and out flows of cash resource (Danos, Holt & Imhoff.Jr, 1989). It helps to establish whether an entity has sufficient cash resource to meet its underlying expenses and obligations. Uses Accounting Information The uses of accounting information can be distinctively grouped into two aspects; uses of accounting information within an entity and its uses outside the entity as well. The uses of accounting information within the entity by such stakeholders as the owners, employees and also the Board of Directors is meant to evaluate the organisation’s immediate stability as well as profitability aspects so that they can make a basis for future effective decisions (Constantin, 2012). In fact, the owners and Board of Directors are specifically interested with an entity’s accounting information for purpose of ascertaining their immediate capacities to generate revenues and thus profits while employee personnel are interested in finding out, off course from these financial information, whether or not the entity is fairly positioned to avail remuneration packages, other benefits as well as possible career opportunities (Constantin, 2012). The uses of accounting information by outside parties like investors and creditors is meant to provide relevant data on the existing risk-benefit relationships at hand as a way of ensuring that effective decisions are made in relation to purchase, sale or event the retention of stock options (Constantin, 2012). This information is also used to establish whether an entity would be able to pay-off dividends. Financial creditors to a given entity uses the accounting information to ascertain on the reimbursement capacity within due dates as well as evaluate possible financial commitments in order to make decisions on possible increase or decrease on the degree of credits offered (Danos, Holt & Imhoff.Jr,1989). Notwithstanding, the suppliers of an entity need accounting information to determine solvency so that they can understand whether or not the amounts owed will be specifically paid off at their respective maturity dates (Constantin, 2012). Customers use the accounting information to ascertain an entity’s continual ability in formulating effective future long-term collaboration possibilities. On the contrary, the public, as a whole, uses the accounting information to easily assess on the underlying economic and social impacts related to an organisation’s level of activities (Danos, Holt & Imhoff.Jr, 1989). Significance of Rules in Preparation of Accounting Records & Key Accounting Concepts It is noted that the credibility and usefulness of accounting as well as financial information is mainly ensured and guaranteed only in the event that numerous accounting rules and regulations have been adopted. In accounting, these rules and regulations are more perceived to be conceptual frameworks upon which numerous transactions are based (Costa, 2012). The overall accounting framework is focused on the practices of accounting information and the profession as a whole that is bounded by different rules or thus concepts. Accounting rules or concepts are deemed to be crucial for the purposes of underpinning the process of preparing accounting information that related to ethical, boundary as well as recording and measurement rules (Costa, 2012). Ethical rules of accounting are meant to oversee the limiting the amount of judgment that can be used in the course of reporting financial information. Boundary-based accounting rules are formulated to comprehend the types of data as well as the amounts for each that should be adopted by entity’s as well as the specific elements of financial information that should be reported (Costa, 2012). In essence, the recording and measurement accounting rules are related to the manner for which different forms of data should be recorded as well as measured by an entity within any given moment in time. The prudence accounting concept is deemed to be an ethical-based concept that is focused on the principle that revenues as well as profits should not be predicted however; they should be included within the profit or loss statement only in the case when they are realised in terms of either cash or other assets, with cash realisation being assessed and determined in a reasonable certainty level (Costa, 2012). It is important to note that the concept calls for the provisions being made for all manner for liabilities and expenses to be the best predictions in relation to the degree of readily-available accounting information while losses determined from distinctive commitments as opposed to making guesses (Costa, 2012). The consistency accounting concept is also an ethical-focused rule that calls for uniformity of accounting treatment of all similar items for all accounting periods (Labardin & Nikitin, 2009). Possible alterations of recording techniques should be followed by intensive and simple-to-understand explanations within the reported annual reports and accounts. Under the going concern accounting concept, entities are subjected to boundary-based rules and regulations that sets to establish the possibility of this organisation having the capacity to continue operations into foreseeable future periods (Labardin & Nikitin, 2009). The rule is deemed to be crucial because it facilitates the effective adoption of original and historical costs of assets that should be applied in the balance sheets on their capacities to produce future revenues. The accrual accounting concepts is an imminent recording and measurement principle that is focused on the basis that both revenues and costs should be recognised whenever they are immediately earned or thus, incurred and linked to one another (Labardin & Nikitin, 2009). Thus, this accounting rule helps to ascertain the possibility of a misleading on profit reports since there is always a difference that arises between the levels of cash received and that paid-off within given operational periods. The separate valuation accounting concept is also a recording and measurement-based accounting rule that fairly attributes to the exact determination of overall amounts incurred for given items. In a way to ensure the determination of these overall aggregated amounts of either assets or liabilities, then each of them should be determined in a more separate manner (Constantin, 2012). The underpinning rule is deemed to be crucial because it fosters the assessment of different levels of economic situations that might arise within the different operational period of an entity. The money measurement accounting concept is a recording and measurement-focused rule that facilitates information associated with the different transactions to allow for easier comparison as it avails a commonly-accepted measurement unit that is able to translate quantifiable amounts into recognisable provisions (Oler, Oler & Skousen, 2010). The concept ensures that all accounting prepared and presented to different users are translated into measurable monetary items. Conclusion To sum up the discussion above, it can be ascertained that the need for having rules in the preparation of accounting information is imperative. Different rules and concepts provide a framework that facilitates the aspects of credibility and usefulness in accounting information that is prepared for different uses. These rules also involve such important concepts as the accrual and separate entity concepts, which help facilitates the way different activities should be conducted. Ethical-based rules ensure that effective and reasonable judgements are formulated and implemented in coming up with different predictions and as a result, ensure that no material misstatement is made at any given point in time. References List Constantin, DF. 2012. The users of accounting information and their needs. Accessed from http://fse.tibiscus.ro/anale/lucrari2013/lucrari_vol_xix_2013_032.pdf Costa, JA. 2012. Accounting: An information system for organisations. Accessed from http://www.upf.edu/usquid-facecon/_pdf/ebook_accounting.pdf Danos, P, Holt, DL & Imhoff. Jr, EA. 1989. “The use of accounting information in bank lending decisions, Accounting Organisations & Society, 14 (3).pp. 235-246 Labardin, P, & Nikitin, M 2009. “Accounting and the Words to Tell It: An Historical Perspective.” Accounting, Business & Financial History 19 (2): pp.149–166 Oler, D K., Oler, MJ & Skousen.CJ 2010. “Characterizing Accounting Research.” Accounting Horizons 24 (4): pp.635–67 Read More