In today’s world there is a lot of discussion of how effective are accruals and going concern concepts are been regarded as fundamentals during the making of financial statements. Many people believe that there are a lot of pros and cons of these types of concepts. There is also another discussion on how difficult to apply these sorts of concepts (going concern and accrual concepts).
Going concern are like assumptions in accounting from which financial statements are created for every business. Financial statements are basically those statements where it records all the cash transaction within the business. It is true that “Going Concern” concept enables the entity to live longer or it ensures that it does not get s old out at a quicker period.
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Not only that but also it classifies assets and liabilities into short term and long term respectively. Another benefit is that the value of the current asset is relatively during the time course of the Business. In contrast, it may mislead as many companies will close after the publication of accounts which is drawn up by the method of going concern concept. There are many companies which has difficulties in applying going concern concept, especially the listed companies who will need to have thorough preparation for going concern concept and to organise a well-formed financial report. Also that Companies are facing difficult economic conditions and/or are in financial difficulty this will necessitate particularly careful consideration by directors when making their assessment. If the directors consider that the company might no longer be a going concern they may need to take legal …show more content…
This type of accounting concept is taken as a basic standard for accounting practices in most of the company which excludes small operations. It helps in providing an exact picture of the current position of the company but in slightly complex manner. Under Accrual concept, both the revenues and expenses are recognised in the period which they actually occur. As an Example, revenues are normally identified when the services are rendered and delivered, even when the cash is not paid immediately. Accrual accounting is exactly the opposite of cash accounting. Cash accounting is basically when both revenue and expenditure are all recorded and incurred. Let’s take an example to differ between accrual and cash accounting “For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.” As to compare between accrual and cash method, it say s that cash method isn’t accurate unlike accrual
A strong balance sheet gives an investor an idea of how financially stable the company really is. Many professionals consider the top line, or cash, the most important item on a company’s balance sheet. The big three categories on any balance sheet are “assets, liabilities, and shareholder equity.” Evaluating Barnes & Noble’s assets for the time 2014 at $3,537,449, 2013 at $3,732,536 and 2012 at $3,774,699, the company’s performance summarizes that it is remaining stable. These numbers reflect a steady rate over the three year period. Like assets, liabilities are current or noncurrent. Current liabilities are obligations due within a year. Key investors look for companies with fewer liabilities than assets. Analyzing this type of important information, informs a potential investor that if the company owes more money than they are bringing in that this company is in financial trouble. Assessing the liabilities of the balance sheet, for the same time period, it is also consistent with the assets. The cash flow demonstrates a stable performance in the company’s assets and would be determined that the liabilities of this company are also stable. Equity is equal to assets minus liabilities, and it represents how much the company’s shareholders actually have a claim to. Investors customarily observe closely
The major distinction between the accrual and the cash basis of accounting is when revenue and expenses are recognized. When the cash method is used, revenue is recorded when money is received. Expenses are recorded only when money is paid. The Accrual method accounts for revenue when it is earned. Expenses for goods and services are recorded when they are incurred. The revenue and expenses are recorded even if is recorded even if cash has not been received or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses.
Accounting is “a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information” (Accounting, n.d.). Financial information mentioned above includes any financial transactions done by the business. There are two types of accounting. The first one is accrual accounting, which realizes transactions at the time they occur and disregards whether or not cash transaction has occurred. This method is widely used in business, because it allows transactions to be completed over time and distance. Financial statements produced by accrual accounting reflect a sophisticated trade and a much more accurate snapshot of the business’ current situation. The opposite of accrual accounting is cash accounting, in which transactions are realized only when cash payment is made or received. This is the method used in personal finance.
An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid).
Financial accounting focuses on providing financial statements to stockholders and internal and external users. Financial statements created under managerial accounting provide instructions and data used for internal business management purposes in effort to compute cost of product. Financial accounting provides data for the sole purpose of preparing companies financial statements. Unlike financial accounting, managerial accounting uses past records to forecast future budgets; additionally it doesn’t adhere to any set financial accounting standards such as US GAAP or IFRS (Averkamp). Financial accounting creates financial income statements, balance sheets and cash flow statements under the guidelines of US GAAP or IFRS; however managerial accounting prepares in-depth management products to include cost volume profit analysis, profit planning, operational budgeting, capital budgeting to name a few
Among other things, when the FASB created the statement of cash flows a vital part, it permitted either the direct or indirect approach/method. However, if the direct approaches are picked, the FASB demands that it be helped by a schedule of the adjustments that make up earnings to cash on the condition that it’s used by operating activities. This particular schedule can be shown as either in the footnotes on the financial statement or on the cover of the statement. In addition, commonly allowed accounting principle ask for that under either approach or method cash figures paid out for things like taxes and interest must be made known
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
This leads to the type of system that works to compare and analyse the amount of revenue going in any one direction to its counterpart. Cash Flow Comparison A sound bookkeeping system is structured to allow a comparison between revenue and spending for each line item in the books. The collection of data is further structured for weekly, monthly, or even daily analysis. Naturally, a more general outcome is provided for an annual inspection of past
For example, the Revenue and Expense Recognition Principle, in which companies recognize revenues and expenses in the period of time when these are earned, these are the basis of Accrual Accounting. Another important concept considered is the Cash-Basis in Accounting, in which companies should recognize revenue once cash is taken and expense when cash is paid, but this is not always accepted. After analyzing both sides (the owners and the players), and considering the two versions of Income Statement we can realize that they agree in many points but the dispute is fundamentally in the following
Accounting is the pillar of every company to measure its growth, loss, revenue , capital, its really specify the real terms in foam of figures and sometimes in tables, in accounting there are certain rules are obtained to make more accuracy while playing with figures.
Accounting has to be one of the most vital components when operating a business; regardless of the size of the business. According to Investopedia, accounting is the systematic and comprehensive recording of all financial transactions pertaining to a business and the process of summarizing, analyzing, reporting transactions to oversight agencies and tax collection entities (2017). Consequently, there are two types of accounting: Financial Accounting and Managerial Accounting that will be compared and contrasted. Finally, there will be an analysis on how managerial accounting helps managers to improve operational and financial performance. First, it is vital to identify the two types of accounting.
The purpose of this document is to describe the nature, purpose and scope of accounting and it deliberately explains the details of each category in accounting. Accounting involves in preparing financial documents of an entity by analyzing, verifying, and reporting this records. It emphasizes its major characteristic role in field of banking and finance, with a mixture of supportive sub topics.
Marshall, D., McManus, W., & Viele, D. (2004). Accounting: What the numbers mean. [University of Phoenix Custom Edition e-text]. New York, NY: McGraw-Hill Companies.
The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...
The accounting cycle is a series of steps starting with recording business transactions and leading up to the preparation of financial statements. This financial process demonstrates the purpose of financial accounting–to create useful financial information in the form of general-purpose financial statements. In other words, the sole purpose of recording transactions and keeping track of expenses and revenues is turn this data into meaning financial information by presenting it in the form of a balance sheet, income statement, statement of owner’s equity, and statement of cash flows.