a/ Companies use
either single-entry or double-entry accounting to produce financial statements.
The difference is that accounts are recorded in one account with single entry
and two separate accounts with double-entry which include credit and debit. The
majority of companies use double-entry accounting because of the advantages it
It is very important to have the ability to prepare
financial statements and reports in financial accounting. Double entry
accounting enables organisations to prepare these statements easily with the
use of software programs. This will ensure an accurate report of accounts
including the balance sheet, income statement and cash flow statement. These
financial statements provide in depth information about the organisations
accounts which allows a financial manager to analyse this and determine what
changes need to be made to improve the financial health of the company.
A main advantage of double-entry accounting is the way it
records assets and liabilities unlike single-entry which only records
transactions as either a revenue or expense. Using this concept, the recording
of assets, liabilities and shareholder’s equity enables an organisation to
produce a balance sheet which clearly shows the financial obligations and
resources owned by the company.
Checks and balances of accounts improves the arithmetical
accuracy and prevents fraudulent activity within the company. If account
manipulation occurs using the double entry system then it is visible by
comparing previous journal entries to current ones for similar transactions. If
both sides of the equation do not balance then this allows the financial
accountant to find the mistake and resolve it using a trial balance which lists
all the accounts posted to the general ledger.
This systematic and scientific system keeps complete records
of every transaction and the aspect of the financial transaction. The advantage
being that this can provide an accurate record of the contact between the
client and protect yourself from claims of negligence in the future.
The matching principle makes accounting a lot more
simplistic because for every revenue transaction recorded there must be a
corresponding expense in the same period of time. This allows a company to
accurately determine their profits and losses. The net income can be calculated
by subtracting expenses from your revenue. Providing external users such as
investors, lenders, agencies and the government with this information will be crucial
as a financial accountant.
b/ One of the
most used and basic accounting concepts is accrual accounting. Accrual
accounting allows companies to recognise revenue and expenses as they incur.
Instead of waiting for a cash transaction accrual accounting can provide the
financial accountant with an idea of how well the company is performing.
Accrual accounting is very effective in monitoring activities
and financial management. Part of the accounting system involves giving
companies an accurate and more immediate reflection of money coming in and an
expectation of what expenses will be coming out in the future. Financial trends
can be analysed by business analysts using this information allowing them to
produce up-to-date cash flow statements enabling the company to recognise and adjust
any problems that arise.
Income and debts in accrual accounting are very accurate as
it shows companies clearly their financial responsibilities and resources
available. This is a big advantage to businesses because it provides good
management of the flow of financial activity.
According to World Bank, Accrual accounting aids financial
managers to plan the future. Managers do not have to wait for cash to be
received to see their profits allowing them to create a strategy to maximise
sales or increase revenue. This will keep the organisation forward thinking and
progressive. Assets such as equipment are better managed under accrual
accounting as it becomes easier to know when an asset has reached the end of its
life and when to start looking for a replacement.
Businesses enter financial transactions that do not
physically materialise until a date in the future. An example is credit
transactions for raw materials are sometimes repaid over years not months, these
materials might generate their own revenue streams. Accrual accounting ensures
both transactions are recorded when they occur which allows the manager to
determine if the product was worth producing after working out the net effect
GAAP (generally accepted accounting principles) is responsible
for issuing accounting standards. Companies in the United States with over one million
in inventory sales and 5 million in annual sales are forced to use the accrual accounting
method for the preparation of income tax and other financial information. Meeting GAAP will provide financial institutions
and investors easier access to important information as a result improving the
image and legitimacy of the business in the eye of the public. SOURCE
C) The way in which an organisation accounts for a
transaction can depend on the materiality of the information provided. The
information is considered material if it influences the judgement of anyone who
depends on the information provided in the financial statement. There are three
main influence the materiality of information and those are the monetary size
of each influence, the company’s operations and the nature of the item.
Under the materiality concept if the transacted pound amount
is insignificant or sufficiently small in relation to the business operations
then this can be considered immaterial and not cost effective to process. Companies
can continue using the accounting method appropriate for the organisation but
instead use a cheaper method for the transaction. Most decisions on the
materiality of the product are subjective although accountants consider anything
material to be over 5% of the net profit.