Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule. It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach. Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach. This kind of approach uses a formula to come up with an income based on value, not costs. On the other hand, positive or descriptive theoretical approach to accounting theory is a set of theories that is concerned with what accountants actually do. These theories rely on a process of inductive thinking, which involves making Continue reading
Financial Accounting
Motives for Holding Cash – Cash Management Concepts
Cash is the medium of exchange on the common purchasing power and which is the most important component of working capital. It includes coins, currency, cheques held by the firm and the balances in its bank accounts. Sometimes near-cash items also are included.’ Cash is the basic input required to keep the firm running on a continuous basis. At the same time it is the ultimate output expected to be realized by selling goods and services. A firm should hold sufficient cash, neither more, not less. An excessive cash remains idle which simply increases the cost without contributing anything towards the profitability of the firm and in the opposite case, trading and/ or manufacturing operation will be disrupted. Not only that, it largely upholds, under given condition, the quantum of other ingredients of working capital, viz., inventories and debtors, that may be needed for a given scale and type of Continue reading
The Fundamental and Enhancing Qualitative Characteristics of Financial Information
The purpose of financial statements is to give financial statements information about the change in financial position, financial performance and financial position of the organization. These can provide data use in decision making such as investment, credit and economic decision making which are useful for various users. There are seven main groups of users which are public, investors, lenders, employees, customers, supplies, government and other agencies and the needs of information is different for each group, for instance, employee will interest on the profitability, retirement benefits and employment opportunities and so on. The qualitative characteristics can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. However, it can limited by two pervasive constraints which is cost and materiality in providing useful financial information. Fundamental Qualitative Characteristics of Financial Information Relevance: Relevant financial reporting information Continue reading
The Importance of Accounting Information Systems
Generally, the day-to-day running of a business organization comprises several transactions which the firm engages in. As a result, there is a need to always keep the records in a systematic manner for decision-making and for reference. Accounting is a systematic way of recording business transactions. The data of all the transactions are recorded and kept mainly for future use. These data are tracked and recorded in a computer-based system (financial accounting system) to facilitate the accuracy of the data. The main users of the accounting information are the shareholders, creditors, financial analysts, vendors, and government agencies. There are various categories of books and documents in which the accounting information is kept. For instance, the books of original entry which comprises of various journals such as cash journal, general journal, purchase journal, and sales journal; and the source documents like, cash receipts, bank statements, and cash statements. The information from Continue reading
Sensitivity Analysis and Scenario Analysis in Capital Budgeting
Capital Budgeting is the process by which a Business makes decision on whether to take up a project or not. This involves analysis of the amount of money which is required to invest in the project and the revenue that the project will generate. A business uses various techniques and analysis tools to determine the effects of the various projects. This may involve the calculation of the time taken for the undertaking to produce return to cover the initial contribution, or the amount of cash flow that will be produced from the undertaking totally in its entire span of period along with the amount of profit or loss generated from the same or the break even of the project can be calculated using the discount rate of the project. All the techniques and methods involve making assumptions and making estimations about the future performance of the project. The results derived Continue reading
Accounting Basics : The Accounting Cycle Explained
The accounting cycle is a sequence of steps starting with recording transactions and takes it to the preparation of financial statements. The main purpose of recording transactions and keeping track of expenses and revenues. The accounting cycle is a set of steps that are repeated in the same order every period. The highest of these steps is the preparation of financial statements. Some companies prepare financial statements every three months while some complete twelve months. 10 Steps of Accounting Cycle Explained The first step is to analyze and record transactions in the journal. This step is where information must be carefully read to determine if a transaction is an asset, liability, common stock, retained earnings, revenue, dividend, or expense. In this step, each account must be determined to see if the amount increases or decreases. Those increases and decreases should be recorded as a credit or debit before entering the Continue reading