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Accounting Principals and Etiquette - Book Report/Review Example

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This book review "Accounting Principals and Etiquette" presents accounting as the measuring, communicating, and processing of financial information in relation to economic entities. This information is conveyed to various users such as creditors, management, regulators, and investors…
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Accounting Principals and Etiquette
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Hand Book on Accounting Principals and Etiquette s Table of Contents Table of Contents 2 Writing in accounting 3 How technology and/or digital media has affected writing in accounting 4 Generally accepted accounting principles (GAAP) 4 Assumptions 5 The principles 6 Constraints 8 Code of ethics 10 Reference List 12 Writing in accounting Accounting is the measuring, communicating and processing of finacial information in relation to economic entities. This information is conveyed to various users such as creditors, management, regulators, and investors. The accounting field is divided into management accounting, financial accounting, tax accounting, and auditing. In all these fields, writing is involved in recording financial transactions. This recorded financial information may be presented in financial financial reports. Most businesses value effective writing. Accountants communicate with their colleagues and clients so as to effectively complete their work-related tasks. Consequently, for ease of reading, writing in accounting is characterized by clarity and conciseness. As an accounting major, you may be required to come up several types of written documents, for instance, letters, memos, and written financial statements. Writing in accounting is not only limited to descriptive works, but also argumentative or analytical pieces (Oldroyd & Dobie, 2008). Audience and purpose as it applies to writing in accounting In accounting writing is inevitable. This is attributed to the fact that the financial information statements needs to written for outdoor consumers, for instance, regulators, suppliers and investors. Furthermore, the financial information is also written for internal use only by the management. In that respect, accountants also need to know how to write reports since most of the time their work is presented to somebody else. Coherence, conciseness and clarity as the most important qualities of the writing that is done by the accountants. How technology and/or digital media has affected writing in accounting Since we are living in the era of information age, the advent of technology has positively impacted on the accounting proffesion. Numerous difficult practices have been made easy with the use of the computer. Initially, one had to write all the numbers and draw figures and table by hand. The process was lengthy and time consuming. The use of technology has literally altered the manner in which accountants do their job. Computers have minimised the cost of storing and writing information that is related to managerial accounting. Technology has also made it feasible to come up wih a more comprehensive and reliable financial data in a very short time (Coyne et al, 2010). The use inter-organizational system has eliminated the need to have someone to carry out inventory and fill out proper documents and send them out (Oler, Oler, & Skousen, 2010). The use of technology has enabled accounting firms to gain competitive advantage in report preparation. These days, the need for real time financial information and reports at the click of a button seems to be the trend. However, one negative feedback of using technology in writing financial information is that less people will be employed thus rendering many people jobless. Generally accepted accounting principles (GAAP) There exists regulation in nearly all spheres of human activity including construction, businesses, the environment, hiring policy, information disclosure, health and safety standards, wage levels, product pricing, and hours worked (McLeay & Riccaboni, 2008). There exist rules and regulations which companies need to follow when making reports using financial information. The most familiar set of accounting principles are often known as generally accepted accounting principles (GAAP). These include conventions, rules, and standards that accountants follow when recording, summarizing and preparing financial statements (Gauthier, 2012). Various countries have different versions of the GAAP. For instance, in the United States, they are GGAP principles in order to remain being listed on the numerous core stock exchanges in the country. Considering the fact that the accounting principles vary across the globe, investors and other financial information users need to be aware of these variations and account for them whilst making comparisons in various nations. However, the accounting principles’ variations do not significantly affect mature markets. In the U.S, accountants make use of GAAP so as to be guided in recording and reporting financial information. As cited by Gauthier (2012), “GAAP is comprised of a wide range of principles that have been developed by the Securities and Exchange Commission and the accounting profession” (45). Besides GAAP, there exists numerous technical standards which the auditors and accountants need to follow when preparing financial statements. Some assumptions, constraints and principles, are usually considered as GAAP. Assumptions The economic entity assumption outlines that the financial records need to be maintained for every economic entity including governments, social organizations, religious organizations, and businesses. Even though the fiscal information from several parties can be merged during financial reporting, each economic event should be linked to and recorded by a particular entity (Arens & Loebbecke, 2008). Monetary unit assumption: the accounting records of an economic entity comprises of only quantifiable transactions. Besides, the accounting records need to be recorded utilizing a stable currency such as the dollar in the US. Going concern: it makes the assumption that enterprises will function indefinitely. This authenticates the approaches of depreciation and asset capitalization. However, when it is quite clear there is liquidation, this assumption is deemed not relevant. The going conern principle leads in the categorization of assets as short and long-term. Time period principle: it implies that money-making activities of a business enterprise can be categorized into artificial time periods. This is because majority of businesses exist for a longtime. Therefore, artificial times ought to be utilized to report any outcomes of commercial activities. Regarding the kind of report, the time periods may be an arbitrary period, a day or even a year. Once the time period is determined, the auditors and accountants utilize GAAP to record and report those periods accounting transactions. The principles The historical cost principle: the principle calls for firms to report and account basing on the expenses as compared to the fair market value for the majority of liabilities and assets. The principle offers reliable information, thus eliminating the prospect to give subjective and skewed values for the market. Hence, there is a tendency of utilizing fair values. Revenue generation principle: revenue is usually earned upon service completion and product delivery, devoid of the cash timing. The principle holds that firms cannot record revenue until it is realized and when it is earned. Cash flow does not have any effect on revenue recognition. This forms the essence of accrual basis accounting. Matching principle: in a business entity, the costs incurred while engaging in commercial actitivities are usually documented in the same period as the proceeds they assist to produce. These costs include salaries, commissions earned, cost of sold products, insurance premiums, and estimates of potential warranty on the products sold. The principle outlines that expenses should be in line with revenues provided it is rational to do so. Expenses are usually not acknowledged when work is done or a good/product is manufactured, save for when the product or work is involved in the adding up of revenue. This implies that the principle permits greater evaluation of performance and actual profitability (Arens & Loebbecke, 2008). The full disclosure principle: any financial statements that are prepared by firms usually provide information in relation to the past performance of the specific firm. On the contrary, certain conditions such as pending law suits and incomplete transactions have minimal or significant impacts on the financial status of the organization. The full disclosure principle stipulates that “financial statements must include disclosure of such information” (McLeay, & Riccaboni, 2008, p.34). Accrual basis accounting: as cited by McLeay and Riccaboni (2008, p.67-68), “In most instances, GAAP needs the utilization of accrual basis accounting save for cash basis accounting”. It adheres to the matching, recognition and cost principles. Accrual basis accounting includes the financial aspects of every financial occurrence in the period that it happens, in spite of when cash changes hands. The cost principle: the principle outlines that “assets are normally recorded at cost that equals the value exchanged at the time of their acquisition” (McLeay, & Riccaboni, 2008, p.70). In America, when assets like buildings or land rises in their value, they are actually not valued for purposes of fiscal reporting. Reliability, relevance and consistency: in order to be useful, the information on finances needs to be reliable, relevant and organized in a consistent way. It has been found that relevant information assists any decision maker to have a better comprehension of the firm’s past performances, the present state and future outlook so as to pave way for timely making of informed decisions. However, the information needs may differ, with the need of information being presented in various formats so as to suit the needs of different people. For instance, internal users require more comprehensive information compared to the external users. On the other hand, reliable information is verifiable and objective in nature. In that respect, consistent information is usually prepared by making use of similar methods every accounting period. It permits meaningful comparisons to be made between various financial statements and accounting periods of several firms that utilize the similar methods (Arens & Loebbecke, 2008). Constraints Objectivity principle: McLeay and Riccaboni (2008) assert that companies’ financial statements that are provided by the firm’s accountants must be founded on objective evidence The materiality principle: the principle stipulates that the needs of any accounting principle can be overlooked whilst there is no impact on the financial information users. An item is taken to be materially significant if it influences the decision of a reasonable person. Even though materaility has been found to have no definitive measure, the judgment of the accountant should be sound. For instance, tracking individual paper clips is excessively burdensome and immaterial to any firm’s accounting department. Consistency principle: the principle means that the firm/company makes use of similar accounting principles and methods in each accounting period. Conservatism principle: in recording transactions that require approximation, accountants need to use their judgment. Examples of items that need estimation include the amount of years the equipments will continue being useful. Most accountants follow the principle of conservatism in reporting financial data. This attributed to the fact that it needs less optimistic estimates be selected if two estimates are judged to be equally alike. By following the above GAAP principles, Gauthier (2012) writes “financial reporting provides information that is: constructive to potential creditors, investors and other users in making informed financial decisions; it also proves helpful to potential investors as well as other users in making assessments of the timing and uncertainty of forthcoming cash receipts; it assists to make informed financial and long-term decisions; it also improves business performance; lastly, the information is helpful in maintaining records” (p.87-91). Without GAAP, a majority of companies and other financial institutions would be free to make decisions for themselves what and when financial information to report and the manner in which they will report it. This makes things quite difficult for the creditors and investors having stakes in that company. GAAP leads to the production of financial statements that are a reflection of the economic reality. As a result, GAAP makes financial status of the company be comparable and understandable in order for the creditors, investors and others users make rational credit, investment and other financial decisions. So as to be useful and helpful to users, GAAP needs all the information on financial statements to be reliable, comparable relevant, and consistent (Stephanie, 2008). Code of ethics Accounts have a code of ethics that govern their professional conduct. It is considered to be in the public interest to review and enhance self-regulation of the accounting profession in order to maintain public confidence in reliability and integrity of the process of financial reporting by means of enhancing the quality of independent audits of financial statements of issuers. The Institute of Management Accountants formulated four basic standard ethical conduct to be adhered to by financial managers and management accountants including objectivity, confidentiality, integrity, and competence (Institute of Management Accounting, 2013). Competence: there is the need to maintain a suitable degree of professional competence by continuously developing your skills and knowledge. Carry out professional duties in accordance with the relevant regulations, rules, and technical standards. Confidentiality: refraining from disclosing confidential information unless legally obligated to do so. Taicu (2012, p.98) asserted that one should refrain form using confidential information obtained in the course of work for illegal or unethical advantage either through third parties or personally. Integrity: refraining from subverting the attainment of the firm’s ethical and legitimate objectives. Next, they should avoid engaging in any activity that would prejudice their capability to perform their responsibilities ethically (IMA, 2013). Lastly, avoiding conflict of interest and advising all appropriate parties of any potential conflict, like embracing cultural diversity in the organization Credibility/objectivity: Taicu (2012) says that “accounting practitioners and finance managers have the responsibility to pass information objectively and fairly. They are also obliged to reveal entirely all appropriate information anticipated to manipulate an intended users comprehension of comments and reports as well as recommendations tabled (p.99).” Since these standards have been viewed as the central code for accounting professionals, they are the same as the obligations and responsibilities of financial accountants. This is because all accountants have the responsibility of ensuring the validity of financial statements they work upon. Reference List Arens Alvin and Loebbecke James. 2008. Auditing: An integrated approach. New York: Prentice Hall. Coyne, Joshua G., Scott L. Summers, Brady Williams, and David a. Wood. 2010. “Accounting Program Research Rankings by Topical Area and Methodology.” Issues in Accounting Education 25 (4) (November): 631–654. Gauthier, Stephen J. 2012. Governmental Accounting, Auditing, and Financial Reporting. New York: Springer. Institute of Management Accounting. (2013). Management Accounting. Montrala: Institute of Management Accounting. McLeay, S., & Riccaboni, A. (2008). Contemporary Issues in Accounting Regulation. New York: Springer Shop. Oldroyd, David & Dobie, Alisdair. 2008. Themes in the history of bookkeeping, The Routledge Companion to Accounting History, Routledge: London. Oler, Derek K., Mitchell J. Oler, and Christopher J. Skousen. 2010. “Characterizing Accounting Research.” Accounting Horizons 24 (4): 635–670. Taicu, M. (2012). Ethics in Management Accounting. Journal of Economic Sciences , 9 (15), 93- 100. Read More
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