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PRINCIPLES OF ACCOUNTING

ASSIGNMENT PRINCIPLES OF ACCOUNTING


Course Title: Principles of Accounting Ali Shahid
INTRODUCTION:

Business needs information to survive and to be successful. This information can be classified into two
broad categories that is internal and external information. Further this information is of qualitative and
quantitative nature. Accounting provide the quantitative information a business needs to attain its goals.

Accounting Function and its Purpose: Accounting functions are financial systems which exist to aid a
business in bookkeeping of its financial information, financial analysis, summary creation and reporting
of transactions made. And all of this is done in a systematic way. It allows the decision makers in the
business to track and record financial information and see it later on when making decisions. It helps in
making of budgets and financial analysis which is necessary for any organizations decision making.

There are three key financial statements generated by your records.

The Income Statement Provides info regarding profit and loss Whereas The Balance Sheet gives you a
clear picture on the financial position of your business on a particular date.

The cash flow statement also act a key bridge between the income statement and balance sheet and
reports the cash Generated

Whether the Business Is Small or Big Accounting Function Is The Foremost Need.

The accounting function will ensure that liabilities such as sales tax, VAT, income tax, and pension funds,
are clearly and properly addressed.

Business trends and projections are usually based on historical financial data to keep your day to day
operations profitable. This financial data is most appropriate when provided by well-structured
accounting processes.

They include account receivable and payable, payroll, stock management, budgeting, reports and
financial statements, legal matters and financial control, and record-keeping.

As all the departments in a business are interrelated in one way or another in order to achieve the
purpose of profit for a business, Accounting Functions allow the decision makers to clearly see which
departments are working well and which not in financial terms and how to make them better and where
to make them better.

It also Ensures Statutory Compliance as in HR department it refers to the legal framework that an
organization should adopt to in dealing with its employees. Each Of The Department Like Sale
Department would forecast the sales, Finance Will accordingly Allocate the Budget For Each Of The
Department Like For Marketing And Operations. So it can be seen that Accounting is integrated With
each of the department and is considered as a backbone of an organisation, without it system May
Collapse!
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ACCOUNTING FUNCTION WITHIN AN ORGANISATION:

• Management function that involves setting goals, establishing strategies for achieving those
goals, and developing plans to integrate and coordinate work activities

• Management Functions

 
Accounting for Each of the Four Management Functions

1. Strategic Management. Cost Management's Information is also used For Strong Startegic Decisions. It
includes products, different manufacturing method, communication channels, customers profitability
and other long and short term issues.
2. Planning and Decision Making. Cost management information is needed to support recurring
decisions regarding replacing equipment, managing cash flow, budgeting raw materials purchases,
scheduling production, and pricing.
3. Management and Operational Control. Cost Management Information is also required to provide
true, fair and effective basis for identifying operations and helps in motivating managers.
4. Preparation of Financial Statements. Cost Management is furthermore needed to provide accurate
information regarding inventory, for the preparation of financial statements

ACCOUNTING FUNCTION &EXTERNAL STAKEHOLDERS OF AN ORGANISATION:


Stakeholders:Stakeholder is a term which refers to any individual or group with vested interest in a
company and can be affected by its decisions. Now Stakeholders are the ones who actually benefit from
these different accounting functions. As these accounting functions are basically a summary or bird’s eye
view of the whole activities of the business the stakeholders can easily understand where the business is
going good and where not and how to improve it.

1:Shareholders and Accounting Function:

Accounting and Capital Allocation: Resources are limited. Due to this, they are used in an efficient way
so that they can be conserved. Efficient use also enables business to determine that where a business
thrives. As a result, there is a great burden on Accounting.  So all these measures must be taken in order
to attract investment capital, by appointing right managers on right time.

This Helps in promoting productivity, it also helps in maintaining a liquid market for buy and sale of
securities, and for credit purpose. False and unreliable information results into poor capital Allocation,
which badly affect securities market.
Financial reporting help stakeholders in decision making: Financial Reporting is the presentation of
accounting information in meaningful way.
Financial Reporting need High-Quality Standards: To facilitate efficient capital allocation, investors need
relevant information and a faithful representation of that information to enable them to make
comparisons across borders. Asingle, widely accepted set of high-quality accounting standards is a
necessity to ensure adequate comparability. Investors are able to make better investment decisions if
they receive financial information from Nippon Telegraph and Telephone that is comparable with
Deutsche Telekom. Globalization demands a single set of high-quality international accounting
standards.
International Accounting Standards Board (IASB):It is the international body provides basis for
financial Reporting.
Types of Pronouncements
The IASB issues three major types of pronouncements:
1. International Financial Reporting Standards.
2. Conceptual Framework for Financial Reporting.
3. International Financial Reporting Standards Interpretations.
2:Government and Accounting Function
The government has only one aim when looking at the accounting functions of a business and that is no
wrong data is presented to them in order to evade the tax. Now Governments can evaluate these sheets
especially the Balance sheets and Income Statement to see clearly and match with other sheets such as
the inventory reports and other things and see whatever is reported on them is it wrong or over
exaggerated or not. Although the companies who do so make it hard to find or use loopholes in the
system but still sometimes the government is able to find irregularities. Besides this these reports allow
the government to know about the GDP of the country and make it easier to calculate them.
ACCOUNTING FUNCTION & CONSTRAINTS:
An accountant may face some constraint whilst doing financial Reporting.These constraints may
be as:
1: Ethical Constraints:In accounting, as in other areas of business, we frequently encounter ethical
dilemmas.Some of these dilemmas are simple and easy to resolve. However, many are not,requiring
difficult choices among allowable alternatives. Companies that concentrate on“maximizing the bottom
line,” “facing the challenges of competition,” and “stressingshort-term results” place accountants in an
environment of conflict and pressure.
Now some of the ethical issues faced by accountants are; a) Window dressing; b) Full disclosure.

Window dressing is when the management of a company in order to attract investors improves the
appearance of the financial statements by making the numbers more pleasing to the public and paint an
image that seems promising for the future investors.

The full disclosure principle states that all information should be included in an entity's financial
statements that would affect a reader's understanding of those statements. Now this is a bit vague
statement as it does not specify which information specifically and which not can be tampered with and
exploiting this flaw many companies present some information in their financial statements which
should not be present to make them seem better or just not present them at all even in the accounting
notes to avoid bad impression in front of the shareholders

Basic questions such as:


1: Is this way of communicating financial information good or bad?
2:Is it right or wrong?” and
3: What should I do in the circumstance?
These cannot always beanswered by simply adhering to IFRS or following the rules of the profession.
Technicalcompetence is not enough when encountering ethical decisions.

2: Regulatory Constraints:
Cost Constraint
In providing information with the qualitative characteristics that make it useful, companies must
consider an overriding factor that limits (constrains) the reporting. This is referred to as the cost
constraint. That is, companies must weigh the costs of providing the information against the benefits
that can be derived from using it. Rule-making bodies and governmental agencies use cost-benefit
analysis before making final their informational requirements. In order to justify requiring a particular
measurement or disclosure, the benefits perceived to be derived from it must exceed the costs
perceived to be associated with it.
Regulations and Accounting Standards Confliction:Sometimes an accountant may face regulatory and
accounting standards confliction. A great deal of judgment is required to handle the situation.

ROLE OF ACCOUNTING IN COMPLEX ECONOMIC & BUSINESS ENVIROMENT


Much is right about international financial reporting. One reason for this success is that financial
statements and related disclosures capture and organize financial information in a useful and reliable
fashion. However, much still needs to be done. Here are some of the major challenges.
IFRS in a Political Environment: User groups are probably the most powerful force motivating the
development of IFRS User groups comprise of those most concerned in or affected by accounting
regulations. Various members in the financial reporting environment may want certain economic events
accounted for or reported in a certain way, and they fight hard to get what they want. They know that
the most efficient way to induce IFRS is to participate in the creation of these rules or to try to change or
persuade the formulators of them. These user groups often aim for the IASB, to make it to change the
current rules and build new ones. In fact, these demands have been multiplying. Some prominent
groups demand that the accounting profession act more quickly and resolutely to solve its problems.
Other groups may also avoid such action, as they may prefer to apply change more slowly, if at all.
Should there be any politics in establishing for financial accounting.
Why not? We have politics at home, schools etc.. Politics is everywhere. IFRS is part of the real world,
and it is difficult to get rid of these pressures
It is not stated that involving politics is adverse. Considering the economic consequences of many
accounting rules, particular interest groups are supposed to vocalize their reactions to anticipated rules.
What the Board should not do is concern standards that are mainly politically motivated. While paying
attention to its communities, the Board should base IFRS on sound research and a theoretical
framework that has its footing in economic existence.
The Expectations Gap
The expectations gap—What comes to mind when thought of expectations gap? It usually refers that
what public think accounts should do, and what they actually do. Although accounting contradicts, but
cannot be responsible for every conflict, still continues to meet the need of the society.
In order, for the development of reliable, clear and transparent system, more resources are needed to
meet public expectations.

Non financial measurement : Apart From All the advantages, financial reports fails in providing key
information, like backlog info, satisfaction index& reject rates on good purchased
Forward Looking Info: Less Info Was provided to potential investors and creditor, which proved as a
major setback of financial reports
Soft assets : Financial statements always lead emphasize on hard Assets(inventory, tangible)  Intangible
Assets(Goodwill) being the most Valued Assets are usually ignored, and very less information is
provided.
Timeliness : Little To No real-time financial statement was available, as were audited once a year,
whereas financial reports prepared quarterly.
Non-financial measurements: Financial reports failed to provide some key performance measures
widely used by management, such as customer satisfaction indexes, backlog information, and reject
rates on goods purchased.
Forward-looking information: Financial reports failed to provide forward-looking information needed
by present and potential investors and creditors. One individual noted that financial statements in 2015
should have started with the phrase, “Once upon a time,” to signify their use of historical cost and
accumulation of past events.
Soft assets: Financial reports focused on hard assets (inventory, plant assets) but failed to provide
much information about a company’s soft assets (intangibles). The most valuable assets are often
intangible.
Timeliness: Companies only prepared financial statements quarterly and provided audited financials
annually. Little to no real-time financial statement information was available.

CONCLUSION:
Accounting is an essential tool for business and an economy .Without accounting economic system
cannot be run. New complex environment and changing businesses challenges make the role of
accounting more important and significant.
Basically accounting is - documenting the financial dealings in the books of accounts, arranging
the markets into different heads and sub-heads, summarizing the accounting information into
reports and financial statements and translating the financial data to help decision making.

The final function of accounting is to examine and explain these figures so that outside parties
can see the viability of a community organization.

From the above we can assume that accounting not only helps an business to conduct its day to
day events easily but also helps in its future growth. At the same time financial statements
produced by different accounting systems are used by several stakeholders to take financial
decisions.
TASK 4: Report and Cash Budget Spread sheet

 
BENEFITS OF BUDGETS:

Budgets played an essential role in management control system. It also plays an integral part when
administered thoughtfully.:
• it aims at facilitating learning and also provides framework for judging performance.
• it helps building a storing communication and coordination among subordinates.
1: Coordination and Communication:
Coordination is meshing and balancing all aspects of production or service and alldepartments in a
company in the best way for the company to meet its goalsCommunication ensure that goals, visions,
missions are clearly understood by all.
Coordination also provides a think tank to executives, that the departments are interlinked, as well as
the supplier.
If production manager is taken as an example, a more timely coordination and communication with the
marketing department, which enables faster operations, as well as faster promotion.
As a result, better forecasting can be made, and enhances the relations with the customers.
Suppose an organization, is planning to launch a new highdefinitionpersonal video recorder service. If its
marketing group is able to obtaininformation about the launch date for the service, it can share this
information with organization manufacturing group. The manufacturing group must then coordinate
and communicate with organization materials-procurement group, and so on. The point to understand
is that organization is more likely to have satisfied customers if the organization coordinates and
communicates bothwithin its business functions and with its suppliers and customers during the
budgetingprocess as well as during the production process.
2: Performance Evaluation and FacilitatingLearning
Budgetary system enables a company to compare actual performances with the predicted ones. 
Budgets helps in overcoming quite of the limitations and provide a sense of judgment with the actual
ones. Past results maybe outdated and not set good standards
Consider a cellular telephone company (MobileCommunications) examining the current-year (2012)
performance of its sales force.Suppose the performance for 2011 incorporated the efforts of many
salespeople who havesince left Mobile because they did not have a good understanding of the
marketplace. (Thepresident of Mobile said, “They could not sell ice cream in a heat wave.”) Using the
salesrecord of those departed employees would set the performance bar for 2012 much too low.

Budgeting comes with many benefits to a business, to start with, it helps managers in gathering
information releated to business and its performance, thus allowing them to predict the future
performance.
However, when the actual performance doesn’t meet the predicted one, it starts an investigation from
senior managers, why the short fall in production occurred, and how the experience from this planning
would further improve the next plannings, so the short fall doesn’t happen again. This realisation and
improvisation from experience is why budgeting helps improve performance
3: Motivating Managers and Other Employees
Motivation of managing staff and other employees have shown that difficult budgets improve worker’s
performance, as they think that not meeting the given targets would be a failure. More workers are
motivated to work harder so they could achieve better performance. Therefore many high post officers
like to set high but achievable goals for their juniors in the hierarchy. Creating a motivated working
atmosphere, however if targets are set relatively high, workers also tend to lose motivation as they see
high risk of failure
LIMITATIONS:
1: Budgets are derived from last year’s activities.
2:Time consuming i.e. taking up an enormous amount of management time which resultsin a situation
where the benefits may not be worth their cost. Hope and Fraser (2003) claim thatbudgeting is a
protracted and expensive process, absorbing up to 30 per cent of management time.
They cite a study indicating that global companies invested more than 25 000 person days per$1 billion
of revenue in the planning and performance measurement processes;
3:ignoring key drivers of shareholder value (e.g. innovation, developing new products and markets
andresponding to competitor threats) by focusing too much attention on short-term financial numbers;
4:Being a yearly rigid ritual that impedes firms from being flexible and adaptive in the
increasinglyunpredictable environment facing contemporary organizations; indeed, Hope and Fraser
argue thatbudgeting conflicts with the new competitive environment and stifles innovation because,
once set,budgets are not typically changed resulting in plans and targets that become quickly out of
date;tying the company to a 12-month commitment, which is risky since it is based on
uncertainforecasts derived from a fast-changing environment;
5:Meeting only the lowest targets and not attempting to beat the targets; Hope and Fraser arguethat
budgets often serve as a ‘fixed performance contract’ whereby targets are set at the beginningof the
period. If the actual performance meets or exceeds the pre-specified static budget target,performance is
deemed to be satisfactory. They argue that a fixed contract represents a poorstandard of performance
evaluation when the factors underlying the targets may have changedduring the budget period. They
also argue that the use of fixed performance contracts encouragesmanagers to engage in dysfunctional
behaviour to achieve the budget even if this results in undesirable actions that do not contributeto the
organization’s objectives;
6:spending what is in the budget even if this is not necessary in order to guard against next year’sbudget
being reduced;
7: Being disconnected from strategy whereby budgets are typically prepared in isolation from, and
notaligned with, the strategic objectives of the organization.

BUDGETARY CONTROL SOLUTIONS


Wenow ask: How do budgets contribute to control of operations?
When talked about Budgetary solutions, controlling company operations, is the management main
function.
It usually means comparing actual results with the planned outcome. If the budgeted reports are not
monitored in a good manner, those planned objectives loses their worth, and its values went in vain. So
it can be seen that Budgetary Control must be overlooked in an effective way.
Budgetary Control system works best if a formal reporting system is provided.Budget reports provide
management with feedback on operations. Thefeedback for a crucial objective, such as having enough
cash on hand to paybills, may be made daily. For other objectives, such as meeting budgetedannual
sales and operating expenses, monthly budget reports may suffice.
Budget reports are prepared as frequently as needed. From these reports,management analyzes any
differences between actual and planned results anddetermines their causes. Management then takes
corrective action, or itdecides to modify future plans.
Budgetary control works best when a company has a formalized reporting system. The system does the following:
1. It also aim towards identifying name of budget report, sales budget, manufacturing overhead budget can be
quoted as an example.
2. It Also Helps in stating the frequency, in terms of week and months.
3. Specifies the purpose of the report.
4. Primary receipts are also indicated via this

Bibliography
1: Solved What is Planning? : management function that | … : management function that involves
setting goals, establishing strategies for achieving those goals, and developing plans to integrate and
coordinate work activities planning; Specific, time-oriented goals. Goals written and shared; Types of
Plans. shows the most popular ways to describe organizational plans. Strategic and Operational Plans
https://www.chegg.com/homework-help/questions-and-answers/planning-management-function-
involves-setting-goals-establishing-strategies-achieving-goal-q84582809

2: Jhksh - Term Paper Cost management information is needed to make sound strategic decisions
regarding choice of products, manufacturing methods, marketing techniques and channels, assessing
customer profitability and other long-term issues. 2. Planning and Decision Making. Cost management
information is needed to support recurring decisions regarding replacing equipment, managing …
https://www.termpaperwarehouse.com/essay-on/Jhksh/422486

3: Accounting and Capital Allocation Resources are limited As a ... Accounting and Capital Allocation
Resources are limited. As a result, people try to conserve them and ensure that they are used
effectively. https://www.coursehero.com/file/p6thq8j/Accounting-and-Capital-Allocation-Resources-
are-limited-As-a-result-people-try/
4: User groups consist of those most interested in or - Course Hero User groups consist of those most
interested in or affected by accounting rules from ACC 211 at College of New Jersey.
https://www.coursehero.com/file/p3n7j9b/User-groups-consist-of-those-most-interested-in-or-
affected-byaccounting-rules/

5: Intermediate Accounting, Volume 1 - Page 1-17 - Google Books Result


https://books.google.com/books?id=uGZMEAAAQBAJ

6: www.coursehero.com › file › 29720256act_b313_u05_141.pdf - ACT B313 Unit 5 Budgeting 141
Course ... • Provide a framework for judging performance and facilitating learning: Control is
exercised by comparing actual results against the budget plan. A budget is basically a yardstick, as the
predetermined standards are laid down in it. Therefore, a budget provides an effective basis for
performance appraisal. https://www.coursehero.com/file/29720256/act-b313-u05-141pdf//

7: Who needs budgets - AFR Mar 14, 2003 — Despite the abilities of computers, it remains a protracted
and expensive process, absorbing up to 30 per cent of management's time.
https://www.afr.com/companies/who-needs-budgets-20030314-j70ca

8: BBBAC2123_L8_Budgeting.pptx - THE BUDGETING ...Mock Exam Paper 2 Solution.docx - Section A(30


Marks... View BBBAC2123_L8_Budgeting.pptx from ACCOUNTING 2123 at New Era University College.
THE BUDGETING PROCESS LEARNING OBJECTIVES EXPLAIN HOW BUDGETING FITS ...The major criticism
is that the annual budgeting process is incapable of meeting the demands of the competitive
environment in today's information age. Ekholm ...
https://www.coursehero.com/file/74846093/BBBAC2123-L8-Budgetingpptx/

9: Budgeting POM - Studylib It is important to remember that a company’s budget should not be the
only benchmark used to evaluate performance. Many companies also consider performance relative to
peers as well as improvement over prior years. The problem with evaluating performance relative only
to a budget is it creates an incentive for subordinates to set a target ...
https://studylib.net/doc/25303233/budgeting-pom

10: quizlet.com › 252138438 › ch-22-accounting-flash-cardsCh 22 accounting Flashcards | Quizlet 1.


identifies the name of the budget report, such as the sales budget or the manufacturing overhead
budget. 2. states the frequency of the report, such as weekly or monthly. 3. specifies the purpose of the
report. 4. indicates the primary recipients of the report. https://quizlet.com/252138438/ch-22-
accounting-flash-cards//

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