Proper Accounting and Financial Systems

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Introduction

Various accounting system have been continuously applied in recording and reporting various business undertakings. The assumed financial accounting systems keep on changing as business environment changes. To keep abreast with the current competitive business environment, firms, companies as well as most business entities tend to adopt the simplest methods of recording the ensuing transactions to ensure market dominance. However, due to the emanating complexities in involved in recording, preparing, and reporting business financial transactions, firms are obliged to adopt proper accounting and financial systems that guarantee accurate statements recording and reporting.

The way modern accounting system (MAS) have changed current organization

Quick access to financial data is extremely essential for investors, outside parties as well as the business management. These parties require financial data to make appropriate and informed decision. Modern accounting system provides the means through which the data can easily and quickly be accessed. Besides, MAS has enabled business entities and non profit making organizations to meet their accounting needs by enhancing the accuracy in the financial recording (Needles et al., 2010). MAS has further eased the tracking of financial trends for forecasting.

Modern computerized accounting system has provided new ways of data classification, reporting in addition to the processing of the transactions. Most importantly, computerized financial reporting system has improved the way financial reports of the company should be viewed. The result is that the external parties now have a wide-range ways through which they can scrutinize and comprehend the financial status of a business entity (Needles et al., 2010). Moreover, managers can now make good use of the available resources through cost savings and reduced spending while improving the gains of the entity.

Modern accounting system has led to the value addition

The value of the product that the business entities will always offer corresponds to the demand of that product. To add value to their products, business entities have adopted MAS that is capable of keeping accurate and appropriate consumer data. The new methods of keeping consumer data are essential in predicting sales since they follow the demand trends. With accurate estimate in sales, companies can easily match up the client orders and at the same time quickly track their progress. Companies can also add value to their products and services through reduced competition, immediate response to the market demands and reduced production overheads (Needles et al., 2010).

Cost reduction

More detailed information about the costs incurred by the company can be achieved through MAS. MAS provide direct access to data related to the costs at the lowest working level. MAS provides historical cost data records efficiently when required. Both the historical and the current cost data are very essential in budget making (Horngren et al., 2009). Accurate budgets which control costs increase the company chances of making profits.

Ensure continuity

With MAS, historical records are constantly being consulted to get enhanced current transaction estimates. Unlike the old paper records which were difficult to evaluate due the volume, the new system easily displays the required records depending on the years or any other methods that could be used to acquire the required records. MAS are also essential for future predictions and forecasting especially when the environment changes or even during unusual scenarios. In other words, the accuracy in forecasting can continuously be improved through the use of MAS (Needles et al., 2010).

Cash and accrual methods in recording accounts

The main objective of achieving profits largely depends on proper and accurate financial recording as well as reporting. The appropriate method through which these records can be kept entirely depends on the choice of the entity (Shaffer, 2010). Different businesses will always choose the method that suits its needs. The commonly used methods are ideally the cash and accrual basis accounting methods. Either of the two methods can be chosen by the business entity depending with its needs.

The cash method is the simpler of the two methods as it records the actual flow of cash that is coming in or going out of the business or company. Revenues in form of cash and cheques are recorded as they are received (Shaffer, 2010). Conversely, businesses incur costs in form of expenses. The recording of these costs is done on payment date. Small business entities such as the sole-proprietorships commonly use cash method because their transactions are normally in cash (Shaffer, 2010). The method also ensures the accuracy in the recording of cash and expenses. Indeed, these businesses have a small number of payable and receivable transactions.

Accrual basis is where the transactions are accounted for when the deliverance of the items has occurred or when a service have been rendered. This method recognizes revenues when the commodities and services are sold. In other words, revenues are recorded whether there is immediate cash transaction or not. Expenses are also recognized and recorded whether the payment will be made at a later date. The basic idea about accrual accounting method is that it recognizes the transaction whether the transaction has been made in cash or credit (Shaffer, 2010). This contrasts the cash accounting method where the transaction is recognized when the cash is received.

The importance of perfect financial statements to the external business interests

Financial statements are summarized into assets, liabilities and the stakeholder’s equity of a company. Assets and liabilities are contained in the balance sheet. Assets are the resources that the company owns whereas liabilities are what the company owes the creditors (Vijayakumar, 2009). Equity is what the company owed to the stockholders in form of monetary value. Most of the financial statements are prepared after a particular period of time and in most cases, after one year. This is very essential in comparing financial statements between two periods.

Profits or losses are usually enclosed in the income statement. The income statement records the revenues and costs that the company has incurred. Profits are reported when the company revenue exceeds all the incurred costs or the expenses. Accurate income statements are used by the investors as well as the creditors to evaluate the company future profitability. Financial institutions that normally give loan to companies use information from the income statement to evaluate the company capability of repaying the loans (Needles et al., 2010). Retained earnings are similarly contained in the financial statement. Investors use accurate retained earnings statement to evaluate how the company pays out the dividends. Investors may also look at how the retained earnings are reinvested to enhance the growth of the company (Needles et al., 2010). Finally, accurate retained earning statement could be used by lenders to monitor the company capability of repaying debts.

The importance of depreciation accounting in firm management

From the management point of view, depreciation measures an expense related to the general physical wearing of the fixed assets. When discussing depreciation, accounting reference has to be made to some of the issues that affect certain management decisions, techniques and the company areas of interest (Vijayakumar, 2009).

Internal investment decision

Besides tax consideration, depreciation reports do not affect investment decisions. This is because the cost of replacing an asset is a sunk cost that will be incurred irrespective of whether the asset has been used or written off (Vijayakumar, 2009). However, the decrease in the resale value may influence the managerial decisions. Depreciation is often indirectly taken into consideration when comparing the proceeds generated by the asset and its original cost.

Measuring performance

Management performances are normally measured by returns on the investment and income. Both return on investment and income depend on the depreciation accounting method used. Therefore, the provisions for depreciation affect the general management performance (Vijayakumar, 2009). Regrettably, all methods of calculating depreciation rate will nearly and often misrepresent all the indicators of performance (income and the return on investments).

The justification for the subsequent current liabilities

Current liabilities of known amount

Current liabilities are normally due within the current accounting period. Current liabilities whose amount are known comprises of the accrued expenses, accounts payable, short term notes payable, payroll liabilities, short-term notes issued at discount, current portion of long term debt, sales tax payable as well as unearned revenue. Recording of these liabilities follows the usual basic rules and principles applied in recording the financial statements.

Current liabilities that must be estimated

When financial statements are being prepared, the values of some liabilities are not known. These liabilities are the estimated liabilities and should be reported as current liabilities (Needles et al., 2010). While recording these estimated liabilities, the account title should state the nature of the account and indicate that the account is estimated. The estimation ought to agree with the principles of full disclosure. Examples of estimated liabilities include income taxes payable, property taxes payable along with warranty service payable.

Contingent liabilities

Contingent liabilities arising from uncertainties and potential obligations the business encounter in the course of accounting period. Such eventualities that bring about the liability to a business are always difficult to predict, when they will occur and the cost involved. Contingent liabilities include charges on legal disputes, product warranties and costs on hazards caused to the environment (Needles et al., 2010). Companies should only record contingent liabilities when they are sure that the event will happen and the amount involved can easily be estimated. This implies that the losses are debited and the established liabilities credited before the settlement.

Conclusion

Modern accounting system has seen a tremendous transformation of both profit making and non-profit making entities. Its importance ranges from adoption of simpler methods of recording transaction to the accuracy required by the interested business parties. Thus, proper accounting and financial statements recording and reporting are very useful in the financial management and the general growth of the company.

References

Horngren, C. T., Jr Harrison, W. T. & Oliver, M. S. (2009). Accounting. Upper Saddle River, New Jersey: Pearson Education, Inc., publishing.

Needles, B. E., Powers, M. & Crosson, S. V. (2010). Financial and Managerial Accounting. New York, USA: Cengage Learning publishers

Shaffer, D. S. (2010). Profiting in Economic Storms: A Historic Guide To Surviving Depression, Deflation, Hyper-Inflation, and Market Bubbles. Hoboken, New Jersey: John Wiley and Sons publishing.

Vijayakumar (2009). Accounting For Management. Mumbai, India: Tata McGraw-Hill Education publishers.

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