The Benefits Of An Accounting System Accounting Essay
This essay is to assist Mr. Peter Anderson, who has gone on retirement last twelvemonth, on his undertaking of puting 3,000,000 RM in the bottled H2O concern in Malaysia. This paper gives an overview of the accounting scientific discipline, and presents the benefits of holding an accounting system which might assist Mr. Anderson in running his concern, along with illustrations and accounts of some of the fiscal statements needed to be declared by him for the benefits of his concern assorted stakeholders.
2.0 Specifying Accounting:
Accounting as defined by Weygandt, Kimmel, & A ; Kieso ( 2010 ) Accounting Principles ( 9th ed. ) consists of three basic activities-it identifies, records, and communicates the economic events of an organisation to interested users[ 1 ].Identifying concern events: A company selects the economic events relevant to its concern. For illustration the gross revenues of “ Spritzer ” bottled H2O by “ Spritzer Bhd ” , or supplying cyberspace services by “ Maxis Communication Bhd ” .Recording events: Once a company like “ Spritzer Bhd ” has identified its concern events, it should enter them in order to supply the history of its fiscal events or activities. “ Spritzer Bhd ” arranges chronologically its relevant economic events, summarizes them and so classifies them consequently.Communicating: In the terminal the company should pass on the gathered information for assorted users by supplying them with fiscal statements.
Businessdictionary.com besides gives a similar definition for accounting: “ Accounting is a pattern and organic structure of cognition concerned chiefly with ( 1 ) methods for entering minutess, ( 2 ) maintaining fiscal records, ( 3 ) executing internal audits, ( 4 ) coverage and analysing fiscal information to the direction, and ( 5 ) reding on revenue enhancement affairs. It is a systematic procedure of identifying, entering, mensurating, sorting, verifying, sum uping, construing and pass oning fiscal information. It reveals net income or loss for a given period, and the value and nature of a house ‘s assets, liabilities and proprietors ‘ equity. Accounting provides information on the ( 1 ) resources available to a house, ( 2 ) the agencies employed to finance those resources, and ( 3 ) the consequences achieved through their usage. ”[ 2 ]
3.0 Business Entity:
Harmonizing to this premise, which is one of many other accounting rules, concern is treated as a unit or entity apart from its proprietors, creditors, debitors and others.
In other words, Mr. Anderson will ever be considered separate from the concern which he controls. All the concern events and fiscal minutess are recorded in the books of histories from the position point of the concern. Even the owner is treated as a creditor to the extent of his capital. By and large there are three signifiers of concern entities[ 3 ].
3.1 Exclusive proprietary:
It is the simplest signifier of concern organisation because it is run by merely one individual ( the proprietor ) .
There is small trouble or complexness in get downing up a exclusive proprietary as it may affect merely acquiring a licence and happening some premises. This is why most of the concerns around the universe are in this signifier. It is usually executable for service suppliers such as doctors, free-lances, attorneies, etc.[ 4 ]Advantages of Sole proprietary[ 5 ]:The proprietor gets and keeps all the net incomes from the gross.There is small adversity or trouble in get downing up a exclusive proprietary.A little capital is comparatively adequate for puting up this signifier of concern.Disadvantages of Sole proprietary[ 6 ]:Sole proprietary has unlimited liability of concern debts. That means that the debts that the proprietor makes for the benefit of his concern are recovered from his personal assets if the concern assets are non plenty or insufficient to dispatch them.
The income of such a concern is taxed jointly with the proprietor ‘s gross and income from other beginnings. This may do Mr. Anderson pay revenue enhancements at a higher rate.The life of a exclusive proprietary is restricted with the proprietor ‘s life span.Sole proprietary ‘s capital elevation chance is restricted largely with the resources of the proprietor.
This makes the growing of this signifier of companies harder.Ownership of a exclusive proprietary may be difficult to reassign due to the demands of selling the whole concern to a new proprietor.
Partnership is a signifier of an organisation or a concern in which two or more individuals reciprocally own, run the concern, and agree to portion net incomes harmonizing to net income sharing ratio or sometimes every bit. It is similar to sole proprietary in many ways[ 7 ]. Therefore as Mr.
Anderson has no experience in the bottled H2O market in Malaysia, I would propose for him to spouse up with an investor who has the needed information to run the prospected concern.Advantages of Partnership[ 8 ]:Due to the nature of the concern, spouses normally fund this signifier of concern with a startup capital together. This means that the more spouses there are, the more money they can set into their concern.They are less purely regulated than corporations, in footings of the Torahs bordering the formation and because the spouses command how the concern is run ( without intervention by stockholders ) they are far more flexible in footings of direction, every bit long as all the spouses can hold.Spouses reciprocally portion the duty of the running of the concern.
This allows them to do the most of their accomplishments cognition and abilities. Alternatively of dividing the direction and taking an equal portion of each concern undertaking, they could divide the work harmonizing to their accomplishments.More spouses means more encephalons that can work on concern thoughts and for work outing the jobs that the concern brushs.Disadvantages of Partnership[ 9 ]:The danger or hazard of dissensions between the spouses.Partnerships are capable to limitless liability, which means that each of the spouses portions the liability and fiscal hazards of the concern with their ain personal assets.The allotment of net incomes between spouses can take to unfairness where one or more spouses are n’t seting a just portion of attempt into the direction of the concern, but still acquiring the wagess.
Corporation is a type of concern which is registered as a populace owned company it is recognized as a separate entity from its proprietors and which has its ownership divided into movable portions of stock[ 10 ]. In my sentiment when Mr. Anderson additions adequate experience and earns a comparative success in the bottled H2O market, he might see altering his concern entity construction into corporation.Advantages of a Corporation[ 11 ]:The liability of the proprietors towards the creditors is limited to their investing in the company.The corporation exists until it is liquidated which means that decease or alteration in ownership has no consequence on the corporation.
Extra capital can be raised easy through stock markets.The transportation of ownership is comparatively easy as it is represented by the figure of portion certifications held by a individual ( stockholder ) .Disadvantages of a Corporation[ 12 ]:Establishing a corporation is a complex procedureStockholders delegate the administration map to the board of managers which hires direction to look after the twenty-four hours to twenty-four hours personal businesss of the corporation.
It is possible that the direction acts to its ain involvements instead than the involvement of the proprietors of the corporation.Double revenue enhancement: First the corporate income is taxed at a level rate and so the dividends paid to the stockholders are besides taxed.
0 Benefits of an Accounting System:
First it is of import to demo the accounting rhythm[ 13 ]:Identify the Transaction: Understand the event as a dealing and let go of the beginning papers.Analyze the Transaction: Determine the sum of the dealing, which histories are related, and in which way.Journal Entries: The dealing is recorded in the diary in the histories as a debit or a recognition.
Post to Ledger: The diary entries are transferred to the related T-accounts in the leger.Trial Balance: This balance is calculated to guarantee that the amount of the debits the same as in the credits.Adjusting Entries: They are made for accumulated and deferred points. The entries are journalized and posted to the T-accounts in the leger.Adjusted Trial Balance: A new test balance is calculated after the adjusting entries.Fiscal Statements: Fiscal statements are generated.Closing Entries: Transfer the balances of the impermanent histories ( e.
g. grosss and disbursals ) to proprietor ‘s equity.After-Closing Trial Balance: A concluding test balance is made after the shutting entries are calculated.
This procedure used to be manual ; nevertheless today with the debut of IT and the Accounting Information System things are much easier and more efficient. An accounting system will demo Mr. Anderson if his concern is truly doing a net income or loss ; it will assist him to foretell hard currency flow deficits ; and enables him in accurately maintaining path of those slow paying clients, or those who are non paying and consequence in bad debts[ 14 ].
An accounting system besides helps the concern in[ 15 ]:Precisely describing concern transactions.ASimplifying entree to fiscal information.Updating studies different debit or recognition histories.Reducing jobs with revenue enhancement sections.Satisfying assorted users of accounting information and supplying them with the relevant statements.
5.0 Fiscal Statements:
The end of the fiscal statements is to describe the organisation ‘s fiscal public presentation and place to external and internal users of accounting information.
It is of import that these statements reflect the minutess of the concern, and non the minutess of its proprietors[ 16 ].
5.1 Balance Sheet ( BS ) :
The ( BS ) shows[ 17 ]:The net worth of a concern at a specific minute, which is the difference between concern ‘s assets and concern ‘s liabilities.The proprietors ‘ equity, which is the capital of the concern, invested by the proprietors. Equity consists of the original capital invested in the concern, and all other net incomes or losingss that the concern has made in the yesteryear and which have been reinvested in the concern.
Because the BS ‘balances ‘ , the net worth and the proprietors ‘ equity should be equal. This is known as the balance sheet equation:Net Worth = Owners ‘ EquityWe can rewrite this equation as follows:Assetss – Liabilitiess = Capital + MilitiasThe following tabular array illustrates the Annual Balance Sheet of Spritzer Bhd in 2011Beginning: Spritzer Bhd_Annual Report 2011The balance sheet is of import for investors and directors to understand how affluent the organisation is, and helps them in computation of assorted ratios which help in better determination devising.
5.2 Income Statement:
The income statement or besides known as ( The Statement of Financial Performance ) shows the income ( grosss ) and outgo of the concern over a twelvemonth or any other accounting period. It is a statement of the concern minutess in the accounting period.The difference between the gross and disbursals of the concern is called net income.
To understand how the concern makes net incomes, the gross and disbursals are split into different classs and different net income figures are reported in the income statement. The income statement shows[ 18 ]:Gross net income is the difference between gross revenues gross ( income ) and cost of gross revenues. Cost of gross revenues is calculated as opening stock ( at the beginning of the accounting period ) adding purchases of goods ( or production costs if the concern is a maker ) , subtracting shuting stock ( at the terminal of the accounting period ) .Net net income is the net income that the concern gets after adding any other auxiliary income ( such as involvement receivable ) and after taking farther concern outgos ( such as rewards, rent and wages, or illuming and heating costs ) , or any other signifier of administrative costs.Retained net income for the accounting period is the concluding net income figure, after giving off distributions to proprietors. These Distributions are called either drawings if the concern is a exclusive bargainer or partnership, or dividends if the concern is a corporation. The maintained net income is so added to militias in proprietors ‘ equity in the Balance Sheet.
The undermentioned tabular array is an illustration of the Income statement of Spritzer Bhd one-year study in 2011:Degree centigrades: UsersDigitalNetDesktopUntitled-1.jpgBeginning: Spritzer Bhd_Annual Report 2011The income statement shows the profitableness of the company over a period of clip. The directors of the company can find the major grosss it earned through this income. Second, an income statement is important because it is based on the matching principal and it shows the disbursal incurred by a company to gain the grosss.
Stockholders of a company are interested in this statement because the dividends are paid out of the entire income. Furthermore, income statement besides helps the managers to analyse their disbursals, calculate their revenue enhancements, and to take into history the major watercourses of runing grosss of the company[ 19 ].
6.0 Users of Accounting Information:
Accounting is normally classified into two classs[ 20 ]:Managerial Accounting: which satisfies the demands of internal users such as:Management: for analysing the organisation ‘s public presentation and place which helps in taking appropriate steps in bettering the company ‘s consequences.Employees: for measuring company ‘s profitableness and its effect on their future wages or rewards and occupation security.Owners: for measuring the viability and profitableness of their investing and finding long term class of action.Fiscal Accounting: which satisfies the demands of external users such as:Creditors: for finding the recognition worthiness or the value of an organisation. Footings of recognition are set harmonizing to the appraisal of their clients ‘ fiscal wellness.
Tax Governments: for finding the credibleness of the revenue enhancement returns filed on behalf of the company.Investors: for analysing the feasibleness of puting in the company. Investors want to be certain they can gain a comparative return on their investing before they put any fiscal resources to the company.Customers: for measuring the fiscal place of its provider which is necessary for a stable beginning of supply in the long term.Regulative Governments: for guaranting that the company ‘s revelation of accounting information is harmonizing to regulations and ordinances set in order to protect the involvements of the stakeholders who use such information in organizing their determinations.
As Mr. Anderson is willing to set up bottled H2O concern in Malaysia, with a startup capital of 3,000,000 RM, it is of import for him to clearly understand the advantages of accounting statements, accounting systems, and the differences between concern entities. I would propose for him to spouse up with experient spouses who might drive his concern frontward, and to analyze the fiscal statements and fiscal ratios of other companies which are related to bottled H2O production and trading in Malaysia so that he would hold an overview of the market state of affairs and market demand in this part.