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  • 1. The primary purpose of accounting is to identify and record all activities that impact the organization financially. All activities, including purchases, sales, the acquisition of capital and interest earned from investments, can be classified in monetary terms and posted to a specified account as an accounting record. These transactions typically are recorded in ledgers and journals and are part of the process known as the accounting cycle.<br />The nature of accounting:<br />An accounting system is a process whereby a specific output is produced by a given input. In an information accounting system, data is processed to provide information. Data is a collection of unprocessed facts, while information is data or facts that have been processed into a meaningful form.<br />In the normal course of events, a business undertaking will enter into a large variety of transactions. The details of a particular transaction are referred to as transaction data. The term transaction data therefore refers to the facts that completely describe a specific transaction.<br />The aim of an accounting system is to record the transaction data and then to process this data to provide information that is ultimately collected in the financial and management reports of the enterprise. There are two stages in the development of an accounting system, namely systems analysis and system design.<br />A good accounting system must comply with at least the following fundamental requirements. The system must provide decision makers with timely and accurate information relevant to the responsibilities and requirements; the internal control measures must be adequate to ensure the protection of assets and the provision of reliable information and the system must be sufficiently flexible to accommodate changes in the volume of activities and in the operating procedures without requiring drastic modifications.<br />A thorough knowledge of the activities of the undertaking and its information and control requirements is an essential prerequisite for the development of an effective accounting system that meets the necessary criteria. The procedure of surveying the undertaking's activities and information and control requirements is known as system analysis.<br />In the system's design process the system is designed to comply with the specifications determined by systems analysis. Initial transactions are recorded in source documents and the in journals and finally they are classified and stored in ledger accounts. The processed information is extracted from the ledger accounts for drawing up the financial reports. The design of any accounting system within this framework comprises of, planning the procedures according to which the system will function, the design of the source documents, journals, ledger accounts and final reports and finally the design of the necessary internal control measures.<br />From a management information point of view it is important that the information needs of a user are determined and that the accounting report meets these needs. Rapid development in the field of computer accounting has led to the effectiveness of the accounting process, enabling more usable, more accurate and timelier output of accounting data. Efficiency increases as the value of the system increases in relation to the cost thereof. Computerized systems have made the accountants job in designing the accounting process that much easier than the manual systems of days gone by.<br />Users of accounting information:<br />Business Owners-Business owners are perhaps the most important user of a small business’ accounting information. Business owners review financial statements to determine how much profit the business has made during a certain time period. The income statement includes information on the company's revenue, sales, cost of goods sold and expenses. The final result of this report is net income. Business owners are interested in the company’s net income since it represents the amount of capital generated from business operations.<br />Employees-Employees are the individuals who transform economic resources into valuable consumer goods or services. Employees can be interested in a company’s financial information for several reasons. Companies may offer contributions to an employee’s retirement account; the income statement usually lists the amount of these contributions in expense accounts. Employees may also receive commissions or bonuses based on the amount of sales a company has generated during a certain time period. Business owners can also treat employees like partners. Employees in a partnership-style organization often receive a portion of net income as their pay.<br />Banks-Banks often require small-business owners to present financial statements to secure loans. Business owners usually provide banks with several financial statements or other accounting information during the loan application process. Accounting information ensures the bank is making a wise investment. Banks also expect business owners will be able to repay the loan from future operational profits. Banks can require business owners to submit financial statements throughout the loan length so the bank can constantly assess the business’ performance.<br />Investors-Investors use small-business accounting information similar to banks. Investors often provide business owners with start-up capital for creating new business ventures. Business owners use contractual agreements to ensure investors will receive a specific rate of return. Investors use the business’ accounting information to review how well the business owner is running the organization. Investors can also receive monthly payments based on the company’s net income or have a management stake in the business. These two contractual agreements allow investors to review the business’ financial information and discuss changes with the owner, if necessary.<br />Shareholders-use the balance sheet and profit and loss account produce by limited companies to decide if they are going to increase or decrease their holding.<br />Management - Management in every level of the business from director level to supervisor level rely on accounting information to do their job properly. They all use the same information for different purposes. For example, directors use it for strategic purposes and middle management can use it to see if they are meeting their financial targets.<br />Suppliers - Along with other data suppliers will look at a company's balance sheet and profit and loss account to see if and how much credit they are willing to give to present and potential customers. Lenders - Similar to suppliers’ lenders also need to make sure a company is in a healthy financial situation before they start to lend money. Government - Governments use the information provided by a company about its finances to levy tax on the profits. Customers - Before another company becomes a customer or enters into a joint venture, they will look at the company's finances to make sure the company is not in trouble and that their supplies are not about to dry up. Employee-Employees also have an interest in how well their employer is doing so use financial accounting information for this purpose.<br />Ethics plays a central role in the accounting profession. Corporate scandals in the early 2000s reduced the public's trust in accountants. Accountants hold control of number reporting and need to make the correct ethical decisions when recording those numbers. Some ethical issues occur commonly in the accounting field.Timing of Customer Sales<br />Many senior executives earn cash bonuses based on the net income reported for the company. Investors like to see high profits on company financial statements. When the profits increase, so does the market price of the stock. Executives who receive stock options as part of their compensation packages earn more when the stock price and the value of the stock options increase. When sales occur just after the cutoff for the period, management may ask the accountant to report the sales on the prior period financial statements.<br />The accountant needs to respond to management while maintaining the integrity of the accounting profession. To do the right thing, the accountant must report the sales in the period when they actually occurred. Since the sale occurred after the deadline, they must be reported in the following period.<br />Uncollectible Accounts Estimates<br />Companies that sell products or services on account to their customers often recognize that some customers will default on their accounts. At the end of the period, the accountant determines the amount of accounts that will likely be uncollectible. The amount of uncollectible accounts reduces the profit for the period. Management may ask the accountant to reduce the estimate or eliminate the uncollectible amount altogether. Management reasons that the company expects its customers to pay their bills so the company should not anticipate that some customers will not.<br />Generally accepted accounting principles require accountants to estimate the amount of outstanding account balances that will not be collected. This principle allows the financial statements to present a more accurate picture of the company's profits for the period. The accountant needs to estimate the amount of uncollectible accounts and include this on the financial statements.<br />Estimating Warranties<br />Companies that sell products to consumers sometimes experience manufacturing issues with the products sold. Consumers return these faulty products to be repaired or replaced under the product warranty. At the end of the period, the accountant estimates the amount of warranty claims that consumers may make. The amount of estimated warranty claims reduces the profit for the period. Management may ask the accountant to reduce the estimate or eliminate the estimated warranty claims altogether. Management argues that the company expects its products to perform and that customers might not have any warranty claims.<br />Generally accepted accounting principles require accountants to estimate the amount of warranty claims that the company may experience. This principle allows the financial statements to present a more accurate picture of the company's profits for the period. The accountant needs to estimate the amount of warranty claims and include this on the financial statements.<br />Current vs. Noncurrent Liabilities<br />The accountant classifies liabilities as current or noncurrent liabilities. Current liabilities will be paid within one year. The accountant divides long-term debt into a current portion, which will be paid within one year, and a long-term portion, which will not be paid within one year. The current portion impacts certain financial ratios calculated based on the financial statements, like working capital or the current ratio. Management might ask the accountant to classify the entire amount as long-term debt.<br />The accountant must follow generally accepted accounting principles and report the current portion of the debt as a current liability.<br />Accounts are records of financial transactions, where the information about how much has been spent and how much has come in, is entered onto a sales ledger. The completed ledger can be manipulated to produce reports and this helps with financial planning.<br />In preparing accounts there are several accounting principles which must be followed:<br />Going concern:<br />This assumes that a business will continue to trade in the future.<br />Consistency: The same principles must be used for every set of accounts that is prepared. For example, depreciation must always be set at the same percentage. This means that different sets of accounts can easily be compared to see trends and growth rates.<br />Prudence:Accountants should always err on the side of caution in their estimates and valuations. For example if revenue were to be over-estimated dividends may appear to be due to shareholders that have not actually been earned.<br />Accruals: Sales and costs are considered to be incurred at the point that the sale is made and delivered, rather than when the company is actually paid. This means that sales which have been secured, perhaps in the form of orders taken but not yet delivered, will not be taken into account.<br />Materiality: This is about the relative importance of individual transactions. Most parties will only be interested in significant amounts. This means that lots of low value sales for one customer could be combined together. However if combining transactions could mislead the user of the accounts the amounts should be split out.<br />Cost: When looking at fixed assets, such as fully owned buildings and machinery, only the original cost of the item is recorded. Its actual value may be quite different, perhaps due to rising property prices, but to calculate a value would make the accounts subjective.<br />Entity: Financial transactions from one person or group of people should be isolated from other unrelated transactions from the same person or group. For example, a sole trader may be withdrawing money for their salary but this would be classed as two transactions because the owner is receiving money and the business is paying out money.<br />Stable money: Transactions that happen over a period of time must reflect a single currency and exchange rate. This will allow one year’s set of accounts to be compared with another regardless of the rate of inflation.<br />Duality: Duality dictates that every transaction has two effects. For example, if a company buys a new asset such as a new printing machine, then fixed assets must be shown to increase and either cash or liabilities must also show an increase<br />