Financial Accounting

Table of Contents

Introduction.

Accounting cycle.

Financial accounting.

Accounting conceptual framework.

Overview of technical accounting knowledge.

References.

Introduction to The Earnings Management Motivation

An adequate accounting cycle is to be performed in a specific period in order to analyse, record, classify, summarize and report all the financial transactions. Accounting cycle is concerned with the series of steps that are helpful in preparing the financial statements by the business organization (Weygandt et al., 2018). It is considered important to analyse the transactions by carefully examining the source documents. Busines transactions are then entered into the books via journal entry. An account is considered as an essential part of accounting system that is being used to categorize and record the decreases, increases and balances of each liability, asset, dividend, expense, revenue and stockholders’ equity item.

Accounting Cycle

In the solution provided of Poppy Ltd., the company has set up accounts for every element of business such as cash at bank, accounts payable and accounts receivable. The transactions were first recorded without GST. Every firm has a cash or bank account in its accounting books as the knowledge of the amount of cash available with the firm is considered as useful information. It is major requirement in accounting that every transaction must be recorded by an entry that has equal debits and credits (Porter, 2019). This procedure is known as double entry process. This procedure helps in maintaining the balance in accounting equation. A journal is considered as a record of business transactions that shows all its effects expressed in debit and credit column and also include explanation of a particular transaction. For instance, purchase return entry has been recorded and the balance is achieved in debit and credit column. Accounts payable control – F Falla has been debited because as the good were received back by the firm and purchase return have been credited with the same amount as the purchases goes out from Poppy Ltd. Purchase journal has been prepared to record purchases made by Poppy Ltd. Similarly, sales journal has been prepared to record all the sales related transactions. Cash receipts and cash payment journals are prepared to record cash related items. After passing all the necessary entries in journals, ledgers are prepared. A ledger is considered as a complete record of transactions and accounts of the business organization. The map of accounts is a entry of all the titles and number of all accounts in the ledger. Debits are entered on the left side of the ledger account and credits are entered on the right side of the ledger account (Franklin et al., 2018). For instance, opening balance of cash is recorded on the debit side of cash at bank account, the total of cash payments is recorded on the credit side, the total of cash receipts is recorded on the debit side and the remaining balance will be carried forward. In the expense related ledgers, CP1 is mentioned for cash payments which indicates that the firm has made their payments using cash. The ledger account of office equipment starts by recording the opening value on the debit side and CPJ indicates that the office equipment has been purchased using cash on 16th July. Expenses and assets generally have debit balances and revenues and liabilities have credit balances. After preparing all the required ledger accounts, a trial balance is prepared in which the closing balances of every accounts is recorded. This trial balance is considered as a listing of all the accounts with ending balances in the order of asset, liability, equity, revenue and expense. The debit and credit side of the trail balance must balance. If it is not balanced, then, there would be some mistake made while recording the business transactions. In the trail balance, assets and expenses amounts are recorded on the debit side and income, equity and liability items are recorded on the credit side. For example, cash at bank, inventory, office equipment, accounts receivable, rent expense, commission paid, sundry expenses, purchases, discount allowed are recorded on the debit side. Accounts payable, share capital, sales, discount received, retained earnings, purchase returns are recorded on the credit side. From this trial balance, a firm prepares its financial statements such as income statement and balance sheet.

Financial Accounting

Financial accounting is considered as a specialised branch of accounting that helps in keeping a track of the financial transactions of the company. These transactions are being recorded, summarized and represented in the financial statements using the standardised guidelines issued by the accounting bodies. Accounting transactions are defined as the business activity that directly influence the financial statements and financial status of the business organization. Such transactions arrive in several forms including issue of shares, purchase of goods, fixed assets, payment to suppliers, etc. The first step in the accounting cycle is concerned with identification of transactions. Businesses have many transactions throughout the accounting period. All such transactions must be adequately recorded in the books of the company. Double entry bookkeeping system is at the core of the financial accounting. Every financial transaction made by the company is recorded by applying this system. Double entry system of recoding transactions shows that every transaction basically influences 2 accounts. For instance, Poppy Limited purchased office equipment of $14000 using cash at bank. By this, the cash asset of the company reduced by this amount and also office equipment as an asset increases by the same amount. Another example is concerned with purchase of goods on credit by the firm from F Falla amounting to $4900. This led to the increase in asset under inventory category with the $4900 and also increase in the liability under accounts payable category with the same amount. In this way, the accounting equation, Assets = Liabilities + Capital remains balanced. For any such financial transaction, the credit amount must equal to the amount recorded on the debit side. The major advantage of the system of double entry accounting is that the balance of the asset accounts of the company must be equal to the balance of capital and liabilities. A company is also required to follow accrual basis of accounting that indicates reporting of revenues when they are earned and not when it is being received. On similar basis, the expenses must be reported when they are being incurred by the firm rather in the period when they are actually paid (Goel, 2016). When a company follow accrual basis of accounting, the profitability, liabilities and assets and several other types of financial information is more in line with the economic reality. In order to acquire usefulness of the financial accounting, the reports of the company are required to credible, simple to understand and comparable to the peer firms present in the industry. For this, financial accounting applies a set of common rules which are called as accounting standards. These accounting standards acts as a basic underlying concepts and principles such as matching principle, economic entity, relevance, reliability, conservatism, full disclosure, cost principle, going concern, etc. Accounting standards helps the users to evaluate and undertake decision making process with regard to the allocation of scarce resources. These assist the directors to fulfil their obligations that are in relation to the reporting of financial statements. Every business organization is required to prepare three financial statements, namely income statement, balance sheet and cash flow statement, in order to provide information to both internal and external users of these statements (Cioca, 2020). Income statement records are revenue and expense related items in order to arrive at net profit earned by the company. Revenue is defined as the income produced by the company by selling its products in the market. From the revenue, cost of goods sold are required to be deducted in order to get gross profit or loss. All the operating expenses are then deducted from gross profits. Expense is defined as the cost of operations being incurred by the firm to generate amount of revenue. Common expenses may include payment of wages to workers, salaries to employees, payment to suppliers, depreciation charged on equipment, etc. All these expenses are deducted to compute net profit. This amount of net profit is added to the capital in the balance sheet. Balance sheet is organised basically into 3 parts, namely, assets, liabilities and equity. The first section reports all the assets of the company and includes items like cash at bank, office equipment, inventory, etc. Liabilities are recorded in the next section and include creditors, bank overdraft, etc. The last section in the balance sheet records stockholders’ equity. This arrives as a difference between total assets and total liabilities (Kahn & Baum, 2020). Cash flows statement records all the cash related items to obtain an estimate of cash being available with the firm to carry out day to day operations. This depicts the change in the cash of the company during a stipulated period of time. This change is basically divided into 3 parts, namely, operating activities, investing activities and financing activities.

Accounting Conceptual Framework

Accounting conceptual framework is a bundle of accounting objectives and fundamentals that are being developed by International Accounting Standards Board to make sure about the uniformity in interpretation across several accounting methodologies. It is a theory that lays down the basic reasoning that acts as a base for preparation of financial statements and financial reporting (Barker et al., 2020). There are basically two types of users of financial statements. They are classified as internal and external users of information. External users include investors, suppliers, creditors, lenders, customers, etc. and internal users include employees, management, etc. The major objective of accounting framework is to fetch necessary information to these users in order to help them in undertaking effective decision making process. The major reasons for establishing an agreed conceptual framework are that it offers a framework for developing accounting standards and a base for resolving accounting related disputes.

Overview of Technical Accounting Knowledge

Accounting is process of identifying, measuring, classifying, recording and summarizing of financial transactions which are then communicated with the users in the form of financial reports. International accounting standards have been developed to ensure consistency in the financial records maintained for different accounting periods. In Australia, several accounting standards have been set by Australian Accounting Standard Board that allow the users to evaluate and undertake effective decision making process with regard to allocation of scarce resources (Garg et al., 2020). These standards assist the directors to fulfil their obligations with regard to regard to financial reporting. These standards are considered as relevant in assessing the performance, financing, investment and financial position of the enterprise. Due to these standards, it has become possible to compare the financial statements of different companies in order to evaluate their performance. General purpose financial reports are to be prepared after recording transactions. A journal is considered as a record of business transactions that shows all its effects expressed in debit and credit column and also include explanation of a particular transaction. After recording the transactions in journal, ledger accounts are prepared. A ledger is considered as a complete record of transactions and accounts of the business organization. After preparing all the required ledger accounts, a trial balance is prepared in which the closing balances of every accounts is recorded. This trial balance is considered as a listing of all the accounts with ending balances in the order of asset, liability, equity, revenue and expense. The debit and credit side of the trail balance must balance. If it is not balanced, then, there would be some mistake made while recording the business transactions. From trial balance, financial statements are prepared, namely, income statement, balance sheet and cash flow statement. Firms also prepares notes to financial statements to ensure full disclosure of financial information. The major objective of these statements is to provide information to the users of financial statements, adequate disclosure and discharge of answerability by the preparers of these statements. These statements help in evaluating financial performance and position of business enterprise. There are five major elements of financial statements, namely, assets, liabilities, revenue, equity and expenses. Assets are considered as the future economic benefits and liabilities are considered as the present and future obligations that are required to be fulfilled by the organization. equity represent the amount of capital available with the firm to carry out day to day business operations in an effective and efficient manner. Revenue is defined as the income produced by the company by selling its products in the market. From the revenue, cost of goods sold are required to be deducted in order to get gross profit or loss. All the operating expenses are then deducted from gross profits. Expense is defined as the cost of operations being incurred by the firm to generate amount of revenue. Common expenses may include payment of wages to workers, salaries to employees, payment to suppliers, depreciation charged on equipment, etc. All these expenses are deducted to compute net profit.

References for The Earnings Management Motivation

Barker, R., Penman, S., Linsmeier, T. J., & Cooper, S. (2020). Moving the conceptual framework forward: Accounting for uncertainty. Contemporary Accounting Research37(1), 322-357.

Cioca, I. C. (2020). The Importance Of Financial Statements In The Decision-Making Process. Annales Universitatis Apulensis Series Oeconomica1(22), 73-83.

Franklin, M., Graybeal, P., & Cooper, D. (2018). Use Journal Entries to Record Transactions and Post to T-Accounts. Principles of Accounting, Volume 1: Financial Accounting.

Garg, M., Peach, K., & Simnett, R. (2020). Evidence‐informed Approach to Setting Standards: A Discussion on the Research Strategies of AASB and AUASB. Australian Accounting Review.

Goel, D. (2016). The earnings management motivation: Accrual accounting vs. cash accounting. Australasian Accounting, Business and Finance Journal10(3), 48-66.

Kahn, M. J., & Baum, N. (2020). Basic Accounting and Interpretation of Financial Statements. In The Business Basics of Building and Managing a Healthcare Practice (pp. 13-18). Springer, Cham.

Porter, J. C. (2019). Beyond debits and credits: Using integrated projects to improve students’ understanding of financial accounting. Journal of Accounting Education46, 53-71.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting with International Financial Reporting Standards. John Wiley & Sons.

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