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Principles of Accounting

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Introduction

Accounting principles are fundamental for the success of any business and they are assumptions on the rules of operating on daily basis and the characteristics that sum up to create the framework of making financial statements. There are different formats used to present principles of accounting and they play a vital role when making a financial statement. There are different aspects of principles of accounting and its application in businesses differs. The principles of accounting play important roles in guiding the business and if applied correctly can steer the business to greater heights. Many modern businesses apply accounting principles in their day-to-day operation to help the management to make important financial decisions. The proper application of principles of accounting in a business helps it get positive outcomes. However, this is possible if the business follows the correct procedures and use financial information to their advantage (Lerner & Cashin 1999, p.65).

Importance of Principles of Accounting

The principles of accounting form a major part of the accounting processes, because it acts as a guide to an accountant when dealing with the different aspects of the accounting. A good example is financial statements, which provide a summary of the financial situation of the business and guide the business owners in making investment and other decisions regarding the business. It acts as a tool for making decision. Accounting principles have some unique characteristics if it is to assist the business make sound decisions. It should be used in a timely manner, should be accurate and verifiable. The basic principles of accounting are relevance to the business, its reliability and ability to be consistent over time and should be comparable in differing situations. Consistency means that the information gathered and presented in any accounting document should be similar throughout the year no matter its time of collection and presentation (Larkin & DiTommaso 2012, p.321). Reliability as used in principles of accounting means that information provided would be verified by a third and independent party. This means that the financial information presented by the accountant should be the same if an external auditor comes to perform an external audit of financial books. The relevance of the financial statement is important for the business in order to make sound decision regarding the financial standings of the business and determine whether it is operating on loses or whether it is making profits. The accounts prepared should be related to the business and applies to the financial situation in the business. It should be meaningful to those who need it to make particular decisions. The principle of comparability holds in situations where the same information is required to make different statements. In this case, the information in the different books of accounts should be similar if it was presented at a particular financial year.

Principles of accounting guide the business to give financial statements that are comparable. This helps the investors, creditors and stakeholders to make rational decisions concerning the operations of the business, because principles of authority demands comparable and reliable financial statements. It helps investors and stakeholders understand the business and compare its financial reports before making any major decision regarding the business (Ashbaugh & Pincus 2001, p.190).

Modern Day Business Management

Principles of accounting affect management of businesses in different ways and managers have to make sure that they follow the stipulated principles. The first impact of principles of accounting on management is its demand for transparency among the different managers in the business. Its demand for comparability and relevance to the business means that managers have to become more involved in the accounting information of the business they are in charge of. This means that the management has to be transparent in its operation and maintain a high level of accountability about how they use funds. The principles of accounting help managers come up with financial reports that match the financial statements in the books (Warren, Reeve & Fess 2005, p.123). This way they avoid committing frauds that are common, because of over-budgeting and creation of unrealistic goals. The management gets to plan their course of action and make sure they use the money allocated in the financial budget wisely. The management has to work together as a whole and make sure they are truthful in the expenses and revenue incurred. This is a major problem in modern businesses, because the lower-level managers hide the truth regarding financial issues from the top managers for fear of being fired or being reprimanded. This costs the business a lot in the end, because it may end up collapsing.

Principles of accounting act as a guide to the management in their decisions on what they need to invest in and the money they can use as expenses. This limits the spending capacities of the business, because they have to make sure that at the end of a certain period they have to account for the circulation of money within and outside the business. The management, in this case, has to make sure that the budget they prepare at the beginning of a financial year is realistic in order to avoid problems arising from audits at the end of the year (Larkin 2011, p.176).

The principles of accounting play an important role in guiding the business managers on decision-making process. Managers have to consider the financial implications of their decisions to the internal and external environment. The decisions made by the management direct the business on its way forward, but without sufficient financial information about the business the decisions made may not change the status of the business. The principles guide the managers on whether to invest in new markets; change their marketing strategies or introduce new products to the market. All these decisions come from the accounting department who prepare the financial statements that guide the managers (Alfredson 2005, p.102).

The success of modern day business depends largely on the ability of management to predict how the actions of the business and foresee the challenges and opportunities they will meet in future. The expenses and revenue play a key role in shaping the vision of the management team and this means that they rely greatly on the efficiency and transparency of the accounting department to provide a good budget that will enable the business to achieve its objectives. The principles of accounting guide the accountants and consequently, they provide a good budget and at the end, prepare financial records that match the budget created at the beginning of the year. The manager then uses the budget to determine how to allocate the money wisely so that at the end the external audit statements match those of the internal auditors (Needles, Anderson & Caldwell 1990, p.156).

The investors, creditors and other stakeholders in the business rely on the financial statements to make decisions regarding the financial standing s of the business. The management is, therefore, required to provide in-depth financial statements that explain how the business used money in the past and how it plans to increase its income. This may be a challenge to many managers who like keeping the financial status of the company on a low profile. However, the principles of accounting advocate for transparency and reliability of the financial statements, meaning that the management has to be accountable for the finances of the business (Mcdaniel, Martin & Maines 2002, p.213).

Applying Principles of Accounting in Businesses

The principles of accounting can be applied by the business in accountancy where the financial status of the company and the circulation of money is handled by an accountant who monitors and provides accounts of how the money came in and out of the business (Vanderbeck 2002, p.245). This way the business will keep track of its money and establish when things are not going well for the business. The accounts of the business can be seen in the different books of accounts created with the same principles. The use of principles of accounting by the financial officers in the business will help steer the business towards making profits and avoiding loses. The other application of accounting principles in a business is bookkeeping. This is the act of maintain and updating financial reports in different financial records. Bookkeeping requires the principles of management to ensure that the information is relevant, reliable, comparable and consistent with the actual financial activities that took place within a particular year. With proper bookkeeping, the business can monitor its financial status and make wise decisions regarding the business (Gray 1992, p. 132).  

The other use of accounting principles in making the business profitable and recording positive outcomes is in auditing where its accountants and financial officers need to maintain a high level of submission to the accounting principles when providing audit reports. Since the audit reports present the management, investors and creditors with a picture of the current financial position of the business. Therefore, auditors need to remember and put into practice the principles of accounting as they audit the financial records of the business. This does not only apply to the internal auditors, but also to the external auditors who are in a position to guide the business and provide an insight on the financial constrain facing the business. Proper application of accounting principles in auditing provides a true picture of the status of the business and this can either attract or chase investors. The internal auditors, therefore, need to be keen when preparing internal audits to prevent it from clashing with the reports of an external auditor.

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