There is some confusion over the difference between bookkeeping and accounting. This is due to the fact that two are related and there is no universal accepted line of demarcation between them.
In general bookkeeping is the recording of business data in the prescribed manner, this is the first phase. Much of the work of bookkeeper is of the clerical in nature. The sphere of accounting starts where the sphere of bookkeeping ends. accounting is primarily concerned with the design of the system of records, the preparation of reports and the interpretation of reports. Accountants often direct and review the work of bookkeepers.
Monday 30 May 2011
Systems of Accounting:
There are basically two systems of accounting:
Cash System of Accounting.
Accrual System of Accounting.
Cash system of accounting:
Definition and Explanation:
It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. For example, the rent for December 2009 has not been paid till January 10the 2010. Under cash basis, rent expense for the month of December will not be recorded as payment has not been made. Government system of accounting is mostly on the cash system.
Accrual System of Accounting:
Definition and Explanation:
It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. This system recognizes the fact that if a transaction or an event occurred, its consequences cannot be avoided and therefore, should be brought into book in order to present a meaningful picture of profit earned or loss suffered.
Cash System of Accounting.
Accrual System of Accounting.
Cash system of accounting:
Definition and Explanation:
It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. For example, the rent for December 2009 has not been paid till January 10the 2010. Under cash basis, rent expense for the month of December will not be recorded as payment has not been made. Government system of accounting is mostly on the cash system.
Accrual System of Accounting:
Definition and Explanation:
It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. This system recognizes the fact that if a transaction or an event occurred, its consequences cannot be avoided and therefore, should be brought into book in order to present a meaningful picture of profit earned or loss suffered.
Branches of Accounting:
Accounting has three main forms of branches, viz, financial accounting, cost accounting, and management accounting. These forms of accounting have been developed to serve different types of objectives.
Financial Accounting:
It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.
Cost Accounting:
Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.
Management Accounting or Managerial Accounting:
It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities.
Financial Accounting:
It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.
Cost Accounting:
Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.
Management Accounting or Managerial Accounting:
It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities.
Double Entry System of Bookkeeping:
The double entry system of bookkeeping owes its origin to an Italian merchant named Lucas Pacioli who wrote the first book on double entry bookkeeping entitled "Decomputis et Scripturis". It was published in Venice in 1544. All modern methods of accounting are simply adaptation of the system invented by that ancient pioneer.
Definition and Explanation:
The double entry theory of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other to giving the benefit - in the same set of books.
In this theory, as the two fold aspects of each transaction are recorded, the name "double entry" has been given to this system.
Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.
Advantages of Double Entry System:
The main advantages of double entry theory of book keeping are as follows:
Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.
The nominal sides of transactions being recorded: it is possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit made by the business during a particular period can be easily ascertained.
As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet.
The transactions being recorded in the most scientific and systematic way gives the most reliable information of business.
It prevents fraud by rendering any alteration in any account more difficult.
It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus know whether his business is progressing or not.
Disadvantages of Double Entry System:
The following are the main disadvantages of this system:
This system requires the maintenance of a number of books of accounts which is not practical in small concerns.
The system is costly because a number of records are to be maintained.
There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance.
Definition and Explanation:
The double entry theory of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other to giving the benefit - in the same set of books.
In this theory, as the two fold aspects of each transaction are recorded, the name "double entry" has been given to this system.
Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.
Advantages of Double Entry System:
The main advantages of double entry theory of book keeping are as follows:
Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.
The nominal sides of transactions being recorded: it is possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit made by the business during a particular period can be easily ascertained.
As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet.
The transactions being recorded in the most scientific and systematic way gives the most reliable information of business.
It prevents fraud by rendering any alteration in any account more difficult.
It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus know whether his business is progressing or not.
Disadvantages of Double Entry System:
The following are the main disadvantages of this system:
This system requires the maintenance of a number of books of accounts which is not practical in small concerns.
The system is costly because a number of records are to be maintained.
There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance.
Important Bookkeeping Terms:
Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.
Transaction:
Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.
Business:
It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.
Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.
Drawings:
The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.
Purchases:
Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.
Purchases Returns:
If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.
Sales:
Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.
Sales Returns:
If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.
Trade Discount:
It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.
Cash Discount:
It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount
Commission:
It is a form of remuneration for services rendered by one person to another.
Expenditure:
An expenditure takes place when assets or service is acquired.
Expense:
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.
Account:
A summarized record of transactions relating to person or thing is called an account.
Debtor (Account Receivable):
A person who owes money to another is a debtor. When we say that we owe Mr. Rahim $200, we mean that we have received from Mr. Rahim $200 which we have to repay. We stand as debtor to Mr. Rahim for $200. It is also termed as accounts receivable.
Creditor (Accounts Payable):
A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.
Assets:
These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.
Liabilities:
They are the debt due by a business to its proprietor and others.
Voucher:
Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.
Goods (Merchandise):
It includes all merchandise commodities which are purchased by the business for selling.
Stock (Inventory):
Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.
Equity:
A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity.
Transaction:
Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.
Business:
It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.
Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.
Drawings:
The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.
Purchases:
Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.
Purchases Returns:
If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.
Sales:
Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.
Sales Returns:
If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.
Trade Discount:
It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.
Cash Discount:
It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount
Commission:
It is a form of remuneration for services rendered by one person to another.
Expenditure:
An expenditure takes place when assets or service is acquired.
Expense:
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.
Account:
A summarized record of transactions relating to person or thing is called an account.
Debtor (Account Receivable):
A person who owes money to another is a debtor. When we say that we owe Mr. Rahim $200, we mean that we have received from Mr. Rahim $200 which we have to repay. We stand as debtor to Mr. Rahim for $200. It is also termed as accounts receivable.
Creditor (Accounts Payable):
A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.
Assets:
These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.
Liabilities:
They are the debt due by a business to its proprietor and others.
Voucher:
Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.
Goods (Merchandise):
It includes all merchandise commodities which are purchased by the business for selling.
Stock (Inventory):
Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.
Equity:
A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity.
Definition and Explanation of Bookkeeping:
The work book or books mean books of accounts and keeping implies maintaining in proper form and order. Thus bookkeeping may be defined as the art of recording business transactions in books in a regular and systematic manner. It has been defined by different experts as:
"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth."
"The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record."
"The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."
It should be noted from the above definitions that bookkeeping primarily deals in the art of recording transactions in books.
"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth."
"The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record."
"The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."
It should be noted from the above definitions that bookkeeping primarily deals in the art of recording transactions in books.
Petty cash imprest system
Petty cash imprest system
Petty cash imprest system allows only to replenish the spending. So, if you start the month with $100 in your petty cash float and spend $90 of that cash in the month, an amount of $90 will be then placed in your petty cash float to bring the balance of your petty cash float back to $100. The replenishment is credited to the primary cash account and the debits will go to the respective expense accounts, based on the petty cash receipts.
===Why use the imprest system In this example the maximum amount of petty cash that can be issued (spent) is $100. You can only spend what you have and you are only replenished with what you spend, in this case $90
In a non imprest system where a fixed amount is issued every month e.g. $100 every time cash is required, there is no incentive to ensure all money issued has been documented because when money is all spent a check for a fixed amount is issued. It is much more difficult to reconcile a non imprest system as you never know how much exactly should be in the float.
In an imprest system the amount requested is documented, the documentation being the petty cash dockets and their associated receipts or invoices. So at all times you can check how much should be left in the petty cash float by deducting the amount spent from the opening petty cash float.
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How petty cash imprest system works
The imprest system ensures that you must document how the petty cash is spent. In a petty cash system, petty cash receipts are written for each amount issued. So, when all of these receipts are totalled at the end of the month and deducted from the opening petty cash float, the calculated value must agree with what is left in the petty cash float. Under the imprest system, only that which is recorded as spent is replenished. Any shortfalls may have to be replenished by the guardian, usually a bookkeeper, of the petty cash float from their own personal resources.
Sunday 29 May 2011
The Importance of Communication Skills in a Successful Life
Every day, in many ways, we communicate with other people. Sometimes it is verbally, other times it is through the written word, and we even do it non-verbally through what we call body language. For that matter, we can use images to communicate, and even a scent can carry a message. If we expect to get our point, our message, our meaning across, it is important that we have good communication skills.
In order to work in an office, function at school or interact with people in any situation, communication is needed. Let us say that you are an engineer, and you have designed a new two hundred unit residential development. Well, to get approval to build that project, there are forms to fill out and permits to obtain.
You will need to fill in applications and probably write some sort of report to outline exactly what you intend to do. Maybe there is a swamp nearby, a beautiful pristine wetland that is home to endangered animals. If that's the case, people may protest your project; you may have to go before a city council or into court to argue that you should be allowed to build it. To do so, you will need to write up a clear, concise and easy to read report explaining every aspect of the development.
If a hearing is held, then you will probably have to get up in front of a crowd of people - some of them hostile - and verbally explain what you are planning, and answer questions. If you have pictures or computer graphics, and can show that your project will not hurt the environment, you will have a good chance of being approved.
On the other hand, perhaps you are engaged in something more mundane, like buying a car, or maybe a house. You will need to present yourself as speaking clearly, knowledgeably and with confidence. Here is where the ability to judge a person's attitude comes in very handy. If you are negotiating with a car salesperson, or a realtor or homeowner, and you ask a question that is something they do not want to answer, they may give off a subtle signal. A slight twitch of the eyebrow or the corner of their mouth; maybe they look down before answering. It can be any one of a number of things. The point is, it can be a signal to you that something is not as it seems.
On the flip side, if you are the salesperson, you will want to be able to speak or communicate in a way that answers a question, but does not leave you open to suspicion. A classic example is the old question about a house: "Does the roof leak?" And you reply: "Only when it rains". That kind of answer will sink your efforts at a sale. So, you have to learn how to put a positive spin on what you say or write. A house is not:"in the city," it is: "conveniently located to the vibrant downtown district."
When dealing with issues in your personal life, good communication is vital. If you are in a relationship with someone, communication is what keeps the relationship alive! More important than agreeing on everything is just the fact that you can talk, write, even IM each other and respect each other's views. As a relationship deepens and expands, children may come into the picture. Once you are a parent, you face the difficult task of (eventually) trying to communicate with a teenager. Shudder! A sub-species of humans that often communicates via grunts and head shakes - at least to adults.
If you are intent on convincing your son / daughter to not smoke, not do drugs, not drink etc. then very good communication skills are vital. And, you cannot only use the verbal skills. Teenagers are experts are tuning their parents' voices out. They have been hearing them since childhood, they can do it. You want to keep your teen from drinking and driving, talking is not enough. A pile of newspaper articles showing the horrid aftermaths of many such instances speaks volumes. There is the old saying: "A picture paints a thousand words." Keep that one in mind, especially in dealing with teens on many issues.
So, whether in work, in your dealings with life, or in your personal life; the importance of communications skills cannot be underestimated.
What Is A Leader
At the most basic level, a leader is someone who leads other. But what makes someone a leader? What is it about being a leader that some people understand and use to their advantage? What can you do to be a leader? Here's what you need to know and do.
A leader is a person who has a vision, a drive and a commitment to achieve that vision, and the skills to make it happen. Let's look at each of those in detail.
The Leader's Vision
A leader has a vision. Leaders see a problem that needs to be fixed or a goal that needs to be achieved. It
may be something that no one else sees or simply something that no one else wants to tackle. Whatever it is, it is the focus of the leaders attention and they attack it with a single-minded determination.
Whether the goal is to double the company's annual sales, develop a product that will solve a certain problem, or start a company that can achieve the leader's dream, the leader always has a clear target in mind. This is a big picture sort of thing, not the process improvement that reduces errors by 2% but the new manufacturing process that completely eliminates the step that caused the errors. It is the new product that makes people say "why didn't I think of that", not just a toaster that lets you select the degree of darkness of the toast. Edison did not set out to build a better candle, he wanted to find a whole new way to illuminate the darkness. That's the kind of vision a leader has.
The Drive To See It Through
It is not enough to just have a vision. Lots of people see things that should be done, things that should be fixed, great step forward that could be taken. What makes leaders different is that they act. They take the steps to achieve their vision.
Is it a passion for the idea, an inner sense of drive, or some sense of commitment? Whatever it is, it is the strength that lets leaders move their vision forward despite all the obstacles, despite all the people saying it can't be done, it's too costly, we tried that before, or a dozen other excuses. The true leader perseveres and moves forward.
Trait And Skills A Leader Must Have
There are things that set leaders apart from other people. Some people are born with these characteristics.
Others develop them as they improve as leaders. These are not magic bullets. They are things you can do and be if you want to be a leader.
Traits Of A Leader
There are as many traits of a leader as there ae lists of what makes a leader. Here are the fundamental traits of a leader from my perspective: Has integrity. People have to believe that you are pursuing your dream because it's the right thing to do, not just because you are ego driven.
Is a people person. Understands the differences that make people unique and is able to use those individual skills to achieve the goal.
Is positive. A leader encourages and rewards people and makes you want to do it and do it right. A leader is not a negative person and doesn't waste time and effort tellng everyone what they're doing wrong.
Has integrity. People have to believe that you are pursuing your dream because it's the right thing to do, not just because you are ego driven.
Is a people person. Understands the differences that make people unique and is able to use those individual skills to achieve the goal.
Is positive. A leader encourages and rewards people and makes you want to do it and do it right. A leader is not a negative person and doesn't waste time and effort tellng everyone what they're doing wrong.
Leadership Skills
Beyond the personal traits of a leader, there are specific skills someone must master if they want to be a leader. Effective communication - it's more than just being able to speak and write. A leader's communication must move people to work toward the goal the leader has chosen.
Motivation - a leader has to be able to motivate everyone to contribute. Each of us has different "buttons". A leader knows how to push the right buttons on everyone to make them really want to do their best to achieve the leader's goal.
Planning - the leader has a plan to achieve the goal. He/she doesn't get too bogged down in the details, that's what managers are for, but rather uses a high level plan to keep everyone moving together toward the goal.
Effective communication - it's more than just being able to speak and write. A leader's communication must move people to work toward the goal the leader has chosen.
Motivation - a leader has to be able to motivate everyone to contribute. Each of us has different "buttons". A leader knows how to push the right buttons on everyone to make them really want to do their best to achieve the leader's goal.
Planning - the leader has a plan to achieve the goal. He/she doesn't get too bogged down in the details, that's what managers are for, but rather uses a high level plan to keep everyone moving together toward the goal.
Bottom Line
Leaders dream dreams. They refuse to let anyone or anything get in the way of achieving those dreams. They are realistic, but unrelenting. They are polite, but insistent. The constantly and consistently drive forward toward their goal. You can be a leader. You will be - when it matters enough to you.
Audit and its advantages
ADVANTAGES TO BUSINESS
Advantages of audit for the business are:
1. Satisfaction of Owner
It is because of audit that the owner will be satisfied about the business operations and working of its various departments.
2. Detection and Prevention of Errors
The errors whether committed innocently or deliberately are discovered by the process of audit and its presence prevents their occurrence in the future. No one will try to commit an error or fraud as the accounts are subject to audit and hence they will have a fear of being detected.
3. Verification of Books
Another advantage of audit is the verification. of the books of accounts, which helps in maintaining the records up to date at all times.
4. Independent Opinion
Auditing is very useful in obtaining the independent opinion of the auditor about business condition. If the accounts are audited by an independent auditor, the report of the auditor will be true and fair in all respects and it will be of extreme importance for the management of the company.
5. Detection and Prevention of Frauds
Just like errors, frauds are discovered by audit and its presence minimizes future possibility if not eliminated totally.
6. Moral Check
The process of audit will establish a check on the minds of the staff working in the business and they will not be able to commit any irregularity, as they will have a fear and will also be aware that the accounts will be examined in the near future and that action would be taken against them if any irregularity is discovered. Thus the audit prevents the happening of any irregularity before it starts and the staff hence becomes more active and responsible. The fear of their getting caught act as a moral check on the staff of the company.
7. Protection of the Rights and Interests of Shareholders
Audit helps in protecting the interests of shareholders in case of joint stock company. Audit gives assurance to the shareholders that the accounts of the company are being maintained properly and their interest will not suffer under any circumstances.
8. Reliance by Outsiders
Outsiders like creditors, debenture holders and banks etc. will rely on the business accounts if they are audited by an independent authority (external auditor).
9. Loan Facility
Money can be borrowed easily on the basis of audited balance sheet from financial institutions. If accounts are audited the true picture will be visible to banks and it will be easy for them to issue loans as early as possible.
10. Easy Valuation
It becomes easier to evaluate property etc. if the accounts are audited when the business is disposed off and as a result no dispute whatsoever will arise.
11. Upto Date Record
Due to the fear of audit the work of accounting always remains upto date and correct in all respects.
12. Reliance by Partners
If a new partner is to be inducted in the business, the audited balance sheet will be a good base to estimate the value of good will. Moreover, the audited accounts of a company by an independent person will minimize the chances of misunderstanding among the partners.
13. Reliance by Shareholders
In case of joint stock company, the shareholders have no hand in the actual running of the business because the management was in the hands of the directors. So the shareholders are assured in the presence of the process of audit that the directors have not taken any undue advantage of their status and position.
ADVANTAGES TO THE PUBLIC
Advantages of audit for the public are given below:
1. Safety from Exploitation
The interest of the public and shareholders is safe and guaranteed in the presence of audit. Otherwise they may have been exploited by the management. This is the main reason for which the audit has been made mandatory for public limited companies.
2. Facility for Prospective Investor
The prospective investor can easily analyze the position of the company gaining through the audited financial statements of the company and can make the decision to invest or not in the company.
3. Satisfaction about Business Operations
In the presence of audit, the public in general and the owner of the business in particular receive the reliable statement of accounts, indicating the true financial position of the concern and they can collect result from it and feel satisfaction about it in every respect.
ADVANTAGES TO THE STATE
Advantages of audit to the state are as under:
1. Privatization of Industries
If the nationalized industries are running in losses, the government may denationalize them after going through the audited accounts of such industries.
2. Easy Assessment of Tax
In the presence of audited accounts the assessment of tax becomes very easy because the tax is imposed on the basis of audited accounts.
3. Quick Recovery of Taxes
As the assessment orders can easily be made it will lead to early recovery of taxes.
4. Leading to Economic Progress
The joint stock companies play a vital role in giving a boost to the economic progress of a country. The successful operation of the companies would have not been possible without the presence of audit. So we can easily say that presence of audit leads to economic progress of the country.
Ethics in Business
For those of us in the accounting profession, however, ethics is at the cornerstone of what we do. Clients look to us to provide impartial information about their company and industry. The business community depends on accountants to perform their jobs with the highest degree of accuracy and ethical standards. The stability of a free-market system depends, in large part, on unimpeachably exact audits and statements.
As more traditional accounting firms become involved in consulting, which to some slightly grays the line of impartiality, it is more important than ever that the accounting profession operate according to the highest ethical standards.
Most ethical lapses are so small as to seem insignificant. However, they add up over time, and can snowball into a serious situation. Poor ethical standards are most damaging in the long-term.
The biggest victim of ethical lapse is trust. A small breach of ethics is often known only between a few people. But this knowledge can destroy trust between fellow employees, and from there make its way up the ladder, destroying trust between employee and supervisor, and between divisions of companies. When ethical lapses become rampant, employee productivity declines, loyalty follows, soon major breaches such as employee theft begin to appear. Eventually, and worst of all, the most important advantage a firm has, the trust between a firm and its clients, erodes.
Why has such an important topic as business ethics gone unnoticed, even actively ignored? The biggest reason is that ethics is largely misunderstood. Ethical behavior-behavior conducted with honesty and integrity, has recently become muddled up with moral or political questions.
In the past generation, the business community for the first time was asked to consider political and moral consequences when making business decisions-whether to do business with South Africa during apartheid, for instance. The public's new interest has changed the way many companies do business.
However, as political and moral concerns have taken center stage, ethical concerns have been forgotten. Ethics has very little to do with political beliefs, or public opinion. Ethical behavior is a very personal matter, which requires that a person be honest and truthful in all business dealings.
Because ethical behavior is so personal, it is unlikely to be given any recognition. While there are many awards for corporate social responsibility, awards that recognize ethical behavior are rare. Ethics is viewed as something that is expected from employees-only when ethics codes are breached is the topic even discussed. However, this Monday Morning Quarterbacking approach to ethics gives employees who are being ethical day in and day out, without encouragement from above, the impression that ethics are not important.
A movement has begun to combat this impression. Business leaders know the importance of ethics--an international survey found that 78% of boards of directors are setting ethical codes of conduct, up from only 41% in 1991.
Ethical behavior starts at the top. Before a company can expect to be viewed as ethical in the business community, ethical behavior within its own walls-to and by employees-is a must, and top management dictates the mood. Ethical behavior by the leaders of an organization will inevitably set the tone for the rest of the company-values will remain consistent. Further, a well-communicated commitment to ethics sends a powerful message that ethical behavior is considered to be a business imperative.
Companies, led by top management, are increasingly adopting ethical codes of conduct. Modern ethics codes aren't just some simple platitudes set in a break-room plaque. Companies now commit considerable time and money to illustrate their reliance on ethical behavior. Companies now bring in consulting firms (including KPMG's own Business Ethics Services Practice), to craft a document with concrete rules and real meaning.
A modern ethics code will consider the main ethical dilemmas of a company's employees, and determine the most vulnerable ethical areas for the company. The execution of a company's ethics program depends on identifying these vulnerabilities. All future messages, from the code, to materials, to training, will focus on these major ethical dilemmas.
Companies are also interested in determining whether ethical behavior can be measured, just as efficiency and productivity are. KPMG's Business Ethics Institute is taking the lead on research in this area. Often companies must innovate ways to measure ethical behavior, which in turn motivates ethical behavior.
Once training, measurement and a new ethical code have been developed, companies are also hiring full-time ethical compliance officers, and starting ethics hotlines to report possible policy violations. Hiring a full-time ethics officer is another signal to employees that ethical violations will be taken very seriously. However, this person isn't just a watchdog-they will take a proactive approach to identifying possible violations before they develop. An ethics violation hotline is another essential step to ensure ethical compliance. Employees can call the hotline 24 hours per day, 7 days per week, to report violations or even to discuss potentially dangerous ethical situations.
As ethical behavior comes to the forefront, more and more companies will be taking these steps to ensure that the ethics of their company and its employees are unassailable.
For those of you about to enter the workforce, ethical questions are fairly faint on your radar screen. However, because companies, and especially accounting firms, are so concerned with maintaining proper ethical standards, it is important to reiterate the major principles of professional ethics:
Avoiding even the appearance of conflict of interest-This is most important in the accounting field. Especially when confidential financial material is involved, as in an audit, there can be no interest conflict. For instance, it is improper to hold stock in a company that you are auditing.
Keeping sensitive information confidential-Most, if not all, information you get from a client is confidential. As an accountant or consultant, you are usually dealing with some of the most sensitive material a client has. Therefore, that material, even its existence, should not be discussed with anyone outside the firm.
Full disclosure-Any information with any impact whatsoever on your duties or professional life should be shared openly and honestly with supervisors. At KPMG we encourage such honesty with a "time-bank" leave policy. There is no such thing as sick leave or personal days, it is all lumped together-employees can use the time for whatever they choose, making for a much more open workplace.
Devotion to responsibility-As a paid employee, you are expected to perform your duties to the best of your possible abilities, and to retain loyalty and respect to your firm.
You may have taken a business ethics class, where you learned theories of ethics and analyzed case studies of famous ethical dilemmas. This is important preparation-but in the business world, there won't be time to fulminate and analyze. Split-second ethical decisions are made every day-and if you follow the main professional ethics principles, making the correct decision shouldn't be difficult.
IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
Key Definitions [IAS 8.5]
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
International Financial Reporting Standards are standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:
International Financial Reporting Standards (IFRSs);
International Accounting Standards (IASs); and
Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB.
Materiality. Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.
Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Selection and Application of Accounting Policies
When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:
the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8.11]
Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]
Consistency of Accounting Policies
An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13]
Changes in Accounting Policies
An entity is permitted to change an accounting policy only if the change:
is required by a standard or interpretation; or
results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance, or cash flows. [IAS 8.14]
Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]
However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]
Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]
Disclosures Relating to Changes in Accounting Policies
Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]
the title of the standard or interpretation causing the change
the nature of the change in accounting policy
a description of the transitional provisions, including those that might have an effect on future periods
for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
for each financial statement line item affected, and
for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the adjustment relating to periods before those presented, to the extent practicable
if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
the nature of the change in accounting policy
the reasons why applying the new accounting policy provides reliable and more relevant information
for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
for each financial statement line item affected, and
for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the adjustment relating to periods before those presented, to the extent practicable
if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]
Changes in Accounting Estimate
The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]
the period of the change, if the change affects that period only, or
the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]
Disclosures Relating to Changes in Accounting Estimate
Disclose:
the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods
if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8.42]
restating the comparative amounts for the prior period(s) presented in which the error occurred; or
if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]
Disclosures Relating to Prior Period Errors
Disclosures relating to prior period errors include: [IAS 8.49]
the nature of the prior period error
for each prior period presented, to the extent practicable, the amount of the correction:
for each financial statement line item affected, and
for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the correction at the beginning of the earliest prior period presented
if retrospective restatement is impracticable, an explanation and description of how the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
IAS 2 INVENTORIES
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
Scope
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
work in process arising under construction contracts (see IAS 11 Construction Contracts
financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)
biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]
producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change.
commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.
Fundamental Principle of IAS 2
Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]
Measurement of Inventories
Cost should include all: [IAS 2.10]
costs of purchase (including taxes, transport, and handling) net of trade discounts received
costs of conversion (including fixed and variable manufacturing overheads) and
other costs incurred in bringing the inventories to their present location and condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
abnormal waste
storage costs
administrative overheads unrelated to production
selling costs
foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23]
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.
The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]
Write-Down to Net Realisable Value
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34]
Expense Recognition
IAS 18 Revenue, addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34]
Disclosure Required disclosures: [IAS 2.36]
accounting policy for inventories
carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
carrying amount of any inventories carried at fair value less costs to sell
amount of any write-down of inventories recognised as an expense in the period
amount of any reversal of a writedown to NRV and the circumstances that led to such reversal
carrying amount of inventories pledged as security for liabilities
cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or nature.
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