Basic Sccounting Principles

Question: Discuss about the Basic Sccounting Principles. Answer: The four principles of financial accounting are as follow : 1.Relevance:The accounting principle states that to be relevant the financial statements must be prepared timely. The characteristics of relevant financial statements are that they must be understandable, timely, useful and needed for making decisions. 2.Comparability: One of the main purposes of financial statement is that the statement of one financial year must be comparable to another year, so that the company can evaluate the change in performance over the years. So, this is possible only when consistent accounting principles are used to prepare the statements over the years. 3.Materiality: Size and importance are the main criteria of materiality concept. A small petty cash expense may be immaterial to a big company and they might not record it but for a company which has a small turnover, this expense may be significant and material to the company. 4.Conservatism: Conservatism principle states that losses and expenses to be recorded as soon as they are accrued but the profits and assets to be recorded only when they are realised. The main aim of the principle is to show lower profits in the balance sheet because the revenues and assets may be delayed. It is very important to keep records of inventory, to find out quantity of goods in hand for effective working of a company. Two such methods are used to keep the track know as periodic method and perpetual inventory system. The main differences between them are as follow: 1.In the perpetual inventory system the transaction of inventory movement are recorded as and when it happens where as in periodic inventory system, the movement of inventories are recorded at periodic intervals. 2.In perpetual inventory system the activity of the business is not affected where as in periodic inventory system the operation of the business needs to be stopped at the time of valuation. 3.In periodic method a separate purchase account is used to record the purchases where as in perpetual method a common inventory account is maintained to record the purchases and sales. 4.Though perpetual inventory system is far more efficient, reliable and preciseas compared to periodic inventory system but it is also more expensive than the latter method. 5.Book records are the basis of perpetual inventory system where as physical verification is the basis of periodic inventory system. 6.Real time information of the inventory as well as the cost of sales is provided by the perpetual inventory system where as information about inventory and cost of goods sold are provided by the periodic inventory system. 7.Businesses which are small and have high sales frequency then periodic system of inventory can be expensive where as businesses of nature where sales volume is low then easy tracking of inventory can be done as per periodic method. Four important users of financial accounting are as follows: Owners and investors: The owners and investors are one of the most important users. The owners need to study, analyse and compare the financial statements of different years to make future decisions and to see whether the company is going on the right track or not. Investors always analyse a companys financial accounts before investing their money as they want the assurance that they will get a fair return in future of what they are investing today. They basically study the risk and return relationship of a company and to force whether the company will be able to pay dividends to them. Lenders and Creditors: A company raises finance from banks and financial institutions to run its operations. They study the financial accounts to know the liquidity of the firms to see whether the firm will be able to repay the loan and interest due at the time of maturity. Creditors are generally the suppliers which sell the goods to their customers on credit terms. They need to know the short term liquidity, cash flows and other aspects of an organisation to see whether they will be repaid or not. They set the terms of credit based on the customers past performance and their financial status. Employees: The better a company performs; the better it is for the employees. Employees are direct beneficiaries of a companys performance. They need to know the future prospects of their employment in the current company and also stability of their pension and retirement funds. They try to assess whether a company will expand, merge or any other major step which would directly affect their job security. Government: A company is required to follow many rules and regulations to perform in a desired manner. The tax authorities are interested to know the tax amount due and whether they have been paying the sufficient amount or not. They also use the financial accounts to get a knowhow of the performance of the economy and to make required financial and industrial decisions. Nowadays government also keeps a check whether a company is following the required corporate social responsibility or not as it is believed that because they are using the societys resources, they should also work towards it. After my graduation I would like to pursue MBA in Finance. Big four refers to the largest accounting firms in the world. They are Pricewaterhouse Coopers(PwC), Delloitte, Ernst Young(EY), Klynveld Peat Warwick Goerdeler(KPMG). They provide auditing and accounting services all over the world. They are also the certified public accounting(CPA) firms and thereby the publicly traded U.S. companies get their auditing done by these firms. The size of the Big 5 Company is much smaller as compare to the size of each Big Four companies. These firms also provide tax advises and other management and assurance services. The main functions of these Big four companies are: Consulting: They generally advise the firms on the implementation of their accounting process and system. Now they focus on more strategic areas like mergers, acquisition and their business strategy. Audit: Auditing is the core area where these Big4 companies work. Their independent team of accountants review the financial information to check whether there is fair presentation of information or not. After the completion of their work, they generate an opinion in relation to the financial statements. Tax: Big4 companies help their clientele to prepare their financial information in such a way that they will have to bear the minimum tax-costs. In U.S the tax procedure are cumbersome and also there are heavy penalties for non compliance of regulations. So, these companies also help them in filing their returns. Transactions: by transactions we mean activities like mergers, acquisitions, spin-offs etc. Big4 companies help in various activities before such transactions and also to facilitate such transactions. Like they review the firm which is to be acquired or merged with, they build a valuation model and other activities. References Basic accounting principles, viewed 19 January 2017, https://www.accountingtools.com/basic-accounting-principles Comparability/consistency, viewed 19 January 2017, https://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/comparability.html Jan, I, Perpetual vs. periodic inventory system, viewed 19January 2017, https://accountingexplained.com/financial/inventories/perpetual-vs-periodic-system Ingram, D, Difference between perpetual and periodic inventory system, viewed 19 January 2017, https://smallbusiness.chron.com/difference-between-perpetual-periodic-inventory-system-3224.html Who are the big4?, viewed 19 January 2017, https://www.big4guide.net/who-are-the-big-4/ Kolakowski, M 2016, Big four public accounting firms, viewed 19 January 2017, https://www.thebalance.com/big-four-public-accounting-firms-1287328