The methods and principles of accounting Essay Example | Topics and Well Written Essays - 1250 words

The methods and principles of accounting - Essay Example Rules and principles of accounting are basically designed in such a way that they provide certain standardized frameworks which help in the assessment of the financial position of a firm or a government. Hence there may always be a difference from one country to another in the accounting practices that are followed. There can be a major influence of the accounting consequences of different kinds of available options with which the decision makers are faced with, on the final decision taken. Thereby, the choice between the different methods of accounting may not limit themselves to just the portrayal of results; they may also play a vital role in the actual shaping of future decisions including the organization's financial structuring, functioning and activities. Accounting is best known as the language of business and communicates the results of the business. As the accepted Lingua Franca in addition to being the medium of communication it also satisfies the role of understanding the existing as well as potential additions to the available literature. As with every credible language, Accountancy also has its own rules and syntax which comprises the principles on which the system is based, known as the Generally Accepted Principles (GAAP), International Accounting Standards, and US GAAP etc. forming the theoretical base of Accountancy, and the Double Entry bookkeeping for recording the transactions providing the Practical Base of the system. To communicate the necessary, vital and relevant information, the requirements of the prospective users are identified and a systematic process is adhered to resulting in the formation of "Financial Statements." They are primarily the Income Statement and the Position Statement which are popular as "Trading and Profit & Loss Account" and the "Balance Sheet" respectively. The Balance Sheet shows the financial status of a business at a given point of time. That is the reason, the heading of Balance Sheet reads as "Balance Sheet of Xxx Company as on 31st March, 20xx." The balance sheet shows the amount of funds the owner has in the business. To determine this amount, the assets owned are listed and a value is placed on them. Liabilities and their values also are listed. The difference between assets and liabilities is equal to the net worth, or the owner's equity in the business (Klinefelter, 2000). The income statement on the other hand reflects the performance of the entry over a period of time and hence it is headed as "Income Statement of Xxx Company for the year ended 31st March, 20xx." The major purposes of financial reporting are: Providing information which in turn becomes the basis for exercising decisions and actions by the potential users, Reflect the financial progress and present health of the business, Aid in the formulation of policies and procedures for the smooth and efficient conduct of the business, Enable the management to discharge their obligations and stewardship functions effectively Financial Reporting The end-users of financial statements need not necessarily be those of finance background. They might not be in a position to understand the complex technicalities of financial statement. People who do not have detailed understanding of the financial