Blog

Nature and Objective of Financial Accounting

Nature and Objective of Financial Accounting, Accounting Principles and Regulatory Framework.

Task 1
Pros and cons for four forms of business organizations
There are four types of business organizations, which is Sole Proprietorship, Partnership, Corporations and Limited Liability Company. The pros and cons will help the business owner to decide which type of business entity will be the best for them.
Sole Proprietorship
Sole Proprietorship means that the person who owns the business or the owner has the responsibility for the business operations for example, Freelancer and online business. They do not form an actual business but they still have the chance to apply license for their business operations.

Pros
Most important, the owner has the right to control the company assets and right to making decisions for their business. Besides, it is simple for them to establish the business or dissolve it. There is no profit sharing for them as just the owner had control over the business.
Cons
Owner of the business have the unlimited liability and they are responsible to the business debts problems. It is risky for the business because the decision making are all onto the owner itself. Plus, it is difficult to hiring manager because the profit are not shareable.

Partnership
Partnership are more likely with the point of Sole Proprietorship. The business is formed when there are two or more people to start it and manage to make profit from the business. The main point is the business itself need to have two or more owners.

Pros
Business capital is larger because there are more owners who run the business. Besides, loss of business are also shared by the owners. Each owner has their different skills to help and strengthen the business. Plus, hiring employees are helpful to the company as the business are shareable.

Cons
Each owner has unlimited liability and they are responsibility to the debts problems as well. Business profit must be share to each owner themselves. Each owner has different opinion or agreements which will lead the effect of clashes between partners.

Corporations
Corporations may look like same with Partnership, but it is not. Corporations are more complex and expensive to set up because the business include the business shares. Shareholder, Board of Directors and Officers have the right to control over the business. Corporations are divided into two types, which is Sdn Bhd and Bhd.

Pros
Shares are easily transfer among different owners of the company. Has higher chance to raise the capital through issuance of shares. If an owner quits or dies, the corporation are not necessary to shut down.

Cons
The cost of establish a corporation is high. The shareholders do not have the right to control the corporation. The requirements are strict because of the government regulations.

Limited Liability Company
Limited Liability Company, which is LLC. They provide protection to limited liability. Of course, owners need to fill some paper works in order to get their help.

Pros
Any owner can involve to LLC. They won’t have any personal debts or liabilities. Owner also can choose LLC to tax corporations or partnership.Cons
Requires registration on filling the form. High regulatory requirement than corporation.

Difference Between Financial Accounting and Management Accounting
Why financial accounting and management accounting is different although they are in same category? There is a reason. Financial accounting are more focus on financial statements which consist of paper works. In order to show the financial health of the company, financial reports must be handed up like annually period or different period, depends to the company law. The example of financial reports are balance sheet, income statements and cash flow statements. While managerial accounting is providing helpful information in order to help the company to be better. Much more on planning the goals of company, the manager has to plan, making decision and control. Managers will help the company to achieve the goals as they need to plan how to achieve. Plus, in order not to let the company to have a tough time on the budget issue, budgeting is important to let them analysis and plan to control the usage on budget for help them in company’s future market.

Accounting Concept.

Accounting is a language of business. To understand the principles of accounting, accountants are taught to understand the major concepts of accounting. The following list are 10 major accounting concepts that accountants need to follow.

Money Measurement Concept
-In world of accounting, anything that is relevant to transaction are considered in terms of cash or money. Since the transaction that has made must be relevant to money, those transactions will only be recorded. While the transaction that are not relevant to money will not be recorded. As example, terms like assets which is premises, buildings, vehicles are not relevant to money, so they will not be recorded. At the same time, terms like cash is bank or cash in hand are relevant to cashflow activities, so they will be recorded.

Business Entity Concept
-In accounting, business is assumed that they are completely separated from its owner because business was existed. Only transaction of the business was recorded in the books of firms and the books of firms will not recorded any private transaction from business owners that are not relevant to the business. The objective of this concept is to separate the transaction between business transaction and private transaction. This concept should be followed by any organizations and any companies.

Going Concern Concept
-This concept which assumes that a business will have a long-life continuity and will continue to operate their business for a certain period. Business assets will be used to produce the income to the business. This account concept will record all the assets value in terms of buying price and not the value in terms of selling price because those assets are not for sales, but it will continue to use in the business. When the business is totally let other individual or company to handle, then the value of the assets will be shown after the assets are sold out.

Cost Concept
-Cost concept means a business transaction that recorded must follow the static value, which is follow the value of the assets when you acquire at that time. All the assets that acquire will be recorded on time and the value of the assets. The cost will be remained even the market value or the asset value has changed. Historical cost has become a basis in accounting records because the cost is more objective and may be the evidence when the transaction is made. This concept also used to record liability value and capital value.

Accounting Period Concept
-Accounting period is a time of a business which has been made so that the financial information and trends will known on time to time. This period will show the earning and expenses of the business after the transaction has been made. Accounting period are always same and structure for a business, which is considered as 1 year, 6 months, 3 months or 1 month only.

Conservatism Concept
-According to this concept, earnings will not be reported if it doesn’t happen. Therefore, loss prediction can be made but earnings prediction can’t be made as it is only a prediction and didn’t happen yet. This means that firms only can think that loss is reasonably possible, and earning are just reasonably certain.

Materiality Concept
-For every single business expenses that like machines which is cost higher than normal will be only recorded as assets. Only major value of assets will be recorded, and minor value of assets will be ignored or not recorded in the books of firm. Minor value of assets such as stationery will not be recorded in book firms but only major value of assets such as computer will be recorded.

Objectivity Concept
-All the financial statements and accounting transaction should be supported by invoices, receipts or business documents as their evidence. These evidences should be objective so that they can support the transaction record documents. Financial records must be fully recognized based on verifiable evidences and objectively to be acceptable universally.

Accounting Equation Concept
-In accounts, every business will be recorded in two different accounts in different side with same amount. This concept assumes one account is debit and another account are credit. At least there will be two changes that will be recorded in assets account, liability account or capital account when the transaction has been made. However, debit always equals to credit. Therefore, the equation should be like this.

Assets = Capital + Liabilities
Anyway, different accounting process will depend on how the equation will solve the accounting problems.
Accrual concept
-According to this concept, revenue and expense are only recognized when they are consumed and not the payment was made. But in actual accounting situation, the revenues and costs are only recognized when they are received or paid. This had made some adjustments in income statement regarding to the revenues and costs.