Principles of Accounting

Statement of Purpose

Accounting is one of the most important fields in the current world. a lot of interest has been placed in this field especially by different organizations because the aspect of finances is inevitable for the welfare of different organizations. For accounting to be effective and efficient in different organizational settings, there are specific rules or guidelines that must followed. These guidelines enhance accuracy and efficiency in different accounting procedures. It is important for accountants to ensure that these rules are adhered to when executing different accounting tasks. In this case, the principles of accounting which are basically the rules and regulations guarding different accounting operations have to be taken into considerations. Some of the common principles of accounting include: principles of regularity, sincerity, consistency, prudence, continuity, periodicity and principle of utmost good faith amongst others. These principles play an important role in the field of accounting hence why it is important that accountants ensure that these principles are followed at all times. The principle of consistency is one of the most important in the field of accounting and accountants should ensure that all the procedures related to accounting are according to the principle. Rarely have research projects been conducted on the basis of investigating the viability of accounting principles in the field of accounting. By investigating the principles of accounting, it would be easier to establish some of the problems facing the field of accounting. Once these problems are resolved, the operations relating to the field of accounting would be easy to execute. Being one of the principles of accounting, consistency ensures that most financial statements meet their objectives in the field of accounting.

Outline

• Introduction

• Background

• Discussion

• Conclusion

Introduction

Most organizations deal with matters related to finances at some point in their existence. Accounting is one of the fields that ensure that all the financial matters of the organizations are met. Dealing with finances is a very sensitive matter and this is the reason why accounting tries to ensure that all the aspects related to finances are carefully analyzed. Accounting is concerned with many operations which are concerned with monitoring finances in different organizations. It is the duty of accountants to ensure that the obligations of accounting are met. Many organizations fail to meet the objectives related to accounting and therefore end up in closure. Prosperity in the world of business is directly linked to the financial plans of an organization both in the short term and the long term. It would therefore be of great relevance for organization to ensure that the finance department is composed of people who are quite proficient in the field of accounting. This proficiency is important because some of the flaws which result to organizational failure is directly associated with the finance department whose main obligation is executing accounting tasks. Accounting assists in the making of future plans within an organization hence why it is considered to be one of the most sensitive departments. Monitoring of cash flow within the organization requires high levels of accounting techniques. The balance sheets in relation to the assets and liabilities of the business have to be well formulated. The profit and loss statement should also be precise in determining the liquidity of business or organization. For the financial statements to be able to meet the demands of the organization utmost accuracy and consistency is required from the part of the accounting technicians.

Background information

The accounting is one which is sensitive because it deals with finances. The many characteristics of money are what make the field of accounting very complex. This complexity is seen in different ways. The basic principles of accounting are applied in reducing the complexity of the accounting field. These principles are applied as the governing rules when it comes to executing various accounting operations. Accounting involves the induction of various documents which enhance the operations involved in accounting. These operations are concerned with coming up with different accounting documents. These documents are used in the short term and the long term operations of the business. The principle of consistency is one that has been violated in many accounting procedures. Consistency is very important because it ensures that the field of accounting is able to meet the objectives of the business with ease (Corbett 81). The balance sheet basically indicates the status of the business in terms of the assets and the liabilities. The assets of the business should therefore reflect on the balance sheet in a consistent manner. This would ensure that the analysis of the business is made in such a way that it no overcasts are made when creating the financial analysis. Apart from overcasts, down casting may also occur and this would automatically affect the welfare of the business. In creating the balance sheet therefore, it should be ensured that consistency is maintained as much as possible. Consistency would in turn result to high levels of accuracy. Accuracy would therefore ensure that effective financial casting is done for the welfare of the business. This would enhance the execution of specific business operations with ease. Many accounting firms have been unable to provide high quality services as a result of failing to adhere to the accounting principles required. The principles of accounting and especially the principle of consistency should be taken into consideration when creating different statements of accounts for different business operations.

The balance sheet statement is one of the most important statements of finance within any business setting. The balance sheet gives a summary of the entire balances of an organization in reference to the assets, liabilities and liquidity of the organization (White 45). For the balance sheet to be fully effective the principle of consistency has to be taken under full consideration. In this case, consistency would have to refer to the actual figures representing the position of the business in the market environment. Consistency would also entail the actual assets of the organization being posted. Consistency is the aspect of being true in posting the actual figures or value of assets in relation to their appreciation or depreciation. Failure to being consistent when creating the balance would imply that every single time the financial position of the organization would be flawed in relation to the assets and liabilities. At one point the business may seem to be in a good state and able to handle all the liabilities while at other times, the business may be viewed to be incapable of balancing its liabilities in relation to its assets. Such flaws would affect the organization or business in that it would be difficult to determine the future of the business as far as far the assets and liabilities are concerned.s

The above figure is that of a sample balance sheet. The balance sheet gives a financial analysis of an organization over a 3 year period. Lack of consistency in such a balance sheet would make it difficult to make financial planning of the successive years. As observed, the balance sheet’s main focus is one the assets and liabilities of the business over the 3 year period. In the figure, the long term liabilities seem to depreciate in a consistent manner. Lack of adhering to this consistency would interfere with the future financial plans of the business. The paid in capital has been consistent over the three year period. The total capital of the business has increased drastically and this may be due to the increased needs of the business. Consistency can also be observed in the long term assets of the business. The principle of consistency can therefore be seen in a number of sections in the balance sheet. The financial projections of the business would contain fallacious information if the aspect of consistency lacks in the balance sheet statement.

The profit and loss statement is also referred to as the income statement. This financial document is important for the welfare of the organization because its main objective is to show whether the organization is operating at a profit or loss (Corbett 82). Another important application of the income statement is that it enables the organization or business to be in a position to analyze and compare the profits and losses of different financial periods. So as to meet all these obligations, consistency is required when preparing the profit and loss statement of any organization. Consistency would ensure that the actual losses are correctly indicated over a specific financial period (White 32). Likewise, the profits gained by the business would have to be accurately spread over a specific financial period. Failure to being consistent when preparing the income statement would place the business or organization in a difficult state where it would not be in a position to predict any future profits or losses that would be made. Lack of inconsistency in the income statement would also mean that an organization or business would not be in a position to determine whether it is operating at a profit or loss. This is risky because at some point the organization may come to a standstill due to huge losses made but could otherwise been avoided lest the income statement was consistent over a particular financial period.

Below is a sample income statement otherwise known as profit and loss statement. Consistency can be observed in the income statement in various sections of the business. The direct costs of the business can be observed to increase in a consistent manner. With such information, the business would be in a position to make prediction of the projection in the fourth year. Likewise, the sales can also be seen to increase in a consistent manner and this may be in relation to the investments made by the business. Such consistency would enable the business predict the expected sales in the future. On the same note, the business would be in a position to improvise strategies aimed at increasing the sales over the next years. The gross margin is also consistent and this can be related to the business operations over the three year period. By having such information on the gross margin of the business, the business would therefore ensure that the gross margin is maintained at that level over the years which follow. Some of the expenses can also be seen to maintain some form of consistency over the years. However, expenses may at some point increase in drastically and this may be as a result of external factors such as the status of the economy. Most of the fixed assets depreciate consistently.

The cash flow statement is another financial document that requires high levels of consistency when being prepared. The main purpose of the cash flow statement is recording the way cash moves in and out of the business (Bernstein 67). It indicates some of the changes in the balance sheet and levels of income for the business so as to determine the system of cash flow in and out of the business or organization. Consistency is required when formulating the cash flow statement. This is because it would assist in ensuring that the flow of cash is monitored and that whenever cash flows into the business, it results to a gain. This does not mean that whenever flows into the business, it must have made a profit but there should be an increase in the financial value of the business. The contrary is equally true but does not imply that whenever cash moves out the business a loss has been incurred. Consistency would be of great significance in monitoring the way cash comes into the business and for what reason. Equally, the statement would be able to show how cash moves out the business and for what reason.

Discussion

The principles or standards governing accounting are many and these are the ones which make accounting effective and efficient in many financial operations. Consistency, as discussed, is one of the most important standards. Accuracy is attained through consistency as well as continuity and periodicity. Books of accounts should be consistent because lack of consistency results to many errors which may interfere with the financial planning of businesses or organizations over a specific financial period. Rules and regulations such as the principles governing accounting are applicable not only in accounting but in other business ventures as well. These principles are important because they assist in ensuring that there is high quality work in the end. The finance department is crucial for the welfare of any organization and this is why adhering to the principles governing accounting is of great significance. The system of ensuring consistency can be observed to play an important in every aspect of accounting. Consistency is important in not only the accounting field but in other economic fields as well. The benefits of maintaining consistency can be seen in different situations. Many businesses have been successful in different market settings as a result of maintaining high levels of consistency in different ventures. However, in the field of accounting, consistency plays a very crucial role and should therefore be given full attention in any case whatsoever. The prosperity and success of many businesses depend on the finance department and this is where the aspect of accounting comes into play. Accounting can therefore be observed to be at the core of many businesses and organizations. This is because the finance department is useful in monitoring the flow of money in the entire ventures of the business. Accounts should therefore be handled with a lot of sensitivity and this is by ensuring that all the accounting principles are taken seriously.

Conclusion

Being one of the most desirable professions in the world, accounting is faced with a lot of challenges most of which are caused by human errors. The principles which govern the accounting profession are very important especially when it comes to preparing various accounting documents. The statements of account apply these principles so as to provide accurate financial information on the welfare of a business. Consistency is one of the principles that should adhere to at all times. As observed, consistency is seen to play an important role in all the statement of accounts documents. Without consistency, it would be difficult for businesses to make some of the crucial financial predictions over a specified period of time. These predictions are important because they enable the business seal some of the major loop holes in financial planning. Financial prediction is also important in making market analysis in different situations. This is important for the welfare of any business as it would be in a position to set sensible prices for the products and services in the market. This could not be possible without the aspect of consistency being taken the seriousness required. This does not however imply that the other principles of accounting are not important. The other principles of accounting are equally important and should be focused on at all times. This is because the principle is one that ensures that the financial documents achieve their objectives. Consistency also ensures that there are high levels of accuracy when formulating different statements of accounts. To enhance proficiency and effectiveness of accounting in any business, the principles of accounting should be applied.