In business there are two types of stakeholders that’s: internal stakeholders and external stakeholders. Internal stakeholders mean those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. All shareholders want to see the use of their investment and thus asses the management through the financial statements. Because financial statements are very useful for businesses. Stakeholders of the company require the financial information for following reasons. To know how well the company is doing. To find company has earned more money than they spent. To get an idea about strategic and tactical plans of the management. To provide information to make decisions who make decisions about organisatoin. Avoid dissimulations and corruptions of the organisation. The usefulness of financial statements to different stakeholders isContinue reading
Accounting Basics
Approaches to Accounting Theories
Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule. It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach. Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach. This kind of approach uses a formula to come up with an income based on value, not costs. On the other hand, positive or descriptive theoretical approach to accounting theory is a set of theories that is concerned with what accountants actually do. These theories rely on a process of inductive thinking, which involves makingContinue reading
Accounting Standards Approach: Principles-Based vs Rules-Based
Accounting standards plays a vital role in financial accounting and reporting in order for investors to make good decisions. Rules-based accounting is generally a list of detailed rules that must be followed when preparing financial statements. Principle based standards derive from a conceptual framework that provides for broad ‘principles’ to be adopted within standards and also requires professional and managerial judgment in relevance to particular transactions and events. The difference between rules-based and principles-based standards is not clear and is subject to a variety of interpretations. But there is a generally held outlook that the FASB’s standards are rules-based and the IASB’s standards are principles-based. Principles-Based Accounting Standard Principles-based accounting standards are based on a conceptual framework. Such standards require a clear hierarchy of overarching concepts, principles that reflect the overarching concepts and limited further guidance. The principles-based deliver a comprehensive way in preparing the financial statement yet has theContinue reading
Accounting Basics : The Accounting Cycle Explained
The accounting cycle is a sequence of steps starting with recording transactions and takes it to the preparation of financial statements. The main purpose of recording transactions and keeping track of expenses and revenues. The accounting cycle is a set of steps that are repeated in the same order every period. The highest of these steps is the preparation of financial statements. Some companies prepare financial statements every three months while some complete twelve months. 10 Steps of Accounting Cycle Explained The first step is to analyze and record transactions in the journal. This step is where information must be carefully read to determine if a transaction is an asset, liability, common stock, retained earnings, revenue, dividend, or expense. In this step, each account must be determined to see if the amount increases or decreases. Those increases and decreases should be recorded as a credit or debit before entering theContinue reading
Evaluate a Businesses Overall Financial Performance Using Profitability Ratios
An accounting ratio is made by dividing one account’s transactions into another. The aim is to achieve a comparison that is easy as well as beneficial to clarify. Evaluate ratios for one Industry enterprise over several years. A graph of the ratio may allow a long-term trend. The same ratio is from many firms of similar size in the same industry. These ratios are used to assess performance and, with other data, forecast prospect profitability. Along with that is the future viability in addition to the soundness, which will repay loans as well as credit, additionally pay the interest along with dividends. Since profits are divided amongst shares, the profit per share indicates a possible dividend. While profitability ratios “evaluate a business’ overall financial performance through appraising its capability to produce revenues in surplus of service costs as well as other expenses. There are at least four profitability ratios, whichContinue reading
Participative Budgeting – Definition, Advantages and Disadvantages
Participative budgeting is the situation in which budget are designed and set after input from subordinate managers, instead of merely being imposed. The purpose of participation in budget setting is to divide responsibility to subordinate managers and set a form of personal ownership on the final budget. The budgeting approach in which the subordinate participates in budget setting, they provide their own information that the supervisors use to formulate the self-imposed budget or participative budget. Organization performance is expected to be well improved by making it possible for the supervisor to allocate the resources more efficiently. According to the information provided by the subordinate, the right resources-allocation decisions are making, the participative budgeting will improve the organization performance. Participation in budget setting has its desirable effects on an organization performance these include the transference of information from subordinate to superior so that it can increase subordinate’s job satisfaction. In addition,Continue reading