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FACC 1

UNIT I

Accounting Concepts, Conventions and Principles and an overview of Emerging Trends in Accounting

 


Overview:

Accounting concepts defines the assumption on the basis of which financial statement of a business entity is prepared. Concepts are those basic assumption and condition which form the basis upon which the accountancy has been laid.

Accounting principles

  1. They should be based on real assumption.
  2. They must be simple, understandable and explanatory.
  3. They must be followed consistently.
  4. They should be able to reflect future predictions.
  5. They should be informational to users.

Accounting convention emerges out of accounting practices, commonly known as accounting principle, adopted by various organizations over a period of time. Accounting bodies may change any of the convention to improve the quality of accounting information.

The basic accounting concept is as follows:

 

  1. Money measurement concept:

A unit of exchange and measurement is required to uniformly account for a company's transactions. The common denominator chosen in accounting is the currency unit. Money is the lowest common denominator for measuring the exchangeability of goods and services such as labor, natural resources and capital.

 

The concept of monetary measurement considers accounting to be a process of measuring and communicating financially measurable company activity. Obviously, the financial statements should show the money spent.

 

The concept of measuring money means two limitations of accounting. First, accounting is limited to the generation of information expressed in monetary units. It does not record and convey other relevant but non-monetary information. Second, the concept of monetary measurement concerns the limitation of the monetary unit itself as a unit of measurement.

 

There are concerns about purchasing power, which is the main characteristic of currency units, or the amount of goods and services that money can obtain. Traditionally, financial accounting has addressed this issue by stating that the concept assumes that the purchasing power of a currency unit is stable over the long term or that price changes are not significant. Although still accepted in current financial reporting, the concept of stable monetary units is subject to continuous and permanent criticism.

 

2.     Entity concept:

The concept of an entity assumes that its financial statements and other accounting information belong to a particular company that is different from its owner. Therefore, an analysis of business transactions, including costs and revenues, is expressed in terms of changes in the company's financial position.

Similarly, the assets and liabilities devoted to business activities are the assets and liabilities of the entity. The company's transaction is reported, not the company's owner's transaction. Therefore, this concept allows accountants to distinguish between personal and commercial transactions. This concept applies to sole proprietorships, partnerships, businesses, and small businesses. It may also apply to multiple companies, such as when a segment of a company, such as a department, or an interrelated company is merged.

 

3.     Dual aspect concept:

This concept is at the guts of the whole accounting process. Accountants record events that affect the wealth of a specific entity. The question is which aspect of this wealth is vital. Accounting entities are artificial creations, so it's essential to understand who their resources belong to or what purpose they serve.

It's also important to understand what sorts of resources you manage, like cash, buildings, and land. Therefore, the accounting record system was developed to point out two main things: (a) the source of wealth and (b) the shape it takes. Suppose Mr. X decides to line up a business and transfers Rs. 100,000 from his personal checking account to a different business account.

He may record this event as follows:

Obviously, the source of wealth must be numerically adequate to the shape of wealth. S (source) must be adequate to F (form) because they're simply different aspects of an equivalent thing, that is, within the sort of equations.

In addition, transactions or events that affect a company's wealth got to record two aspects so as to take care of equality on each side of the accounting equation.

 

If a corporation acquires an asset, it must be one among the following:

(A) Other assets are abandoned.

(B) There was an obligation to pay it.

(C) Profitable and increased amount of cash the operator has got to pay to the owner.

(D) The owner funded the acquisition of the asset.

This doesn't mean that the transaction affects both the source and sort of wealth.

 

There are four categories of events that affect accounting equations:

(A) Both the source and sort of wealth are increased by an equivalent amount.

(B) Both the source and sort of wealth are reduced by an equivalent amount.

(C) Some increase without changing the source of wealth, others decrease.

(D) Some sources of wealth increase and a few decreases without changing the shape of wealth retention.

 

The above example shows category (a) because once you start a transaction for an entity, the source of wealth and therefore the sort of wealth, cash, increases from zero to rupees. 1,00,000. In contrast, X may plan to withdraw Rs. 20,000 cash from business.

 

In that case, the financial position of the entity would be:

It is essential to know why each side of the equation are reduced. By withdrawing cash, X automatically reduces the availability of personal funds to the business by an equivalent amount. Now suppose Mr. X buys a listing of products for Rs. 30,000 in cash available. His capital supply remains an equivalent, but the composition of his business assets does.

 

The two aspects of this transaction aren't within the same direction, but are compensatory and are increasing stocks that set a cash reduction. Similarly, sources of wealth are often suffering from transactions. So, if X gives his son Y, it becomes Rs. 20,000 shares of the business by transferring some of his own profits, the consequences are:

 

However, if X gives YR. He personally receives $ 20,000 in cash, and when Y puts it into the business, each side of the equation are affected. Y capital Rs. 20,000 is balanced by additional Rs. 20,000 in cash, X capital remains rupees. 80,000.

 

4.     Periodicity Concept:

According to this concept, accounting should be created after all periods, not at the end of the entity's lifetime. This period is usually one calendar year. In India, it lasts from April 1st of the year to March 31st of the following year.

This is also known as the concept of fixed accounting periods. According to the concept of "going concern", an entity is expected to have an indefinite life. It is inconvenient for an entity to measure the performance it has achieved in the normal course of its business.

If a spinning mill lasts for 100 years, it is not desirable to measure its performance and financial position only at the end of its life.

 

Therefore, a small but feasible portion of the entity's life cycle is selected to measure performance and confirm financial position. A year is usually spent measuring performance and assessing financial position. However, it can be 6 months, 9 months, or 15 months.

 

According to this concept, accounting should be created after all periods, not at the end of the entity's lifetime. This period is usually one calendar year. In India, it lasts from April 1st of the year to March 31st of the following year.

 

Therefore, you do not need to look at revenues and expenses over an excessively long time frame for performance evaluation. This concept makes the accounting system work and makes the term "occurrence" meaningful. Given the infinite time frame, nothing happens. There can be no unpaid expenses or undeceived income. Accrued expenses or income accrued only occurs when you refer to a finite time frame called the accounting period.

 

 Therefore, the concept of periodicity is simplified in the following ways:

(I) Comparison of financial statements for different periods

(Ii) Unified and consistent accounting to identify business profits and assets

(Iii) Matching costs and regular income to obtain correct results of business operations

This concept is derived from the concept of going concern. As we have seen, companies are expected to continue their business indefinitely unless they know the opposite. However, investors and other users of corporate accounting information cannot afford to wait forever for the information they need for their diverse needs. To meet their needs, the "lifetime" of an entity is divided into any specified time period that is shorter than the lifespan of the enterprise. The normal reporting period is 12 months (1 year). Companies also report financial information summarized on an interim basis: semi-annually, quarterly, and even monthly. This is a concept called periodicity, period assumptions, or simply accounting periods. Periods are usually identified in the financial statements.

 

Periodicity allows report users to compare information over specific time periods and between companies in the same industry (as a basis for decision making). Aside from these advantages, the concept of periodicity has certain drawbacks. For example, this concept assumes that you can identify a business transaction over a specific time period, even if you know that some transactions (such as the purchase of fixed assets) will affect many periods. Also, as the concept implies, determining income on a regular basis leads to a comparison of the results of consecutive periods. Such comparisons can be misleading as the patterns of business activity change over time. In addition, recurring accounts require arbitrary allocation and allocation methods.

 

 

5.     Realization or Cognitive concept:

The concept of realization or recognition indicates the amount of revenue that should be recognized from a particular sale. Realization rules help accountants determine if revenues or expenses have been incurred. This allows accountants to measure, record, and report on financial reports.

 

Realization refers to the inflow of cash or cash charges (accounts receivable, accounts receivable, etc.) resulting from the sale of goods or services. Therefore, if the customer purchases Rs. If you pay 500 worth of goods in cash at a grocery store, the store will realize Rs. 500 from the sale.

 

If the clothing store sells Rs suits. 3,000, if the buyer agrees to pay within 30 days, the store will realize Rs. From sale to 3,000 (accounts receivable) (conservative concept), provided the buyer has a good credit record and the payment is reasonably secure.

 

The concept of realization states that the amount perceived as revenue is reasonably certain to be realized, that is, reasonably certain to be paid by the customer. Of course, there is room for difference in judgment as to whether or not it is "reasonably certain."

 

However, this concept explicitly acknowledges that the perceived revenue amount is lower than the selling price of the goods and services sold. The obvious situation is the discounted sale of goods at a price lower than the normal selling price. In such cases, the revenue will be recorded at a lower price rather than the normal price.

 

6.     Matching concept:

The concept of matching in financial accounting is the process of matching (associating) performance or revenue (measured at the selling price of goods and services offered) with labour or expense (measured at the cost of goods and services used) over a specific period of time. is. Targets for which income has been determined.

 

This concept emphasizes which item of expense in a particular accounting period is expense. That is, expenses are reported as expenses for the accounting period in which revenue related to those expenses is reported. For example, if the sales of some products are reported as revenue for one year, the costs for those products are reported as expenses for the same year.

 

The concept of matching only needs to be met after the accountant has completed the concept of realization. First measure the revenue according to the concept of realization, then associate the costs with these revenues. Cost matches revenue, but not the other way around.

 

Therefore, the reconciliation process requires significant cost allocation in acquisition cost accounting. Past (history) costs are investigated and steps are taken to assign a cost element that is considered to have expired service potential or to match it with the associated revenue.

The remaining component of the cost, which is considered to have continued potential for future services, is carried over to the past balance sheet and is called an asset. Therefore, the balance sheet is just a report of unallocated past costs waiting for the estimated future service potential to expire before it matches the appropriate revenue.

 

7.     The concept of accrual accounting:

According to the Financial Accounting Standards Board (USA):

"Accrual accounting is that the financial impact of transactions and other events and situations that affect a corporation on cash, not only during the amount during which it had been received, but also during the amount during which those transactions, events and situations occur. Accrual accounting is paid to the corporate as more (or perhaps less) cash spent on resources and activities, also because the start and end of the method. it's associated with the method of being returned. We recognize that purchases, production, sales, other operations, and other events that affect a company's performance during a period often do not match the receipt or payment of cash for that period. "

 

Realization and matching concepts are central to accrual accounting. Accrual accounting measures revenue for a period of time as the difference between the revenues recognized during that period and the costs that match those incomes. In accrual accounting, the period revenue is usually not the same as the period cash receipt from the customer, and the period cost is usually not the same as the period cash payment.

 

Cash Basis Accounting:

In cash-basis accounting, sales are not recorded until the period in which they are received in cash. Similarly, costs are deducted from sales during the period in which the cash payment was made. Therefore, neither realization nor matching concepts apply to cash basis accounting.

 

In reality, "pure" cash-basis accounting is rare. This is because the pure cash basis approach requires the acquisition of inventory to be treated as a reduction in profit when paying the acquisition cost, not when selling the inventory. Similarly, the cost of acquiring plant and equipment items is treated as a reduction in profit if these long-lived items are paid in cash rather than after they have been used.

 

Obviously, such a pure cash basis approach would result in a balance sheet and income statement with limited usefulness. Therefore, what is commonly referred to as cash-basis accounting is actually a mixture of cash-basis for some items (especially cost of goods sold and period costs) and accrual-based for others (especially product costs and long-term assets). This mix is   sometimes referred to as modified cash-basis accounting to distinguish it from the pure cash-basis method.

 

Cash-basis accounting is most often seen in small businesses that do not have large inventories because they provide services. Examples include restaurants, hairdressers, hairdressers, and income tax filing companies.

 

Most of these establishments do not provide credit to their customers, so cash-basis profits may not differ dramatically from accrual income. Nevertheless, cash basis accounting is not permitted by GAAP for any type of entity.

 

8.     Consistency concept:

In this concept, once an organization has decided on one method, it should be used for all subsequent transactions and events of the same nature unless there is a good reason to change it. Frequent changes in accounting methods make it difficult to compare financial statements for one period with financial statements for another period.

 

Consistent use of accounting methods and procedures over the long term checks income statement and balance sheet distortions, and possible operations on these statements. Consistency is needed to help external users compare the financial statements of a particular company over time and make sound economic decisions.

 

9.     Conservatism concept:

 This trait can be considered a reactive version of the Minimax management philosophy. That is, it minimizes the potential for maximum loss.

 

The concept of accounting conservatism suggests that accounting should be cautious and cautious until the opposite evidence emerges, where and when uncertainty and risk exposure are legitimate. Accounting conservatism does not mean intentionally underestimating income and assets. It applies only to situations where there is reasonable doubt. For example, inventories are valued at the lower end of cost or market value.

 

In its application to the income statement, conservatism encourages recognition of all losses incurred or may occur, but does not recognize profits until they are actually realized. Early depreciation of intangible assets and restrictions on recording asset valuations have also been motivated, at least to some extent, by conservatism. Not recognizing revenue until the sale is made is another sign of conservatism.

 

10. Materiality concept:

The law has a doctrine called de minimis non curat lex. This means that the court does not consider trivial issues. Similarly, accountants do not attempt to record events that are not so important that the task of recording them is not justified by the usefulness of the results.

 

The concept of materiality means that transactions and events that have a non-significant or non-significant impact must not be recorded and reported in the financial statements. Recording of non-essential events is claimed to be unjustifiable in terms of their low usefulness to subsequent users.

 

For example, conceptually, a brand-new paper pad is an asset of an entity. Each time someone writes on the pad's page, some of this asset is exhausted and retained earnings are reduced accordingly. Theoretically, it is possible to see how many partially used pads the company owns at the end of the accounting period and display this amount as an asset.

 

However, the cost of such efforts is clearly unreasonable, and accountants are not willing to do this. The accountant took a simpler action, albeit inaccurate, that the asset was exhausted (expenditure) when the pad was purchased or when the pad was issued to the user from the consumable inventory. Treat as.

 

Unfortunately, there is no consensus on what it means to be important and the exact line that distinguishes between important and non-important events. Decisions depend on judgment and common sense. The accounting creator is meant to interpret what is important and what is not.

 

Perhaps the importance of an event or transaction can be determined in terms of financial position, performance, changes in an organization's financial position, and its impact on user evaluations or decisions.

 

11. Going Concern Concept:

An entity is considered to be in business unless there is evidence of opposition. Because companies are relatively permanent, financial accounting is designed with the assumption that the business will survive indefinitely in the future.

 

The Going Concern concept justifies the valuation of assets on a non-clearing basis and requires the use of acquisition costs for many valuations. In addition, fixed and intangible assets are amortized over their useful lives, rather than in shorter periods, in the hope of early liquidation.

 

This further means that the data transmitted is tentative and that the current statement should disclose adjustments to the statement over the past year revealed by more recent developments.

 

12.   Historical Cost Concept

The concept of cost is that the asset should be recorded at the exchange price, that is, the acquisition cost or the acquisition cost. Acquisition costs are recognized as an appropriate valuation criterion for recognizing the acquisition of all goods and services, costs, expenses and capital.

For accounting purposes, business transactions are usually measured in terms of the particular price or cost at which the transaction occurred. That is, financial accounting measurements are based on exchange prices, where economic resources and obligations are exchanged. Therefore, the quantity of an asset listed during a company's account doesn't indicate what the asset could also be sold for.

The concept of acquisition cost means there's little point in revaluing an asset to reflect its current value, because the company has no plans to sell its asset. Additionally, for practical reasons, accountants like better to report actual costs over market values that are difficult to verify.

 

Accounting Principles

The basic assumptions and concepts mentioned above have been modified to make accounting information useful to a variety of stakeholders. The principles of these changes are as follows:

Principles are:

1. Cost-benefit

2. Importance

3. Consistency

4. Be cautious

 

  1. Cost-benefit Principle

This amended principle states that the cost of applying the principle must not exceed the benefits obtained from it. If the cost is greater than the profit, then the principle needs to be changed.

2.     Materiality Principle

The principle of materiality requires that all relatively relevant information be disclosed in the financial statements. Important non-essential information is omitted or merged with other items.

3.     Principle of Consistency

The purpose of the principle of consistency is to maintain the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously adhered to and applied annually. Comparing the financial results of a business between different accounting periods is important and meaningful only if you follow consistent practices in reviewing them. For example, asset depreciation can be provided in a variety of ways, but whichever method you choose, you must do it on a regular basis.

4.     Principle of Prudence (conservatism)

The principle of prudence takes into account all expected losses, but leaves all expected benefits.  For example, when valuing a stock in trade, the lower of the market price and cost is taken into account.

 

Key takeaways:

  1. Accounting rules are guidelines that help companies determine how to record business transactions that are not yet fully covered by accounting standards.
  2. They are generally accepted by accounting institutions, but are not legally binding.
  3. Accounting rules no longer apply if the supervisory body has guidelines that address the same topics as accounting rules.
  4. There are four widely recognized accounting rules. Conservatism, consistency, full disclosure, and importance.
  5. Accounting policies are the procedures that a company uses to prepare financial statements. Unlike accounting principles, which are rules, accounting policies are the basis for following those rules.
  6. Accounting policies may be used to legally manipulate revenue.
  7. The choice of a company in its accounting policy indicates whether management is willing or conservative in reporting its revenue.
  8. Accounting policies should still adhere to generally accepted accounting principles (GAAP).

 


1. Inflation Accounting

Definition

Inflation is a situation in which the money in circulation is more than the production of goods and services, the purchasing power of money declines, and the prices of goods and services rise.

Accounting for price fluctuations (inflation accounting) has become synonymous with accounting for inflation due to the pressure of rising inflation prices, which has been unprecedented in most countries in recent decades. During periods of sustained price increases, acquisition costs lose their relevance and can even be misleading as a measure of economic value.

Description

Experience has shown that prices are not constant for products and fluctuate for economic, social and political reasons. Price changes can be due to inflation or deflation. Changes in price levels lead to an accurate presentation of financial statements prepared to give a correct overview of a company's financial discipline.

Financial statements are created based on acquisition costs, assuming the account unit is i. e. The rupee in our country has a static value. In real life, the value of money changes from time to time, showing a tendency for prices to rise during the post-WWII period.

Financial statements prepared based on the acquisition cost record have many drawbacks during periods of rising prices. they are:

1. Fixed assets are displayed on the balance sheet at acquisition cost. They do not show true present value and are often unrealistically low.

2. Depreciation is charged to the acquisition cost of the asset. As a result, depreciation is also inadequate to finance fixed asset replacement costs. Therefore, due to lack of funds, the company may have to face serious problems.

3. During periods of rising prices, cost of goods sold is calculated on a historical cost basis and does not take into account the decline in purchasing power of money, resulting in a significant overestimation of profits. Exaggeration of profits also puts a heavy financial burden on the company in terms of large dividends and large taxes.

In June 1969, AICPA's APB recommended adding a supplementary explanation to a company's annual accounting to disclose the impact of changes in general price levels on its financial position. Inflation accounting

Adjust them to reflect a company's financial performance and position over a particular period in a true and fair manner.

The balance sheet created at one point contains items such as cash, debtors, etc. that are listed in the current purchasing power. Other items, such as inventory, are displayed in monetary units that reflect recent purchasing power. In addition, some furniture, land, plants, equipment, etc. are listed at acquisition cost.

If general price levels are rising rapidly, the reported profits of companies that make up the majority of the assets presented in acquisition costs are exaggerated. If profits are overvalued, then costs and costs are undervalued. This can lead to fictitious profit reporting.

Therefore, accountants use the concept of inflation accounting to convert currency units with different purchasing powers into a single currency unit.

Purpose of inflation accounting

The purpose of inflation accounting is to adjust acquisition cost figures to substantive changes in the general level of the economy. The following are some of the purposes of inflation accounting.

(I). Eliminate various distortions incurred by financial statements based on acquisition costs.

(II). To provide a more meaningful inter-period comparison.

(III). Improving the meaning and measurement of income and expenditure in the face of changing purchasing power of money.

(IV). To improve organizational decision making.

 

In addition, inflation-adjusted information assists decision makers in the following ways:

1. Capital allocation is achieved through the capital market pricing mechanism. Incomplete or misleading financial information-based pricing can lead to inadequate pricing and allocation decisions. Inflation rates vary from year to year, so there are uncertainties in our business activities. In addition, management recognizes the need to incorporate inflation into business decisions, but there are hundreds of them because financial reporting does not systematically and explicitly recognize the impact of inflation. ..

When an inflation accounting system is introduced, it will support a variety of parties with interests and interests in the business. Shareholders, employees, external users, management, government.

2. Management is better prepared to tackle the problems caused by inflation and thus increase productivity in the long run.

3. Information about specific individual price changes For all companies and industry groups, it helps policy makers analyze the impact of different inflationary impacts on each industry. Inflation accounting also helps provide clearer disclosures, which in turn helps governments make various policy decisions.

4. Increases public understanding of the various impacts of business and inflation. This helps keep businesses from being seen as somewhat critical to the general public, and helps them expand, invest new, and mobilize funds to provide jobs for their continued use.

 

Inflation accounting method

Various ways are there to reflect the true changes in the purchasing power of money. However, no consensus has yet been reached on a particular solution, and professional agencies in various countries argue that this method should be accurate, rational, effective and easy to implement. Below are the various methods proposed for inflation accounting.

  1. Current Costing (CCA)
  2. Current Purchasing Power Law (C.P.P)

Inflation and productivity measurements

Productivity can be measured as the ratio of sales to number of employees.

Productivity = Sales / Number of employees

If inflation increases the selling price by 15% and the actual productivity and the number of employees are the same, the actual productivity does not change, but the productivity increases by 15%.

Strengthening budgeting

As a result of inflation, organizations may need to strengthen their budgetary readiness to use existing resources more effectively. Additional Budget Formats — You may need to prepare a requirement budget, as is currently done by some organizations.

Inflation and Dividend Policy During periods of inflation, the board needs to make sure that it primarily distributes its current earnings as dividends. During inflation, the initial cost may be in line with the earnings, resulting in higher net income than otherwise. The board must ensure that it has not unintentionally distributed revenue over the past few years.

Inflation accounting restrictions

Financial statements prepared on the basis of historical cost do not, in principle, describe the actual situation of the organization. The figures in the financial statements do not reflect the current values. Nevertheless, accounts created based on acquisition costs have the following advantages over other accounting systems:

  1. It is based on actual events and data.
  2. It is widely used and understood by everyone.
  3. You can easily compare numerical values   for a certain period of time.
  4. It forms the basis of tax assessment.

Manipulating accounting records is difficult under acquisition costs.

Therefore, it is imperative to present inflation-adjusted financial statements to shareholders and other stakeholders. Still, there are many dissenting opinions about inflation accounting. They are:

(1) The credibility of financial statements is lost because it violates the concept of objectivity.

(2) This method is not accepted by the tax authorities.

(3) Inflation accounting may bring arbitrary profits.

Therefore, the main problem with inflation accounting is that this method did not come up with an accounting system that would satisfy everything. This method is still a long way to go, and an objective and simple method is being sought in its implementation, taking inflation into account.

 

  1. Creative Accounting

Definition of creative accounting:

It is characterized by excessive complexity and therefore the use of latest methods to characterize income, assets, or liabilities. As a result, financial reporting isn't boring in the least, but the appellation is "creative" because it's all the complexity of James Joyce's novel. The words "innovative" or "aggressive" are sometimes used.

Creative accounting may be a sort of lie, generally involving the preparation of monetary statements with the intention of misleading the reader of the financial statements.

Despite its deceptive intent, it examines and rejects arguments for considering creative accounting as not within the sort of lies. Next, we glance at the moral issues raised by creative accounting within the light of the literature on false ethics.

This document contains various excuses and assessments of justification for lying, which are considered here within the context of creative accounting. It are often concluded that even in situations where creative accounting will undoubtedly serve a valuable purpose, that purpose will function well, a minimum of through honest communication.

Creative accounting, also referred to as aggressive accounting, is typically the manipulation of monetary numbers within the letters of law and accounting standards, but it's very contrary to their spirit and of companies where accounting is meant to never provide a "truthful and fair" view:

(A) the standard purpose of creative accounting is to inflate profit figures. Some companies can also reduce the profits reported in good years to facilitate results. Assets and liabilities can also be manipulated to remain within limits like debt agreements or to cover problems.

(C) Window dressing has an equivalent meaning when applied to an account, but may be a broader term applicable to other areas. within the us , it's often wont to describe the manipulation of performance figures in investment portfolios. within the context of your account, "window dressing" is more likely to imply illegal or fraudulent practices than "creative accounting", but you ought to .

(D) Creative accounting techniques change over time. As accounting standards change, so do the technologies that employment. Many changes in accounting standards are aimed toward blocking certain ways during which you use your account. That is, those that shall do creative accounting got to find new ways to try to things. At an equivalent time, other deliberate changes in accounting standards open up new opportunities for creative accounting, and therefore the use of fair value may be exemplar of this.

 

Prevention of window dressing:

  1. Companies with the highest risk of fraudulent financial reporting tend to have one or more of the following attributes: Weak internal control. There is no audit committee. Family relationships between directors and / or officers. Assets and returns less than $ 100 million. And / or a board of directors controlled by an individual who holds significant shareholding and has little experience as a director of another company.
  2. To prevent creative accounting, experts state that accountants and managers should split the obligations of the internal control checklist. In addition, the Independent Audit Committee always needs someone with accounting background and audit experience to deal directly with external auditors. Investors need to diversify their investment portfolio to avoid problems related to creative accounting by a small number of malicious companies.
  3. The company must adhere to the ethical values   it has set in the long and short term. Accounting and accounting practices need to be consistent and show investors that they follow ethical practices in all financial transactions and reporting.
  4. According to Malford, an expert in this field, the most common creative accounting practices include improper revenue recognition and misinformation on expenses. However, Enron's game describes Malford, which involves a special purpose vehicle.
  5. Malford wrote and published the book before Enron's transaction was published, stating that Enron's "investors and creditors had not fully discounted the risks associated with the company's trading activities." We have included a special note in the preface regarding the accounting practices of the company.

 

Creative accounting methods:

1] First method:

While technically correct, many annual and quarterly reports and presentations have jumped heavily into theoretical scenarios where one-time "billing" of revenue is excluded. What this means is that, for example, the settlement amount in a proceeding is taken from the reported profits in one large chunk, even if the payment is gradual over time.

This practice calls a reservation. In many cases, when explaining quarterly results, the CEO might say: "If we didn't take this responsibility for the proceedings, we would have made this much money." Very often, it has been suggested that virtual situations become even more complex. The main "creative" aspect of this is when "one-time" and "exceptional" fees are very common in business.

2] Second method:

Banks can lend out most of the money they receive in their deposits. Banks can also lend money borrowed from other banks. However, to protect against bad debts, banks must set aside a hiding place for money called "reserves." Within general guidelines, banks can set the size of this reserve to a size that they feel cautious compared to the risk of unpaid loans. But if a bank wants to appear to have made more money this quarter than it did last quarter, one way to do this is to make money from reserves and call it profit. This is an excuse that mortgages are safer than they used to be and that amount is no longer needed.

3] Third method:

One of the major genres of "creative accounting" known as slush fund accounting. This will give you some of the revenue from your hideout this quarter in case the profits for the next quarter aren't enough for management to make a bonus. This happened most famously on Freddie Mac. As of 2004, a large-scale investigation is underway to determine whether retroactive insurance policies from insurance companies such as Berkshire Hathaway's General Reinsurance have been used for slush fund accounting. The question is, did these insurance policies really transfer some risk, or were they just a slush fund?

 

2.     Environmental Accounting

What is environmental accounting?

Environmental accounting principles and practices are basically employed by firms to keep track in better way environmental costs to specific activities. Government agencies, private sectors, communities and individuals are all responsible for protecting and operating natural resources in most developed countries in a sustainable manner. Government agencies and businesses are accountable to the general public for setting environment-related efficiency targets that lead to cost savings and improved operational processes. These organizations are likely to implement environmental accounting techniques, which are an increasing subset of traditional accounting.

Environmental accounting practices and benefits

Environmental accounting can focus on environmental accounting or financial accounting, but the most notable benefits come from the application of environmental accounting methods. This type of accounting focuses on collecting, estimating, and analysing costs associated with the use of energy and physical materials such as wood, metals, and coal. Whereas standard accounting practices tended to classify these costs into all overhead categories, in environmental management accounting, accountants apply activity-based costing to these costs in various projects and You can associate them more accurately with the event. Decision makers who have an accurate picture of where these natural resources are used in different projects can find areas of synergies that can reduce the amount of wasted material at the program or enterprise level.

Duties of an environmental accountant

Environmental accountants help decision makers set energy efficiency goals by investigating historical data and recent trends in the raw materials used to produce a company's goods and services. These accountants also track the availability of raw materials used in the company's goods and services. They make calculations to determine if appropriate raw material alternatives can reduce life cycle costs and reduce the environmental impact associated with a company's current practices. Environmental accountants are also business experts in break-even and cost-benefit analysis to replace traditional energy systems with alternative systems such as wind turbines and new solar single roofs.

Education and training required for environmental accountants

The niche area of environmental accounting is not yet mature and there are limited university-level academic programs that directly focus on this accounting category. For example, Aquinas University in Michigan offers students a Bachelor of Science degree in Sustainable Business, and Dalhousie University in Canada holds an MBA in Natural Resources. However, most environmental accountants earn a standard undergraduate degree in accounting, and that they usually return to high school to get a graduate degree in ecology . Many environmental accountants obtain professional qualifications, such as the Certified Environmental Auditor (CEA) designation, which is managed through the National Registry of Environmental Professionals. For certifications such as CEA, an environmental accountant must have a bachelor's degree from an accredited university, have at least four years of experience in environmental auditing, and have successfully completed the CEA exam.

Conclusion

 Then, tracking more detailed cost data often improves resource management with respect to environmental accounting.

 

3.     Human Resource Accounting

This is the method of allocating, budgeting, and reporting the prices of human resources incurred by a corporation (such as wages, salaries, and training costs).

Human Resources Accounting is an activity that knows the prices invested in hiring employees, trains them, pays salaries and other benefits, and reciprocally knows their contribution to the profitability of the organization.

Flamholtz (1971) provides an identical definition for HRA.

HR accounting concept

Human Resources Accounting (HRA) may be a new division of accounting. All human capitalization expenditures are supported the normal notion that they are doing not create physical assets and are therefore treated as expenses for the income of the amount. But today, this notion has changed and therefore the cost of an asset (as a person's resource) must be capitalized because it provides a monetarily measurable benefit.

HR accounting means accounting for people as an organizational resource. this is often a measure of people's cost and value to a corporation . This includes measuring the prices incurred by private companies and therefore the public sector to rent, select, hire, train, train, and determine the value of a corporation .

According to Likert (1971), HRA serves the subsequent purposes within an organization:

  1. It provides cost / value information for creating administrative decisions regarding the acquisition, allocation, development, and maintenance of human resources to realize cost effectiveness.
  2. This allows administrators to effectively monitor the utilization of human resources.
  3. It provides a healthy and effective foundation for human wealth management. That is, whether the asset is valued, depleted, or preserved.
  4. This helps develop management principles by classifying the economic impact of various practices.

Meaning

Human Resources accounting is an effort to spot and report investments made in an organization's human resources.

It is currently accounted for under traditional accounting practices. Basically, it's a data system that tells management what changes are happening to the human resources of a business overtime, and therefore the cost and value of human factors for the organization. The system serves both internal and external users, providing management (internal users) with relevant data that underpins recruitment, training, and other development decisions, including investors, lenders. Utilization of human resources within the organization for external users of monetary statements.

Accounting is a man-made art, and its principles and procedures have evolved over time to support businesses in reporting to management and therefore the general public. Of the four factors of production of individuals, money, materials and land, the last three are suitable for traditional accounting, but the primary factor, human resources, isn't subject to such accounting. Over the last 20 years, the thought of accounting for human resources has been actively considered.

Much of the work on human resources accounting has focused totally on developing or validating the concept of HRA. the normal practice of treating all expenditures on human capital formation as immediate claims on income is inconsistent with the treatment given to equivalent expenditures on physical capital. The American Accounting Association has strongly criticized the practice of assigning zero values to assets, saying that "costs got to be capitalized once they are incurred to get future profits and when such profits are often measured."

Managing concerns may be a constant effort for max efficiency. the standard thanks to measure a company's effectiveness is to seem at its financial statements. These statements include a record that records physical assets like cash receivables, inventories, and plants. These statements usually don't mention the productivity of workers or the credit of the corporate.

HRA may be a technology that systematically evaluates, records, and presents human resources add an organization's accounting books. Therefore, it's primarily an data system and may be a take that informs management of changes within the location of the organization's human resources.

Purpose of HR accounting

The purpose of HRA includes not only recognizing the value of all resources used by an organization, but also managing human resources that ultimately improve the quantity and quality of goods and services. The main purposes of the HR accounting system are:

  1. Provide cost-value information to make appropriate and effective management decisions regarding the acquisition, allocation, development, and maintenance of human resources to achieve cost-effective organizational goals.
  2. Effectively monitor the use of human resources by management.
  3. Analysing human assets, that is, whether such assets are preserved, depleted, or valued.
  4. To support the development of management principles. Make good decisions for the future by categorizing the economic impact of different practices.
  5. Overall, it facilitates the valuation of human resources that record valuations in the books and disclose information in the financial statements.
  6. This helps organizations make decisions in the following areas:

        Direct recruitment and promotion, transfer and maintenance, reduction and maintenance, impact on budget management of relationships and organizational behaviour, decision to relocate factories to close existing units, development of overseas subsidiaries, etc.

Benefits of HR accounting

  1. The HR plan determines not only the type and number of employees required, but also an action plan. The main advantages of HR accounting are:
  2. Check your organization's corporate plans. Corporate plans aimed at expanding, diversifying, changing technological growth, etc. should be developed with the availability of talent for such placements and key positions in mind. If such human resources are unlikely to be available, Human Resources Accounting proposes amendments to the entire corporate plan.
  3. It offsets uncertainty and change by enabling organizations to place the right people in the right jobs at the right time and place.
  4. It provides room for employee progress and development through effective training and development.
  5. This helps individual employees aim for promotion and better benefits.
  6. The purpose is to ensure that human involvement in the organization is not wasted and that it brings high benefits to the organization.
  7. It helps you take steps to increase employee contributions in the form of increased productivity.
  8. We provide interview methods to be adopted in the selection process based on the various test methods used, skill level, qualifications, and future talent experience.
  9. You can anticipate changes in the value, aptitude, and attitude of human resources and change your interpersonal management practices accordingly.

 

5.     Forensic Accounting

What is Forensic Accounting?

If you turn on news today, you may see stories related to fraud. Fraud has become much easier as criminals and scammers have adapted to the Internet-centric world. According to the Global Fraud and Identity Report, 33% of companies experienced more fraudulent losses than the previous year.

 

Thankfully, people with good numerical skills are looking for employment as court accountants. Court accountants combine auditing and investigative skills to identify the cause of suspicious financial activity. Companies use this information as credible evidence in court and / or to recover losses from fraud.

Court accountants generally receive a lucrative salary because of their important role and difficult work. The Association of Certified Fraud Examiners reports that the median salary received by certified fraud examiners exceeds $ 100,000. This area remains the top choice for many students due to growing needs, lucrative income opportunities, and opportunities for analytical people to develop problem-solving skills. Continue reading this guide to learn more about forensics and see if this carrier is right for you.

What Do Court Accountants do?

Court accountants examine the data to determine where the missing money goes and how to get it back. They may also present a report of their financial findings as evidence during hearings they often testify as expert witnesses. This work serves important purposes for certified accountants and consulting firms, law firms, law enforcement agencies, and insurance companies.

Court accountants play different roles in each of these settings. Companies handle money in different ways, and scammers target organizations based on their job responsibilities. Some accountants are working on a wider range of fraud cases, including working for law enforcement agencies and law firms. Accountants working in more specific areas such as certified accountants and insurance usually focus on certain types of fraud, such as insurance fraud. Court accountants working in some institutions are more likely to testify in court.

The job of a court accountant is so important to financial security and security that it requires a certain level of competence. The next section describes the skills and prerequisites required by a court accountant and how they apply in different cases.

Forensic accounting and its applications

Before gaining a position as a court accountant, you must qualify as a certified accountant and gain one to three years of experience in this area. After obtaining these prerequisites, the individual must have a strong knowledge of the general account. This can be combined with expertise in handling different cases.

 

Key takeaways:

  1. Inflation accounting is that the practice of adjusting financial statements according to price indexes.
  2. The numbers are revised to reflect these values of the hyperinflationary business environment.
  3. IFRS defines hyperinflation as prices, interest rates, and wages associated with a price index that accumulates by quite 100% over a three-year period.
  4. Human Resources (HR) is that the business unit responsible for finding, screening, recruiting, training, and managing employee benefits programs for job seekers.
  5. Additional personnel responsibilities include compensation and benefits, recruitment, dismissal, and keeping up-to-date with laws which can affect the company and its employees.
  6. Many companies are moving from traditional internal human resources (HR) management tasks and outsourced tasks like payroll and benefits to external vendors.
  7.  the impact of environmental policies and devises solutions to the problems that arise from them is called Environmental economics studies.
  8. This approach is either normative or incentive-based.
  9. Creative accounting takes advantage of loopholes in accounting standards to misrepresent a much better image of an organization.
  10. Tweaking the numbers will increase the director's bonus and help convince the lender to provide the company with a loan to inflate the company's valuation.
  11. Creative accounting tricks are essentially different and evolve consistently as regulations change.
  12. Investors are always sceptical and need to read the financial statements from top to bottom for signs of fraud.
  13. Forensic accounting could also be a mixture of accounting and investigative methods used to detect financial crimes.
  14. One of the important functions of forensic accounting is to elucidate the character of monetary crimes to the court.
  15. Forensic accounting is used by the insurance industry to finalize claims for damages.

 

References:

  1. https://www.yourarticlelibrary.com/human-resources/human-resource-accounting-meaning-definition-objectives-and-limitations/32403
  2. https://www.sciencedirect.com/topics/earth-and-planetary-sciences/environmental-accounting
  3. https://www.accountingformanagement.org/historical-cost-concept/
  4. https://www.accountingedu.org/environmental-accounting/
  5. https://smallbusiness.chron.com/basics-environmental-accounting-4932.html
  6. https://marketbusinessnews.com/financial-glossary/creative-accounting-definition-meaning/#:~:text=Creative%20accounting%20refers%20to%20imaginative,healthier%20than%20it%20really%20is.
  7. https://cleartax.in/g/terms/historical-cost
  8. https://cleartax.in/g/terms/inflation-accounting

 

Text Books:

  1. Gupta R.L. and Radha swamy. M, Sultan Chand & Sons, New Delhi.
  2. Shukla M. C. Grewal T. S and Gupta S.C., S. Chand & Sons. New Delhi.
  3. Shukla S. M., Sahitya Bhawan Publication, Agra.
  4. Murti Guru Prasad, Himalaya Publishing House, Mumbai.
  5. Jain and Narang, Kalyani Publisher, New Delhi.

 

 


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