Principles and Concepts of Accounting Essay - 2475 Words

Principles and Concepts of Accounting (Essay Sample) Content: Principles and Concepts of AccountingNduati CathreenUniversity of Nairobi Introduction The major accounting principles that guide accounting practices are endorsed on the Generally Accepted Accounting Principles (GAAP). This is international guidelines that all the companies and organizations are expected to apply in their operations. These principles are further classified into assumption and constraints. The assumption principles include business entity, going concern, monetary unit and time period assumption principles (Hendrick, 2011). Other accounting principles listed in the GAAP include historical cost, revenue recognition principle, and matching, and full disclose principles. On the other hand, constraints are also divided into objectivity principle, materiality principle, consistency principle, and conservatism principle (Weygandt J., 2012). Disney Company adhered to these concepts while preparing its financial reports to present fair information to the user s is recommended in the International Financial Reporting Standards. This research work dwells on the analysis of the various principles and constraints with regards to Walt Disney Company.Accounting Period Concept Accounting period concept requires that all transactions must be of regular period or interval upon which the accounting records are to be assessed. Usually the intervals range between quarterly, semi-annually and annually reporting periods. An accounting period lasting twelve months is normally referred to as an accounting fiscal year (Shaub, 2011). When a fiscal year begins on 1st January and elapses on 31st December of the same year it becomes a Calendar Year. But when it begins on 1st April till 31st March the following year it becomes a Financial Year. The same applies to other fiscal year that passes to the following year. The transactions are to be recorded in the book of accounts for that particular period of time. For example, goods that were purchased and sold in that accounting period have to be accounted for at the end of the same period. Walt Disney Company has divided its accounting period into quarters. In its recent reports the four quarter periods ends on 28th December, 29th March, 28th June and 27th September respectively. The quarterly reports are then summarized and the annual report is given for the overall financial year. The fiscal quarters are used for financial reconciliations on Disneys transactions during the fiscal year. Walt Disney Cos fiscal year normally ends on September 30th after a period of 52 weeks. Accounting period concept forms the foundation of the matching principle, recognition principle and the annual reporting practices. Depreciation expenses are thus spread over the life of an asset according to the recognized accounting period stipulated. Accounting periods are thus used to determine the useful life of an asset over its operating period. Accounting period concept helps in tax calculation by directly sh owing the year of income of which the company is to be assessed for tax purposes (Shaub, 2011). It also helps in the prediction of going concern of the firm. It helps various firms with the distribution of income at specific intervals e.g. dividends distribution. This concept also dictates that continuity principle is divided into different parts know as accounting period which could be even 3 months, one year.Conservatism Concept Conservatism concept is the accounting concept which requires verifiability for the treatment and recognition of the business uncertainties. It deals with taxation as well as accounting regulations (Weygandt, Kimmel, Kieso, 2013). The concept provides an accountant with an alternative that will ensure that the selected concept will give less income and less asset value amounts. Accountants rely on this concept because it helps them in breaking a tie. Accountants are expected to practice professionalism in that they should be unbiased or being subjective i n their practice. It allows accountant to report and fully disclose potential losses. For example, Disney Company tests its intangible assets like goodwill for impairment annually and on interim basis if need be. This is to help in recognizing losses that may result from this impairment on the fair value of intangible assets. The accountant uses discounted cash flow valuation techniques in determining the fair value. An accountant also uses appraisal values where appropriate so as to get the fair market value of long-term intangible assets. During uncertainty, accountants will least likely to: overstate assets and income as well as not to disclose potential gain but instead disclose potential losses (Weygandt J., 2012). However, conservatism does not imply that various income and assets to be understated as this will bring conflict with other accounting practices. This will in turn give a false financial position of the firm. For example, if income is understated in the current acco unting period, expenses will also be overstated in the current period thus earning in the coming years will be overstated too as expenses in the future will be understated (Z.Weiss, East, Hartley, Damon, Carol, 2008). Some of the conservatism practices include: use of LIFO when inflation is high, use of accelerated depreciation method for plant assets, recognition of bad debts.The Realization Concept Realization concept states that revenue is to be measured and recorded in the book of accounts like journals and ledgers only when it is realizable by the reporting entity. The concept dictates that revenue is to be realized when goods are delivered to prospect buyers as per the contract of sale. Realization helps with the appropriate recording of sales and expense transaction as it allows these transactions to be recorded when goods are delivered or when expenses are incurred (Z.Weiss, East, Hartley, Damon, Carol, 2008). However, in rendering of services, recognition of revenue is wh en the service is completed as specified in that contract of service. According to Disney Company affiliate revenues are postponed until commitments for its earning programming are met. The commitments are satisfied by the second half of Disneys financial year. This results in high revenues during that accounting period. Disney recognizes its international sales revenue at the time they made a sale of books abroad to English Language Center that is in China. A further example of this principle is about advance payment that Disney may get from its customers. For instance, Disney gets an advance order against 30% down payment on order price from a specific customer. The customer promises the dealer that the other 70% payment is due after thirty days from delivery date (Weygandt, Kimmel, Kieso, 2013). The inventories are delivered to the customer only on the 30% price payment and he pays the remaining 70% as per the contract. Realization principle therefore will allow Disney to recogn ize revenue only when the 30% price is submitted but until the inventories are delivered to the customers.Matching PrincipleMatching principle refers to basic underlying guidelines on accounting practice. This principle demands that a company reports its expense in the income statement during the same accounting period when the revenues associated were earned in that same Calendar period. In matching principle concept revenue must be realized first, then locating it to relevant accounting periods (Juan, 2007). Matching principle has different importance in the financial reporting. For instance, it helps in determining how expenses are to be matched for exact determination of profits and losses in different accounting periods. It also assists investors in knowing the realistic business performance.An illustration of the matching principleAssume that Walt Disney Company sales are made through sales representatives who earn 10% commission. These commissions for each months sales are p aid to the sales representatives on the 10th day of the following month. If the company has $6000000 of sales in November, the company pays commissions of $600000 on December 10th. Matching principle requires that $600000 of commission be reported as expense on the November income statement along with the related November sales of $6000000. This is to be carried out through an adjusting entry on November 30th that debits Commission Expense and credits Commissions Payable for $600, 000. Matching principle is associated with HYPERLINK "/blog/acrrual-basis-accounting" \o "What is the accrual basis of accounting?"accrual method of accountingand adjusting of accounting entries. Without the principle, the company may report the $600 000 of expense in December when paid instead of reporting it in November when the expense and liability are incurred. Disney Company limited applies this principle in its consolidated income statements when yearly expense and cost are deducted from the yea rly revenues achieved to arrive at net income. For example, cost and expenses amounting to $35591 million in 2013 are deducted from $45041 million of revenue of the same year to help in arriving at the net income figure of $6636 million for the year. Yearly taxes are also deducted from the yearly income before income taxes of the same accounting period. Cost of goods sold for a manufacturing entity, like the Toyota limited company,is another example where HYPERLINK "/blog/what-is-an-expense" \o "What is an expense?"expensesare matched with sales on goods by a cause - effect relationship. However, all costs and expenses do not have this cause- and- effect relationship to revenues. Therefore, matching principle requires systematic allocationon costs to accounting period which the costs are used up. For instance, if a company bought an elaborate office supplies ... Principles and Concepts of Accounting Essay - 2475 Words Principles and Concepts of Accounting (Essay Sample) Content: Principles and Concepts of AccountingNduati CathreenUniversity of Nairobi Introduction The major accounting principles that guide accounting practices are endorsed on the Generally Accepted Accounting Principles (GAAP). This is international guidelines that all the companies and organizations are expected to apply in their operations. These principles are further classified into assumption and constraints. The assumption principles include business entity, going concern, monetary unit and time period assumption principles (Hendrick, 2011). Other accounting principles listed in the GAAP include historical cost, revenue recognition principle, and matching, and full disclose principles. On the other hand, constraints are also divided into objectivity principle, materiality principle, consistency principle, and conservatism principle (Weygandt J., 2012). Disney Company adhered to these concepts while preparing its financial reports to present fair information to the user s is recommended in the International Financial Reporting Standards. This research work dwells on the analysis of the various principles and constraints with regards to Walt Disney Company.Accounting Period Concept Accounting period concept requires that all transactions must be of regular period or interval upon which the accounting records are to be assessed. Usually the intervals range between quarterly, semi-annually and annually reporting periods. An accounting period lasting twelve months is normally referred to as an accounting fiscal year (Shaub, 2011). When a fiscal year begins on 1st January and elapses on 31st December of the same year it becomes a Calendar Year. But when it begins on 1st April till 31st March the following year it becomes a Financial Year. The same applies to other fiscal year that passes to the following year. The transactions are to be recorded in the book of accounts for that particular period of time. For example, goods that were purchased and sold in that accounting period have to be accounted for at the end of the same period. Walt Disney Company has divided its accounting period into quarters. In its recent reports the four quarter periods ends on 28th December, 29th March, 28th June and 27th September respectively. The quarterly reports are then summarized and the annual report is given for the overall financial year. The fiscal quarters are used for financial reconciliations on Disneys transactions during the fiscal year. Walt Disney Cos fiscal year normally ends on September 30th after a period of 52 weeks. Accounting period concept forms the foundation of the matching principle, recognition principle and the annual reporting practices. Depreciation expenses are thus spread over the life of an asset according to the recognized accounting period stipulated. Accounting periods are thus used to determine the useful life of an asset over its operating period. Accounting period concept helps in tax calculation by directly sh owing the year of income of which the company is to be assessed for tax purposes (Shaub, 2011). It also helps in the prediction of going concern of the firm. It helps various firms with the distribution of income at specific intervals e.g. dividends distribution. This concept also dictates that continuity principle is divided into different parts know as accounting period which could be even 3 months, one year.Conservatism Concept Conservatism concept is the accounting concept which requires verifiability for the treatment and recognition of the business uncertainties. It deals with taxation as well as accounting regulations (Weygandt, Kimmel, Kieso, 2013). The concept provides an accountant with an alternative that will ensure that the selected concept will give less income and less asset value amounts. Accountants rely on this concept because it helps them in breaking a tie. Accountants are expected to practice professionalism in that they should be unbiased or being subjective i n their practice. It allows accountant to report and fully disclose potential losses. For example, Disney Company tests its intangible assets like goodwill for impairment annually and on interim basis if need be. This is to help in recognizing losses that may result from this impairment on the fair value of intangible assets. The accountant uses discounted cash flow valuation techniques in determining the fair value. An accountant also uses appraisal values where appropriate so as to get the fair market value of long-term intangible assets. During uncertainty, accountants will least likely to: overstate assets and income as well as not to disclose potential gain but instead disclose potential losses (Weygandt J., 2012). However, conservatism does not imply that various income and assets to be understated as this will bring conflict with other accounting practices. This will in turn give a false financial position of the firm. For example, if income is understated in the current acco unting period, expenses will also be overstated in the current period thus earning in the coming years will be overstated too as expenses in the future will be understated (Z.Weiss, East, Hartley, Damon, Carol, 2008). Some of the conservatism practices include: use of LIFO when inflation is high, use of accelerated depreciation method for plant assets, recognition of bad debts.The Realization Concept Realization concept states that revenue is to be measured and recorded in the book of accounts like journals and ledgers only when it is realizable by the reporting entity. The concept dictates that revenue is to be realized when goods are delivered to prospect buyers as per the contract of sale. Realization helps with the appropriate recording of sales and expense transaction as it allows these transactions to be recorded when goods are delivered or when expenses are incurred (Z.Weiss, East, Hartley, Damon, Carol, 2008). However, in rendering of services, recognition of revenue is wh en the service is completed as specified in that contract of service. According to Disney Company affiliate revenues are postponed until commitments for its earning programming are met. The commitments are satisfied by the second half of Disneys financial year. This results in high revenues during that accounting period. Disney recognizes its international sales revenue at the time they made a sale of books abroad to English Language Center that is in China. A further example of this principle is about advance payment that Disney may get from its customers. For instance, Disney gets an advance order against 30% down payment on order price from a specific customer. The customer promises the dealer that the other 70% payment is due after thirty days from delivery date (Weygandt, Kimmel, Kieso, 2013). The inventories are delivered to the customer only on the 30% price payment and he pays the remaining 70% as per the contract. Realization principle therefore will allow Disney to recogn ize revenue only when the 30% price is submitted but until the inventories are delivered to the customers.Matching PrincipleMatching principle refers to basic underlying guidelines on accounting practice. This principle demands that a company reports its expense in the income statement during the same accounting period when the revenues associated were earned in that same Calendar period. In matching principle concept revenue must be realized first, then locating it to relevant accounting periods (Juan, 2007). Matching principle has different importance in the financial reporting. For instance, it helps in determining how expenses are to be matched for exact determination of profits and losses in different accounting periods. It also assists investors in knowing the realistic business performance.An illustration of the matching principleAssume that Walt Disney Company sales are made through sales representatives who earn 10% commission. These commissions for each months sales are p aid to the sales representatives on the 10th day of the following month. If the company has $6000000 of sales in November, the company pays commissions of $600000 on December 10th. Matching principle requires that $600000 of commission be reported as expense on the November income statement along with the related November sales of $6000000. This is to be carried out through an adjusting entry on November 30th that debits Commission Expense and credits Commissions Payable for $600, 000. Matching principle is associated with HYPERLINK "/blog/acrrual-basis-accounting" \o "What is the accrual basis of accounting?"accrual method of accountingand adjusting of accounting entries. Without the principle, the company may report the $600 000 of expense in December when paid instead of reporting it in November when the expense and liability are incurred. Disney Company limited applies this principle in its consolidated income statements when yearly expense and cost are deducted from the yea rly revenues achieved to arrive at net income. For example, cost and expenses amounting to $35591 million in 2013 are deducted from $45041 million of revenue of the same year to help in arriving at the net income figure of $6636 million for the year. Yearly taxes are also deducted from the yearly income before income taxes of the same accounting period. Cost of goods sold for a manufacturing entity, like the Toyota limited company,is another example where HYPERLINK "/blog/what-is-an-expense" \o "What is an expense?"expensesare matched with sales on goods by a cause - effect relationship. However, all costs and expenses do not have this cause- and- effect relationship to revenues. Therefore, matching principle requires systematic allocationon costs to accounting period which the costs are used up. For instance, if a company bought an elaborate office supplies ...