Discuss about the Various Technical And Legal Requirement In Business.
The main purpose of this assessment is to analyze the various technical and legal requirement which most of the business need to consider for reporting purposes. Such refer to accounting conventions, principles, standards which are to be followed in order to effectively prepare the annual reports for reporting purpose. The assessment will also be considering general accounting concepts which are to be followed for the purpose of reporting. The role of accounting system is very essential as the same is used for portraying the financial performance of the business over a period. A detailed analysis of the various standards, conventions and principles which are used for making the entire accounting process and reporting of the same effective.
The main focus of the assessment is to analyze the process of accounting which is used n businesses and the various accounting standards which are followed by businesses for the purpose of preparing the financial accounts of the business.
Technical, Accounting and Legal Requirement in External Reporting
In todays world, the overall role of accounting is a vital part of the business administration as the same is to be published to the general public in order to demonstrate the financial performance of the business during that particular year. External Reporting requires an organization to formulate reports which contains confidential information of the company and also information which is related to financial performance of a business during a particular period. The process of external reporting can be classified on two basis which are external reporting which is carried out by the business of its free will so as to demonstrate accountability and performance of the business to the stakeholders and the other external reporting process is carried out when the legal regulations mandatorily requires a company to publish its annual reports. External reporting is an effective process whereby the public and the government are able to get insights of the activities which are undertaken by the business and also asses the performance of the business during that particular year. The process of external reporting is done so as to ensure that the shareholders and general public gets an insight on the activities of the entity. The finance related information are provided by the business in the reports by the help of financial statements which are prepared following the process of accounting. The process of accounting follows various established rules and regulations in order to bring about consistency in the accounting process. Generally, accounting system and processes are handled by professionals who have specialized skills and knowledge and the same is regulated by an accounting board such as IFRS, IAS, AASB and several other boards as well. The accounting process follows various accounting standards which governs various accounting treatments which are used in the annual reports. These standards are issued by the accounting boards. Moreover, in case of accounting some principles are established which are also known as Generally Accepted Accounting Principles (GAAP). These principles are consistently followed for the process of preparation of the financial statements of the business. This brings about consistency in accounting process and also improves the reporting framework of accounting.
The legal requirement of accounting refers to the statutory provisions which are in place in order to ensure that the process of accounting is fair and effective. In most of the countries, public limited companies are required to publish their annual reports which must be audited so as to show the general public and the stakeholders of the business about the financial performance of the business during that period. The legal requirement for such companies is to effectively follow the accounting standards which are issued in the preparation of the annual reports. Moreover, businesses are also required to effectively follow the fundamental accounting principles which are assumed while preparing final accounts for a business. The role of accounting in a business is a prominent one and therefore the process should be governed by legal regulations in order to make the process effective and efficient. It is also imperative that the accountant who is carrying out the accounting process have proper knowledge of various aspect of accounting process along with adequate knowledge of the accounting standards. This is important because accounting is a technical process and the same requires clear knowledge and application of such knowledge in various complex treatments and disclosures which are required to be shown in the annual reports.
In most cases, companies engage in the process of external reporting not just because it is mandatory and a requirement of law but for demonstrating the performance of the business during the period and also showing in what activities the funds which are taken from the shareholders utilized. Moreover, it is way to make the potential investors believe in the company and make the accumulation of funds easier from the market. It is as general requirement that the financial statement should be presented in such a way that all information is clear and logical which the user of the annual reports will be easily able to understand. In addition to this, companies should not include any secretive information in the annual reports and all the treatments should have notes which will help the users to under the financial information in a better way. This is the main reason due to which business should follow accounting standards in preparation of the financial statements of the business.
Accounting Concepts and Procedure
The significant accounting concepts which are used in the reporting process are generally same for different regions so as to bring about consistency in the accounting process. There are various concepts which are followed in accounting some of which are discussed below in details:
- Accrual Concept: This is known as one of the fundamental concept of accounting and must be followed by every business in the preparation of the annual reports of the business. As per this concept, expenses and incomes should be recorded in the books of account as and when the same are earned and not when the actual cash for the same is paid or received.
- Consistency Concept: As per this concept, a business needs to stick to the method of accounting on consistent basis unless a change in the accounting method would bring about an improvement in the reporting process or the change is initiated by legal requirements.
- Going Concern: As per this concept, it is considered that the business will continues its operations in business and has no intention of winding up the business. This is considered to be one of the fundamental concepts of accounting process. As per this principle, business are considered to operate without any intention of stopping the business and the same will continue for foreseeable future.
- Conservation Concept: As per this concept, revenue and profits are to be recognized in the financial statement when the same are realized or there no doubt on the realization of the same whereas expense and liabilities are to be recognized even if there is a possible for the same to be incurred during the period. This concept is also known as the concept of prudence.
- Matching Principle: As per this concept, all the expenses of the business should match the incomes which are earned by the business during the year. The principle states that the double entry system which accounting process for most of the companies follow facilitates matching principle of the business.
- Business Entity Concept: The business entity concept refers to the principle that a business is separate from the owners of the business. Therefore, it is necessary that accounts should be maintained for the company and in such a way that the same is free from the owners of the business.
- Accounting Period Concept: As per this concept, accounting process for recording of various transactions are carried out for a particular time period. The interval which is followed by most of the business is one year. The financial year for business can be different for different businesses. Some business may prefer the year end interval which is January to December and others might prefer April to March period for recording of transactions of the business.
- Revenue Recognition: This is one of the most important concept which is followed by every businesses for recognizing expenses and revenues. The concept states that revenue should be recognized when it is sure that the business will earn the same. On the other hand, expenses should be recognized as and when the same are probable. This concept states that a business should recognize expenses as and when the same are incurred.
- Accounting Equations Concept: This is another concept which is followed in accounting which states that the total of the asset side of the balance sheet should be equal to the total of the equity and liability side of the balance sheet. The concept further clarifies that every debit balance should have a credit balance which should cancel out. The concept can be said to be an extension of the matching principle of accountancy.
In addition to the above-mentioned concepts, there are other concepts which are related to the process of accounting. Accounting process closely follows double entry system which allows the matching principle which states that all expenses of the business should match the income which is related to the business. The assets of the business are recorded at historical costs and not at the market value of the assets of the business. There are other concepts which are associated with accounts such as concept of materiality which states that a major transaction which can have significant affect on the financial statement should be recorded in the annual statements and appropriate disclosures should be provided for the same in the financial statements of the company.
In a business form the annual report of the company should consist of the following statements which are statement of profit and loss account, balance sheet, cash flow statement of the business. These three are the primary statements which should be shown in the annual reports of a business along with proper disclosures for various treatments which will be shown in the notes to accounts section of the financial statements. It is mandatory to include notes to accounts in the financial statements so that all the disclosures which are required by the accounting standards are shown which can explain the various treatments which are associated with the financial statements.
The various concepts and principles which are followed in accounting guide the accountants in preparation of financial reports under a framework and makes the accounting process more systematic in nature. The above discussions also makes it clear that accounting process are more or less similar in most of the countries due to the universality of the accounting standards and provisions which are introduced by different accounting regulation boards. The application of concepts, standards, conventions and principles which are followed in accounting process makes the process systematic and classifies the financial information in such a way which is easy to understand for all users of financial accounts.
Thus, from the above analysis, it can be stated that accounting standards and concepts plays a vital role in the overall process of accounting and presentation of financial information. The above discussion also establishes that accounting has technical, legal and financial considerations and the significant impacts which such consideration has on the process is also clear. It can be said that the system is still developing and with new amendments to accounting standards, further improvements can be brought about in the accounting and external reporting process of companies.
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