Explain the purpose of keeping accurate financial records.
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Financial Accounting E1 Explain the purpose of keeping accurate financial records. Keep stakeholders informed Controlling and planning the activities of a business such as SPA Ltd is a critical concept of a business succeeding internally and externally. The financial situation of any business such as SPA Ltd must be monitored and handled effectively, taking considerations of information being accurate and well planned for presentation. Without, SPA Ltd having accurate financial information, the business may not perform effectively internally and externally and may incur problems suffering from financial position and legal status. There are many purposes of which accurate financial records are kept. One of the main particular records is used to present information to inform the stakeholders of SPA Ltd, which it is legally entitled to present accurate financial position at a certain time. The whole purpose of presenting the current financial status of SPA Ltd to its stakeholders is to inform them of how well the company has progressed through the year. As SPA Ltd is a large company business, with a large yearly revenue, it has many stakeholders connected to the business internally and externally. Internal stakeholders These are stakeholders of SPA Ltd, where they contribute on expanding its efficiency and yearly financial revenues. * Employees- Employees of SPA Ltd play a major role within the company, to make it run efficiently on a daily basis. They may want to be informed or to keep track of SPA Ltd financial position to see if there may be wage increase rises. On the other hand, to see if there is a job security if the finance of SPA Ltd is exceeding or meeting its expectations. * Manager- The managers need to be informed because they will assess the financial documents', to see what needs to be improved and in what situations to get rid of, to improve SPA Ltd as a company.
Moreover, it may be in the interest of partners to draw up an agreement of how the partnership will operate, and what roles and responsibilities each partner shall take on, this agreement is referred to as a Deed of Partnerships. The Partnership Agreement or Deed of Partnership covers the following: * Division of profit and losses * Partners salaries * Interest allowed on capital * Interest charged on drawings The above elements of the agreement determine how the profit and losses of the partnership are appropriated. When the final accounts of a partnership are drafted and the net profit from the trading has been determined, then an appropriation account is prepared. The final accounts of a partnership are similar of those of a sole trader, except that there is more then one owner. There are additional sections which need to be covered; these include profits and ownership of capital. Final accounts include: * An appropriation account: final section of profit and loss account showing how profits are divided. * A capital account: this is not changed by profits or drawings, but is fixed showing the original capital invested. * A current account for each partner on the balance sheet: this shows the profits, to which each partner is entitled and any drawings taken. Here are the layouts of the accounts, which will be included on the balance sheet: Partners Capital Account X Y X Y £ £ 1 Jan Cash 5,000 10,000 Appropriation account 31 Dec share of profit 31 Dec net profit b/d 10,000 Current account X 5,000 Y 5,000 10,000 10,000 Partners' Current Accounts X£ Y£ X£ Y£ 1 Dec Drawings 3,000 4,000 31 Dec share profit 5,000 5,000 Balance c/d 2,000 1,000 5,000 5,000 5,000 5,000 1 Jan Balance c/d 2,000 1,000 As for other business organisations, there are many advantages and disadvantages to them. For partnership accounts, these include: Advantages * Additional skills- anew partner may have abilities which the sole trader does not possess.
Objectivity The presentation of final accounts should be objective rather then subjective. This should not be influenced by the owner's expectations. It is the same in the case for legal requirements of financial accounts statements procedure. For each step it needs to be considered by each person in the diagram, that an accurate set of data is represented and this checked. The final amendments and procedure of final accounts is undergone by the directors of the business where, then external auditors examine the financial statements and provide an image of the companies performance and position. Business companies must undergo to follow legal requirements, where importance of accurate financial records is vital in keeping stakeholders of the company informed. Every limited company whether public or private is required by law to produce financial statements which are available for the public to inspect if they so wish. The law which stated that these legal requirements must be fulfilled is the Company Act 1985. The financial statements required by the companies act are: * Profit and loss account * Balance sheet * Directors report- the directors report mentions; -Review of the activities of the company -directors name and shareholdings -proposed dividends -policies and actions mad -They are mainly responsible for preparing the accounts. * Auditors report - This is basically where the auditor criticises and makes comments on the company's accounts and questions whether or not the accounts are true or fair. When producing these final statements, business companies must follow the procedure of the accounting practise and financial reporting standards. Under the legal requirements, it is stated that: * Final accounts must be published which is publicised at companies house. * Accounts must be produced to protect creditors and investors, who may not get their money back if the business fails. * Accounts are produced for shareholders to see if the directors of the company are doing their job properly and not just wasting money. * Accounts must be produced as it can have a great influence on the local community, to find jobs. ?? ?? ?? ?? 1
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