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The Purpose of Keeping Accurate Accounts

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Introduction

The Purpose of Keeping Accurate Accounts It is important for a business to create and maintain accurate financial records and to know about the different users of financial information. Every business has to meet internal and external reporting requirements to show its financial health and to meet legal and other requirements. The reasons why businesses therefore keep accurate records are: Assessing its financial position - businesses assess their financial position every year so they know the business is making efficient use of resources to provide the necessary financial return to achieve a profit or suffered a loss, they do this through analysing the cash flow, profit and loss account, and balance sheet. Businesses can find out if it as the ability to generate cash to ensure continued trading and to make dividend payments. This can be done by using figures from the profit/loss account and balance sheet to work out appropriate ratio such as acid test ratio which shows the liquidity of the business. Compare the company's performance with previous years - this can show businesses their future prospects and predict future trends to show profit and loss. Good records provide the financial data that help you operate more efficiently, thus increasing the profitability of your enterprise. This is because accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses which, when compared to appropriate industry averages, help you pinpoint the strong and weak phases of your business operations over the years. Records can be compared by working out gross profit and net profit margins for pervious years which will show if the business as increased or decreased their profits over the years. This will also show if the business as understated or overstated their profits over the years. Raise finance - can support businesses wanting to raise money by comparing the accounts and to pay of expenses. ...read more.

Middle

The problem, of course, is in deciding what is and what is not material: we are concerned here with RELATIVE IMPORTANCE. As far as an individual is concerned, the loss of a �10 would be important and MATERIAL. As far as Chevron or Barclays Bank are concerned, the loss of �10 could be considered unimportant in many circumstances and therefore immaterial. The material concept is only items material in amount in their nature will effect the true and Fairview given by a set of accounts. There is no certain value we use but anything over 5% of value has a material aspect. The materiality concept does not apply while recording cash transactions. Thus, small amounts cannot be omitted from the cash book on the grounds that they are not material. As a general rule, therefore, every cash transaction has to be recorded in the cash book - regardless of the materiality of the amount involved. Again, the principle of materiality does not hold good when errors of principle are detected which need correction. If it is discovered that a capital item has been erroneously expensed, or a different method of depreciation other than that used in previous years has been applied for a particular asset, the errors should be corrected immediately. The concept of materiality cannot be used as a defence for not correcting the errors. The context of materiality is important for example, �20,000 may not effect the fixed asset of 25 million because it is below 5%, however �20,000 in stocks worth �25,000 will have an enormous effect. SSAP2 and the Companies Act The SSAP2 is the four concepts going concern, accruals, consistency, and prudence. It is summarised below: The four accounting concepts stated in the SSAP 2 are given statutory force within the 1985 Companies Act, which refers to them as 'fundamental principles'. In addition the Act lays own two other principles: 1. ...read more.

Conclusion

Most software packages have a payroll facility built onto their programme, or is available as an add on package. When employing staff it saves a lot of time. The calculation of wages and production of wage slips is extremely repetitive, especially when employees are paid the same amount week after week. The computer system will also keep record of the statutory reductions such as Income Tax and National Insurance. When the time comes the software can calculate the necessary returns and how mush is due to be paid. The main limitation of payroll is that the core information has to be kept up to date. Both Tax and National Insurance are subject to periodic change by the government, and the business must make sure that the changes are correspondingly amended within the system. If the company is registered for VAT the company can calculate the VAT by a computerised accounting system. The system will control the entire process of calculating eth VAT and then producing relevant figures for return. It will take into account all of the input and output VAT, based on transactions for the relevant period. The price of the software is equalled out on the amount of time saved compiling the returns manually. A computer based accounting system enables a company to produce all of the forecasts and financial statements, such as, Cash flow forecasts, operating budgets, balance sheet, and profit and loss account. It is simple to base the forecasts on historic performance, while asking eth computer 'what if?' questions. For example, once the business has prepared the basic forecasts the company could increase in sales to see what the results would be. On the other hand the company could decrease the sales, or an increase in costs, or both, to see how it would affect the business. These calculations would take several hours to do manually. In addition to the example above, the company can undertake a detailed analysis of the company's costs within minutes, comparing any number of comparing figures using the computer. These benefits offer more control that a manual based system. ...read more.

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