• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  6. 6
  7. 7
  8. 8
  9. 9
  10. 10
  11. 11
  12. 12
  13. 13
  14. 14
  15. 15
  16. 16
  17. 17

The Purpose of Keeping Accurate Accounts

Extracts from this document...


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.


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.


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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Accounting & Finance section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Accounting & Finance essays

  1. Marked by a teacher

    Business Finance. There are a number of sources of finance, which businesses will need ...

    3 star(s)

    Another advantage is that there is no interest charge, which is a very good advantage because you wont have to worry about paying back extra money on top of the money borrowed as it is. Also this method is based on trust.

  2. In this assignment I am opening a tuck shop in the school grounds and ...

    This Graph is showing what type of sweets you like. In this graph you can see that the most favourite sweet is Star Burst an the least Favourite is Skittles. This graph is about what chocolates you like. And in the graph you can see that the most favourite chocolate is Kit - Kat Chunky.

  1. Errors that do not affect the Trial Balance.

    10 in cash Dr. Cash account Lm 10 Cr. Sales account Lm 0 - Thus Dr. Suspense account Lm 10 Corrected by the following Dr. Suspense account Lm 10 Cr. Sales account Lm 10 Error of incorrect figure in one account Such an error can occur when the amounts of the debit and credit entries to the accounts do

  2. Compare the final accounts of two organisations explaining the similarities and differences.

    Both they both has depreciation on their vehicles which shows that they choose it quite often. Since subway Groningen belongs to a sole trader, the sole trader will eventually put everything in the profit and loss account so that he or she can see where the money is going and coming from.

  1. Harmonisation of accounting standards in Europe

    This objective might once have been thought to be too ambitious in one respect and not ambitious enough in another. Until recently, to attempt worldwide harmonisation seemed hopeless and unnecessary. However due to the huge impact of globalisation and new technology, harmonisation plays more and more an important role for many European countries and represents a reasonable objective.

  2. Manchester Airport's Stakeholders Task 4

    The Manchester airport suppliers may also rely upon regular orders to ensure the success of their own business. Marks & Spencer plc was heavily criticised when they decided to end links with some of their British suppliers and use cheaper foreign clothing manufacturers in north Africa and eastern Europe.

  1. Task1: different types of business ownership

    so that one partner could retain all of the profits, due to conflict between partners, death of one partner and so that the partnerships might not be making enough profit for two wages. A partnership could also become into a private limited company (LTD)

  2. Business systems Babatunde Onaola - Identify and use planning, control methods in conjunction with ...

    afford to pay, or one could say that it is the actual rate of return on the project. One can arrive at an IRR by trial and error, i.e. by changing the discount factor until it produces a net present value of nil.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work