In the current age, it is imperative that business people and especially employees understand what goes on in a business. ZENE drycleaners is expanding at a first pace and employees should follow the relevant procedures. Usually, Generally Accepted Accounting Principles (GAAP) determine the accounting standards in most businesses. The principles are established in a conceptual framework and managers, and other people in management should have the ability to create accounting policies that uphold GAAP standards in their businesses. In accounting, it is important for employees to understand several concepts and accounting procedures. These concepts are those related to accounting methods, accounts payables, accounts receivables, reconciliations, and accounting period. Therefore, as employees of ZENE, it is crucial to understand the underlying and most fundamental accountancy procedures and concepts.
Importance of Accounting Information
In every business organization, whether private or public they are required to prepare their financial statements and keep them in order. However, it is important to note that it is mandatory for public companies to develop and present their accounts to the public. Usually, accounting information is essential for business for different reasons. In essence, these statements are the language of business since they communicate so much on what managers, investors, and managers need for purposes of evaluation of a company's financial performance (Scott, 2015). At this point, it is crucial to mention that there are two forms of accounting including management accounting and financial accounting with each having different purposes and importance.
Management accounting is fundamental in aiding managers and other people in management to carry out their responsibilities. The format and the presentation of managerial accounting should be flexible since the users have numerous tasks and responsibilities. That is, the presentation should have a high degree of relevance, accuracy, and timeliness to help people in management make proper and effective decisions (Warren, Reeve, & Duchac, 2015). In preparing such information accountants, must operate from a functional perspective in different sectors and departments of a business including human resources, finance, marketing, and operations.
Financial accountants are responsible for preparing and organization's books of accounts such as the SFP and the income statement. These statements offer a summary of a firm's performance in the past with an aim of understanding its effectiveness. The preparation of such statements must adhere to Generally Accepted Accounting Principles (GAAP). Numerous users of financial accounting information including owners and managers use them to identify whether a company is making profits or losses. Investors and creditors also use this information to evaluate whether it is smart to invest in a business. That is, they show the financial health of an organization. In a company, financial information is crucial since it is presented to different government agencies for purposes of legal adherence (Scott, 2015). In general, different people assess a business' performance from financial accounting information benefiting the company in the end.
Gross Profit versus Net Profit
There are fundamental differences between gross profit and net profit. Usually, net profit has varying meanings and definitions. However, it refers to all revenues minus all expenses including the COGS and other expenses such as administrative and non-operating expenses. In a company or a corporation, it may also refer to what is obtained after-tax expenses. Usually, gross profit and net profit are presented in an income statement where gross profit is calculated first then all expenses are deducted to get the net profit. Simply, gross profit presents the total of all revenues excluding the COGS where the cost of goods refers to the expenses a business incurs in the production of goods and services over a given period. The calculation is obtained using the formulae Gross profit margin = (Revenue - Cost of Goods) Ã· Revenue = Gross Profit Ã· Revenue
Net profit is an excellent measure of a company's profitability because it shows how much a business earns through its sales. It is an important term and idea in business to understand since an increase in revenue does not always amount to an increase in profits for a business (Beams, Brozovsky, & Shoulders, 2017). As earlier mentioned, the calculation of net profit involves getting a total of all expenses and subtracting them from gross profit. The formula can be presented as Net profit margin = (revenue - cost of goods - operating expenses - other expenses - interest - taxes) Ã· revenue = Net Income Ã· Revenue
Current Assets, Non-current Assets, Current Liabilities and Non-current Liabilities
Usually, Current Assets, Non-current Assets, Current Liabilities and Non-current Liabilities exist in a firm's balance sheet. Here, non-current assets refers to those assets a business can hold for more than one fiscal year, and they cannot easily be converted into cash within a short period. NCA's are the long-term assets of a company. Examples of non-current assets include; land, property, plant and equipment, and furniture and fittings. On the other hand, current assets are those assets that can be converted into cash within one fiscal year. Examples of current assets include cash, debtors, and inventory.
In accounting, long-term liabilities or non-current liabilities are listed in a company's statement of financial position. They refer to a company's obligations that are not due within a particular fiscal period. Examples include long-term debt, bonds payable and long-term lease obligations. Usually, investors are interested in non-current liabilities to evaluate whether it has too much debt compared to its cash flow. On the other hand, current liabilities are those that are present within a fiscal year. Examples of these include creditors, customer advances, taxes payable, and payments due on a long-term loan.
Non-current liabilities are termed long-term since the debt is not realized within one year following the date of the balance sheet. In cases where the operating cycle is more than one year, a non-current liability is an obligation that is not realized in one operating cycle. However, debt that is due within one year following the statement of financial position is reported as a non-current liability. It is important to mention that there must be an intention to refinance this debt with an arrangement in process to restructure the obligation to a non-current nature (Petrovic, Manson, & Coakley, 2016).
Double Entry Bookkeeping System
The double entry bookkeeping system is a crucial concept for every form of business. A basic idea behind the concept is that in every transaction a business undertakes, there should be at least two accounting entries and sometimes more. That is, in every transaction, a credit entry has a corresponding debit entry (Petrovic, Manson, & Coakley, 2016). The rule follows the accounting equation; assets = liabilities + owner's equity to ensure that it is always in balance. For instance, if a company decides to purchase a motor vehicle worth $4000 and pays the amount through the bank, two entries exist. One, debiting the motor vehicle account with $4000 and two, crediting the bank account with the same amount. In this case, the point of making two entries in such a transaction ensures that the accounting equation is always balanced. In the same vein if a business pays $400 for a service rendered, the cash account is to be credited with the amount to decrease it while the account of the service rendered increases through a debit entry. In both examples, the equation is kept balanced since the amounts in a general ledger on the debit side must correspond with the amounts entered on the credit side.
Debit and Credit
The debit and credit rule is an important aspect in financial transactions related to the double-entry bookkeeping system. It is an aspect that every accountant should understand and lies deep in the heart of double-entry bookkeeping system. In every financial transaction, the debit and credit rule ensures that the basic accounting equation is upheld. Ideally, in a T-account or in a ledger, debit entries are located on the left side while credit entries are located on the right side. In an accounting equation assets are equal to liabilities and equity and in case an asset account increases by a debit then a corresponding asset which is a credit must be increased or decreased (Warren, & Jones, 2018).
In every time an accounting transaction occurs, there must be the creation of two accounts involving debiting one and credit the other. As a rule of thumb, an accountant can open, as many accounts as possible but the minimum number should be two for every transaction with a matching credit and debit entry. In essence, the total of all debits must equal the total of all credits to ensure that the accounting transaction is in balance (Carey, Knowles, & Towers-Clark, 2017). If a transaction is not balanced, creation of a financial statement is impossible. Therefore, one can argue that the use of debits and credits is a fundamental control over accounting accuracy.
...(download the rest of the essay above)