Accounting principles serve as a guide in the preparation of financial statements. The principles include the operational rules, fundamental assumptions, and essential characteristics used in the preparation of the financial statements. Consequently, the original guides confused the different users of the financial reports.
The accountants implement the accounting principles during the preparation of the financial statement reports. The accounting principles unite the entire accounting process together. One of the accounting principles states that financial statements must objectively serve as one of the readers’ tools decision –making tools. Another accounting principle states that financial data must have certain characteristics. The characteristics include dependability and practicality. Dependability includes generating objective, accurate, and verifiable financial statements. Practicality includes distributing timely and meaningful financial statements. Another characteristic is the issuance of financial statements for each time interval.
In addition, the entities implement the intricacies of the accounting principles. For example, the matching rules mandate the deduction of operating expenses from the corresponding revenues. The policies include supplying the necessary information needed to the readers. The assumptions include management’s classification of the business as a going concern.
Entities must implement established accounting standards to ensure readers will understand the financial information. To avoid a repeat of Enron, WorldCom, and other accounting scandals, unwavering compliance with international accounting principles and accounting standards is necessary.
On the other hand, accounting standards focus on how entities treat an accounting issue. For example, the accounting standards emphasized the implementation of the proper inventory method. One inventory method is to record the inventories at the lower amount between the cost or market prices. Another inventory method is the weighted average inventory method. Another accounting standard states the company must use the capital lease to record the assets. The accounting standards board constantly modifies the principles and standards.
The accounting police force ensures companies implement accounting principles and standards. The accounting luminaries set up the Financial Accounting Standards Board in 1973. The Financial Accounting Standards Board focused on analyzing and reviewing all accounting-related issues. The board distributes pronouncements on how to resolve an accounting issue. The American Financial Accounting Standards Board and the London-based International Accounting Principles Board are private accounting entities. As such, the government does not fund the two board’s activities. Instead, the two accounting boards receive contributions from private entities. The Accounting Principles Board replaced the Financial Accounting Standards Board as the United States’ accounting entity authorized to issue guidelines and standards.
Likewise, the American Institute of Certified Public Accountants (AICPA) requires its members to abide by established accounting principles and standards. The AICPA is an organization of American Certified Public Accountants. In addition, the Securities and Exchange Commission determines and sues companies for issuing fraudulent financial statements. Some entities intentionally violate accounting standards and principles. The violation precipitates fraudulent financial statements.
There are many good reasons for preparing financial statements. The financial statements enhance the readers’ business decisions. The financial statements aid in predicting the company’s future revenues and profits. Another reason is that the financial statements offer confidence among the different parties transacting with the company.
The international accounting standards create several significant impacts. First, the entities must prepare objective financial statements. The objective financial statements favor the majority of financial statement users. Objectivity includes the issuance of traceable and accurate financial data.
Next, the financial statements enhance trending. The profit-based financial statements point to a possible profit in the coming year. On the other hand, a company that generated a net loss during the past two years will probably generate another net loss result in the coming year. Trending increases the success of predicting future profits.
Another impact is the increase in investors. More readers will invest in a business that generated profits during the past two years. A net loss income statement discourages people to invest in the company. The net income entices the silent investors to funnel one’s cash into the profitable business venture
Further, another impact is the increase in understandability. The knowledge of accounting standards and principles increases the readers’ interest. For example, the accounting students understand how the cash flow statement supports the statement of financial position’s cash and cash equivalent balance.
Next, another impact is the increased incomparability. Implementing similar accounting standards allows comparing and contrasting the revenues between two accounting periods. The managers can discuss the variance between the sales of 2010 and 2011. The managers scrutinize why 2010 profits are higher than 2011 profits.
Another impact is the recording of all relevant business transactions. The entities are required to record all sales generated in the books of accounts. The companies must record all expenses incurred during the accounting period. Compliance with international accounting standards avoids edging towards Enron’s fraudulent activities.
Another impact is disinterest. Prospective investors shy away from companies violating international accounting standards. Eager clients refuse to transact with businesses presenting fraudulent financial reports. Confused investors avoid companies with vague recording practices.
Lastly, another impact in determining the company’s future. Normally, the recording of business transactions focuses on the going concern principle. A bankrupt company is not a going concern company. A company having a net loss amount is not a going concern company. On the other hand, a company having a net income amount is a going concern company.