Financial Systems and audits Essay Example | Topics and Well Written Essays - 3000 words

Financial Systems and audits - Essay Example An income statement is composed of several items, including sales, costs, increase and decrease in intangible value, taxes, and outstanding shares. Another key accounting record is the balance sheet. A balance sheet categorizes a company’s resources such as assets, liabilities and owner’s equity. According to Pandey (2002), the components of a balance sheet are divided into current and long-term categories. Pandey (2002) further observes that these components are listed in order of liquidity. Besides a balance sheet and income of statement, a statement of cash flows is also very important in a business. A statement of cash flow provides one with information about a company’s cash receipts and cash payments during a period. According to Khan and Jain (2003), a statement of cash flow has several objectives. Firstly, it is effective in predicting the amounts timing and ascertaining of future cash flows. Secondly, it indicates how cash is used and generated. For thes e reasons, it also helps the creditors, stockholders and customers to determine the flow of cash in a business. Thirdly, it helps an entrepreneur to understand the differences between net income and net cash flow from operating activities. Finally, it helps an entrepreneur to examine a company’s investing activities and financing transactions. 2. Importance of accounting concepts It is important for an entrepreneur to understand different accounting concepts the common of which are business entity, matching concept, money measurement, going concern, accounting period, cost concept, realization concept and accrual concept. To understand the importance of each of these concepts it is instructive to examine their roles. To start with, the business entity treats business and owner as two different entities. In other words, a business entity is the very basis of accounting concepts, conventions and principles. The money measurement concept allows an entrepreneur to distinguish bet ween transactions that can be expressed in terms of money and those that cannot. The going-concern concept assumes a business entity can carry out its activities for an indefinite period of time. This concept is important as it facilitates the preparation of financial statements. The accounting period concept is important in calculating tax, predicting future prospects of a business and helping an entrepreneur to procure credit from financial institutions. The accounting cost concept requires all assets to be recorded in the books of account at their purchase price. This requirement is helpful in the sense that it allows an entrepreneur to calculate depreciation of fixed assets. Another key concept is the dual aspect concept which allows an entrepreneur to detect errors. Another key concept is the realization concept which makes accounting information more objective. Equally important is the accrual concept which helps an entrepreneur to know the actual expenses and income during a particular period of time. In addition, using this concept an entrepreneur should be able to calculate the net profit of his or her business. Finally, there is the matching concept which states that revenue and expenses should be recorded in the same accounting period. This concept should help an entrepreneur to ascertain the exact amount of profit or loss of the business. 3. Factors influencing the structure of accounting systems In order to effectively business it is also important for an