Define Accounting and the Importance of Accounting Information

Definition

Accounting is the practice and body of knowledge concerned primarily with

Methods for recording transactions,

Keeping financial records,

Performing internal audits,

Reporting and analyzing financial information to the management, and

Advising on taxation matters.

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm’s assets, liabilities and owners’ equity.

Accounting provides information on the

Resources available to a firm,

The means employed to finance those resources, and

The results achieved through their use.

(Piper, 2010)

The Importance of Accounting Information

From a layman’s view, accountancy is keeping records of transactions. Thus, most basic and simple motive of such an activity is to keep a record for further use. This recorded data helps the person to determine the earnings and expenditures that have taken place. In addition to that, such records are also proofs that such a transaction has taken place. The last basic intention is to determine fields where the income can be increased and expenditure can be decreased. There are a number of other functions performed by accounting information. These include: management, use in measurement, use as an economic value, and a determinant tool for change (Piper, 2010).

Management

Accounting systems are a tool used by management to determine the financial status of a company. Accounting keeps track of income and expenses and helps the management team to make plans. One aspect of accounting is the budget process. Managers use budgeting to project income, expenses and staffing needs for company projects and growth. By using accounting, a company’s leaders can plan appropriately for downturns in the economy or ready the company for growth (Piper, 2010).

Measurement

Accounting measures the success or failure of a company. Public companies use their positive financial statements to encourage stock investors to buy stock. With an infusion of capital from stock purchases, a company can expand and grow to meet the increasing needs of its client base. Without accounting systems, the management team has no way of measuring a company’s productivity (Piper, 2010).

Economic Value

The economic value of a company is assigned by the records and transactions that accountants keep. Company owners allow others, for a fee, to review the accounting records when they want to sell the company. The accounting records assign an economic value to the company based upon its financial activities: the income and expenses. Accounting also keeps track of the debts a company might have or the taxes it pays each year (Piper, 2010).

Tool for Change

Company leaders or managers use accounting reports as tools to make needed changes. When production or sales decrease in a specific area, accounting records reflect these decreases. This allows managers to make informed decisions that might include adding or reducing staff. If the product or service offered is no longer of value in the marketplace, the accounting records will reflect this and allow the company’s leaders to use the information to make the needed changes. Accounting systems and records allow a company to be responsive to the changing marketplace (Piper, 2010).

Differentiate Between a Public and a Private Limited Companies

There are numerous differences between private and public companies, some derived from statute while others are derived from practice. The general rule is that any company which is not a public company is a private company.

Very broadly stated the most important difference between a public company and a private company is that a public company is intended as a vehicle not only for a business but also for public investment in that business, whereas a private company is the private concern of the persons engaged in the business incorporated in it (Millerrosenfalck, 2013).

Commencement of Business: Public limited company cannot start its operation after registration. It requires Certificate of Commencement to start its operation. And Private limited company can start its operation after getting Certificate of Incorporation (registration) from the registrar of Company.

Transferability of Shares: Public limited company can transfer its shares easily. Shares are transferable. And Private limited company cannot transfer its shares. Registrations are imposed on transfer of shares.

Minimum Subscription: Public limited company cannot sell shares in the share market until minimum subscription is collected. And Private limited company has no provision to collect minimum subscription.

Company Name: Public limited company must add the word Limited as the last word after its name. And Private limited company must add the words Private limited (Pvt. Ltd.)  As the last words after the name of the company.

Number of Directors: In public limited company there must be at least three directors in the board of directors. And In private limited company there are two directors in the board of directors.

Statutory Meeting: Public limited company must convene statutory meeting. It is compulsory to hold statutory meeting and statutory report must be submitted. And Private limited company does not have to convene statutory meeting. As a result, there is no need to submit statutory report.

Qualified Shares: In public limited company the directors must purchase the number of qualified shares to become directors. And To become directors of private limited company it not mandatory to purchase minimum qualified shares.

Retirement of Directors: At least 2/3 of the directors of public limited company must retire by rotation. On the other hand, the directors of a private limited company not retire.

Scope of Business: The scope of public limited company and company ownership is wide and expanding. And the scope of private limited company is limited in known people and places nearby.

Financial Strength: Since public limited company can subscribe huge amount of capital from the public, it is financially strong and can take large projects. And Private limited company cannot subscribe capital by selling shares. So, its financial position compared to public limited company is less.

Secrecy of Business Operations: In public limited company many documents have to be submitted to the registrar of Company and to the shareholders in the annual general meeting. So, secrecy is not maintained. And In private limited company many documents and information are not disclosed to the shareholders, hence secrecy can be maintained.

(Millerrosenfalck, 2013)

Explain any Four (4) Attributes of Goodwill

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company’s balance sheet (Dudin, Lyasnikov & Didenko, 2013).

Attributes of Goodwill

The following are the special attributes of goodwill;

Goodwill can be sold only with the entire business or it cannot be sold in part or in isolation except on admission or retirement of a partner when new partners compensate the old partners or the retiring partner gives up his rights in favour of remaining partners.

Goodwill is valuable only if it is capable of being transferred from one person to another. If it cannot be transferred then there will be no value of goodwill.

Goodwill represents a non-physical value over and above the physical assets.

Goodwill cannot have an exact cost as its value fluctuates from time to time due to internal or external factors which ultimately affect the fortune of the Company.

The value of goodwill is based on subjective judgement of the valuer.

(Dudin, Lyasnikov & Didenko, 2013)

References

Dudin, M. N., Lyasnikov, N. V., & Didenko, E. N. (2013). Economic Features of “Goodwill” Category as a Factor of Business Management Improvement. (English). European Researcher, 58(9-1), 2212-2217.Piper, M. (2010). Accounting Made Simple: Accounting Explained in 100 Pages or Less. Chicago: Simple Subjects.

Millerrosenfalck (2013). Differences Between Private Limited Companies and Public Limited Companies: Miller Rosenfalck.