A trial balance is a statement which is prepared with taking the closing balance of the different ledger accounts where the debit total balance matches the credit total balance. In simple words, a trial balance uses closing balance of different ledger accounts which have debit or credit balances and the statement tallies. If the statement does not tally then there may be certain errors in the statement. The main use of a trial balance is to check the mathematical accuracy of the transactions as recorded in the ledger accounts. Every business prepares a trial balance periodically to ensure that the books of accounts which are made following double entry system are free from errors which may be due to calculations. This is possible because under double entry system, the total of debit side will always be equal to the total of credit side. This the principle which is followed by a trial balance (Needles, Powers and Crosson 2013).
If the trial matches it only means that the mathematical accuracy is there but it does not mean that their may not be any accounting errors. The matching of trial balance only shows that there are no calculation errors but there still maty be material errors present in the books of accounts. For example, an error of omission of an entry will not be identifiable as the trial balance will match. Another example which can be given is that of bookkeeping error which means that equal debit and credit been entered into wrong accounts. In this case also, the trial balance will match but still there is an error in the financial statements.
As per the matching concept of account all the expenses should be reported in the same period in which the income which is related to such an expense is realized. In other words, this is an accounting principle which requires to recognize expenses and income in a related way (Shipman, Swanquist and Whited 2016). As per the matching concept two methods which are popularly used in accounting are Accrual system of recognizing and Cash system of Recognizing.
Under the accrual system of accounting the expenses are recognizes in the year in which such an expense has been incurred and it does not matter whether cash is paid for such transaction. In other words, accrual basis of accounting is not dependent on the cash received or cash paid for recognizing and recording of transactions. Whereas in the case of cash basis of accounting expenses are recorded when cash is actually paid by the business irrespective of the fact when the expenses was incurred. Therefore, the major difference between cash basis and accrual basis is the timing of recognition of transactions.
Conceptual Framework refers to a system which is followed by organizations in reporting accounting items and is important in the preparation of the annual reports of a business while considering the rules and regulations which are universally established (Weil, Schipper and Francis 2013). The enhancing qualities characteristics of the financial statements are given below:
Factoring may be defined as a source of financing wherein the account receivables of the business are sold to financial intermediary who are known as factors at a discount. In simple words, it is a source of procuring funds by selling off the receivables of the business. It is to be clearly understood that factoring is not same as a loan and the funds which are received are not to be considered as debt capital of the business (Michalski 2014
Provision for bad debt are allowed in financial statements in order to estimate the losses which the business might incur. As per the principle of Conservatism, a business must always recognize probable losses or liabilities and record the same ahead of income or assets. Therefore, the business has to recognize such a doubtful debt as a provision. If the provision is not allowed than it will affect the profit which is generated by the business which will be showing profits in excess and also impact the value of debtors in the balance sheet of the company.
For the purpose of calculating the value of depreciation, the initial cost of the machinery is taken which is shown at 65,000. The other items which are included in the cost of machine are cost to deliver the machine to site which is shown at 3500. In addition to this, the installation costs and the repair made to the machinery are also a part of the cost of the machinery. The reason for this because such costs incurred on the machinery is increasing the useful life of the asset and thereby is to be capitalized. The depreciable value of the machinery as shown in the above table comes to 84500. The amount which is paid for painting the name of the company on the machinery and the expenses incurred on the damaged door which was due to machinery entering the factory will not be considered as a part of the cost of the machinery as such expenses does not increasing the useful life of the machine or adds any value to the machinery.
The two most popular methods which are used for the purpose of calculating the depreciation are Straight line method and Diminishing value method. In case of straight line method of depreciation, a fixed amount is charged as depreciation. In the case of Diminishing value method, depreciation is charged on the value of the asset and is on the basis of certain rate of depreciation. The amount which is charged as depreciation is changing and variable in nature (Del Giudice, Manganelli and De Paola 2016).
In the case of straight line method, the net profit will be deducted by the same amount of depreciation and the amount under this method remains fixed. If the company uses Diminishing value method then the amount of depreciation charged by the company diminishes with every year. The profit in case of diminishing value method will be more in comparison to straight line method of depreciation.
The revaluation of assets is done when the market value of the assets is more than the historical cost of the asset. The asset’s value can either be appreciated or depreciated depending on the type of revaluation which is the company is planning on the assets (Tabari and Adi 2014). Normally in any business assets are recorded on the basis of historical costs. The market value of the assets is always fluctuating and therefore there is a high probability that the market value of the asset will be more than the historical cost of the assets. Therefore, it is up to the choice of the management whether to value the asset at historical cost or revalue the asset and show the same at revalued cost. The revaluation of the asset allows the companies to ensure that the asset value is up to date with the market value of the asset. It is also to be remembered that the method of revaluation allows both upward and downward revaluation which is appreciation of the assets as well as depreciation of the assets.
As per the tables which are shown above perpetual system for measuring inventory is more suitable as the profit under the method is more than the profit generated under periodic system of inventory measurement. In addition to this, the perpetual system has its own advantage as it continuously updates the inventory records of the business to ensure that everything is up to date. As shown by the table above the net profit under perpetual inventory system is 7200 whereas the net profit under periodic inventory system is 6905 and hence perpetual system of inventory is to be followed.
The lower of cost or net realizable value is a principle which is widely followed concept which is used in inventory valuation. The concept states that the inventory should be valued at cost or net realizable value of the inventory which ever is lower. Net realizable value means the value at which the inventory is expected to be sold.
The company has made a sustainability report which shows that the company has shown in the financial statements and the company has won Climate Leadership Award and has the title of the most profitable business in carbon reduction activity.
The company is committed to making the working environment as efficient as possible in global supply chain and also ensure that the products which are provided by the company qre of ethical in nature and sustainable. An ethical sourcing policy was implemented in 2017 across the group.
Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s assets. In International Conference on Computational Science and Its Applications(pp. 214-227). Springer, Cham.
Hope, O.K., Thomas, W.B. and Vyas, D., 2013. Financial reporting quality of US private and public firms. The Accounting Review, 88(5), pp.1715-1742.
Jassaud, N. and Kang, M.K., 2015. A strategy for developing a market for nonperforming loans in Italy (No. 15-24). International Monetary Fund.
Michalski, G., 2014. Factoring and the firm value.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.
Shipman, J.E., Swanquist, Q.T. and Whited, R.L., 2016. Propensity score matching in accounting research. The Accounting Review, 92(1), pp.213-244.
Tabari, N.Y. and Adi, M., 2014. Factors Affecting the Decision to Revaluation of Assets in Listed Companies of Tehran Stock Exchange (TSE). International Journal of Scientific Management and Development, 2(8).
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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