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Accounting systems in small and medium enterprises

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par Jean Damascène HAGENIMANA
School of finance and banking Rwanda - Bachelor degree of business administration 2008
  

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2.18. Objectives of financial statements

Financial statements are prepared from accounting the records maintained by the firm. The general accepted accounting principles and procedures are followed to prepare these statements. The basic objective of financial statements is to assist in decision making process. The other objectives are:

To provide reliable financial data about economic resources and obligations of a business enterprises;

To provide reliable data about changes in net resources (resources minus obligations) of an enterprise that result from the profit directed activities;

To provide financial data that assists in estimating the earnings potential of an enterprise;

To disclose to the extent possible other information related to the financial statement that is relevant to statement users.16

2.19. The qualities of accounting information

The accounting information must have some qualities in order to its users. These qualities will help to avoid the misleading. These qualities are:

15 ACCA paper 2.6, preparation of financial statements, 2006

16 ACCA paper 1.1, preparation of financial statements ,2003

Relevance: the information should be relevant enough to the needs of the users, so that it helps them to evaluate the financial performance of the business and to draw conclusions from it.

Reliability: the information should be of a standard that can be relied upon by external users, so that it is free from errors and can be depended upon by the users in their decisions. Comparability: accounts should be comparable with those of other similar organizations and from one period to the next.

Understandability: the information should be in a form that is understandable to the user groups.

Completeness: accounting systems should show all aspects of the organization.

Lack of bias: accounting statements should not be biased towards the needs of one user; they should be objective oriented.

Timeliness: accounting information should be published as soon as possible on a periodic basis.17

2.20. The needs of an accounting system

An accounting system is an important tool whose existence is undoubtedly important. Accounting is termed as the language of business. The basic function of the language is to serve as a mean of communication. Accounting also communicates the results of organization's operations to various parties who have some stake in the business, i.e. the proprietor, creditors, investors, government and other agencies. Though accounting is generally associated with business, it is not only the business that makes use of accounting.

The need of an accounting system is all the more great for the person who is running a business or any other organization. He must know what he owns, what he owes, whether he has earned a profit or suffered a loss on account of running a business, what his financial position is i.e. whether he will be in a position to meet all his commitments in the future or whether he is in the process of becoming bankrupt.

Thus, an accounting system is designed to accumulate data about an organization's financial affairs, classify the data in a meaningful way and summarize it in periodic reports called financial statements.18

17 Rajeshwar kumar sharma and R.S popli, principle and practice of financial accounting, seventh edition, 1994

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