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Accounting Theory Concepts with Critical Analysis

Discuss about the Accounting Theory Concepts with Critical Analysis.

Answer:

Introduction of Accounting Theory Concepts

Accounting theory concepts are referred as doctrine or elementary accounting postulates. These concepts can be said as rules implement as guides to actions. A concept is general and recommends a guide. There are many probable events in accounting but rules could not be approved for every conceivable ultimately (Hub Pages, 2011).

Some significant accounting concepts are as follows:

  • The Accrue Concept: According to accrue concept, profits acquired by conducting events are affects only to the equity of owner. It specifies that the profits should be recorded when sales occurred, whether cash from sales due accrue or is in arrears. It can be said that it is same as matching concept of accounting. Expenditures are also concurrently known at the time of event conducted and it is not compulsory to know at the time of cash paid. This concept holds that revenue which was earned and cost which was incurred tha

    t produces revenue have to be match and reported for the accounting period.
  • Business Entity: Business and owner of business are different so all the transactions which occurred in business can be documented as they affect the business and are different from the owner. But in the case of company, difference can be maintained easily. Because under companies, laws and rules follow according to the business and company has its own personality. Company can sue by its own name in place of sue by name of all its owners or shareholders because company has its own existence. Company is treated as entity with separate existence from the proprietary business.
  • Quantifiable / Money Measurement: This concept says that under accounting, every item should be assessable in terms of money (i.e. in cent and in dollar). Each item in accounting should be placed in the terms of money. The cause behind it is that money can be accepted in value and as medium of exchange.
  • Duality: It is based on the principle of book keeping of double entry system. Each transaction occurs by debit and credit items. For example, if an asset purchased in cash then asset will be debited or cash will be credited. As per double entry system, each transaction affects two items.
  • Periodicity: Generally, accounting period is of one year, although for the purpose of management, some time reports are prepared for short period of time which is known as interim statements. Until the final liquidation of business, the results cannot be measured appropriately. So, accounting period of one year is used to measure or evaluate the changes in financial position of business.
  • Realization: Under this concept, revenue recognized in an accounting period is discussed. The four categories of realization are as follows:
  • Revenue can be identified at the time of scale
  • Revenue can be identified during production period
  • Revenue can be identified at the time of production is completed
  • Revenue can be identified consequent to the sale (for example, at the time of collection of cash).

Revenue can be recognized at different points of time. For example, at the time of production of goods, at the time of delivering the goods, or at the time when transaction is completed. In most of the cases, choice depends on norms of industry.

  • Historical: The concept of historical cost tells that the base of accounting recognition of all asset attainment, providing or receiving services, incurred expenses and all other transactions is cost. So this concept refers that acquisition cost of assets are maintained throughout the process of accounting (Miss CPA, 2012).

Analysis of Annual Report of Common Wealth Bank of Australia

Common wealth bank of Australia which is listed corporation under Australian ASX is taking as topic this report.

As per annual report of 2015 of Common wealth bank, they are practicing accounting policies which are (Financial Report, 2015):

Financial statements are prepared as per International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB).

Concept of periodicity is applicable while preparing financial report. The annual report prepared yearly.

Financial report has been created as per historical cost concept, except some assets and liabilities evaluated at fair value.

In financial report, amounts have been rounded as per ASIC, to the closest million dollars. Financial statements are presented in Australian dollars, which is functional and presentation currency of common wealth bank. Foreign currency transactions are also occurring in functional currency.

Income and expenses are offset in income statement while assets and liabilities are offset in balance sheet. Revenue is measured at the fair value of the consideration received or receivable.

Profit before income tax of bank increases from $M 11,007 to $M 11,670 in 2015 with compare in 2014. And profit of group are 10,645, 11,997 and 12,612 in year 2013, 2014 and 2015 respectively which is also increasing. Net profit after income tax increases from $M 8,442 to $M 8,976 and net profit attributable to equity holders of bank remains same as net profit after income tax because there non controlling interest is absent. The increasing profits showing good financial position.

Total comprehensive income net of income tax of bank is increases from $M 8,883 to $M 9,488 in 2014 to 2015. And income of group is $M 8,558, $M 9,303 and $M 9,799 in year 2013, 2014 and 2015 respectively. It can be said that income of bank and groups of bank is increases.

As per the balance sheet, total assets increases from $M 830,877 to $M 920,167 in 2014 to 2015 and total liabilities increases from $M 782,442 to $M 868, 420 in 2014 to 2015. Hence, net assets and total shareholders’ equity increases from $M 48,435 to $M 51,747 in 2014 to 2015.

Dividend distributed at the end of half year. Dividend per share is 164, 200, 183, 218, 198 and 222 cents per share from December 2012 to June 2015. Dividend payout ratio was 77.4% in 2013 which decreases in 2014 to 75.5% and then increases in 2015 to 75.7%. On the yearly basis, dividends per ordinary shares of group are 364, 401 and 420 (in cents per share) in 2013, 2014 and 2015 respectively. Dividend per share is also showing growing trend of groups of bank.

Earnings per share are distributed as basic earnings per share and fully diluted earnings per share. Basic earnings per ordinary share are 474.2, 533.8 and 557.0 (in cents per share) in 2013, 2014 and 2015 respectively. While fully diluted earnings per share are 461.0, 521.9 and 542.7 (in cents per share) in 2013, 2014 and 2015 respectively. Both earnings are increases in current year with compare to previous year. It reflects the sound financial position of groups of Common wealth bank. It is beneficial for investors or shareholders.

As per cash flow statement, net cash provided by operating activities while net cash used in investing and financing activities. Finally, cash and cash equivalent decrease from $M 6,432 to $M 1,321 in 2014 to 2015. And this effects on cash and cash equivalent at the end of year. 

Bank adopts the risk management framework to manage risk.

 Accounting standards are followed by the bank while preparing financial report for the year ended 20 June 2015.

Conclusion

Financial statements under financial report are showing good financial position of bank. All the accounting standards and accounting concepts are followed while preparing financial report. All the obligations are meeting by bank while preparing financial report. The directors are accountable for preparing the financial statements. These statements are prepared in accordance with laws and regulations which are applicable and accepted by bank. Accounting standards required fair presentation of financial statements for each financial year and as per annual report financial position, financial performance and cash flows showing fair presentation. Here, accounting policies are selected and applied properly by the directors. The true and fair presentation of financial statements enhances believe of investors in bank. All the information provided in the report included accounting policies which provide relevant and reliable information of bank. As per sound financial position, it can be assessed that bank ability to continue as going concern.

Recommendation

The financial position of bank is good and sound as its profits are increasing. Dividend per share and earnings per share increases with good rate, which is beneficial for investors and shareholders to invest in the bank. Income and profits are increases which show that bank performing well in market. Assets are more than liabilities which reflect sound financial position and also tell bank can easily meets its obligations.

References 

Hub Pages, (2011). Accounting Theory – Concepts, Assumptions And Conventions. Retrieved on 30 August 2016 from: https://hubpages.com/business/Accounting-Theory-Concepts-Assumptions-And-Conventions

Financial Report (U.S. Version) Year ended 30 June 2015. Commonwealth Bank of Australia [AU]. Retrieved on 30 August 2016 from: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/us-investors/docs/US_Annual_Report_2015.pdf

Miss CPA accounting and finance tips, (2012). Basic Accounting Principles And Concepts. Retrieved on 30 August 2016 from: https://misscpa.com/basic-accounting-principles-and-concepts/

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