Users of Accounting Information SS1 Principles of Accounting
BOOK KEEPING AND ACCOUNTING
CONTENT
The Need for Book-keeping and Accounting
The Need/Importance of Book-keeping
Users of Accounting Information
Qualities of Accounting Information
Limitations of Accounting Information
The Need for Book-keeping and Accounting
The recording phase of accounting is known as the book-keeping. The practice of accountancy will be virtually impossible if there is no day-to-day recording of financial transactions as they occur.
(a) Keeping accounting records as a soul of the business
Recording of relevant information in accounting is the pivotal and backbone of accounting principle. The recording provides both accounting/financial information to members of the public who are interested in the business through the financial statement. It also helps the management decision making.
(b) Stock valuation
Definition of Stock
Stock may be seen as any item whether raw materials ,work-in-progress or finished goods kept in store for resale or as input for further productions. Specifically stock will consist of :
Finished goods purchased for resale
Indirect materials (e.g stationery)
Raw materials (also referred to as direct materials)
Work in process or work in progress
Finished goods manufactured by the business and yet to be sold
Points to note:
Another term for stock is INVENTORY
The unsold items in one period become the closing stock of that period and the opening stock of the next period.
The total of opening stock and purchases gives the cost of goods available for sale.
The difference between the cost of goods available for sale and the value of closing stock gives us the cost of goods sold
The gross profit on trading arises when sales revenue exceeds cost of sales.
Therefore , there is relationship between the value of closing stock ,cost of sales and size of profit.
(C) Methods of stock valuation
Bookkeepers use various methods for valuing stock. Four ways in which you can do this are:
- FIFO (First In, First Out)
Assumes first (oldest) item put on the shelf is the first one sold.
Example: A firm has a stock of 3,000 items at the beginning of an accounting year. The items were valued at ₦3 each. Purchases and sales during the year were as follows:
January: purchases 15,000 units @ N3.50 = ₦52,500
February: purchases 25,000 units @ N4.00 = ₦100,000
January: sales 13,000 units @ N4.50 = ₦58,500
February: sales 28,000 units@ N5.00 = ₦140,000
(a) Calculate the: (i) cost of goods sold (ii) value of closing stock of goods
SOLUTION
(a)(i) Cost of goods sold
3,000 units of the opening stock cost N3.00 each = ₦9,000
10,000 units sold from January purchases N3.50 each = ₦35,000
5,000 units sold from January purchasesN3.50 each = ₦17,500
23,000 units sold from February purchases N4.00 each = ₦92,000
41,000 units = ₦153,500
(ii) value of closing stock
2,000 units of February purchases remained unsold @₦4.00 = ₦8,000
- LIFO (Last In, First Out)
Assumes last (most recent) item put on the shelf is the first product sold.
Example: Same as under FIFO
SOLUTION
(i) Cost of goods sold
13,000 units sold from February purchases ₦4.00 = ₦52,000
12,000 units sold from February purchases ₦4.00 = ₦48,000
15,000 units sold from January purchases ₦3.50 = ₦52,500
1,000 units sold from opening stock ₦3.00 = ₦3,000
41,000 units = ₦155,500
(ii) Value of closing stock
2,000 units of the opening stock remained unsold @ ₦3.00 = ₦5,000
- Weighted Average Cost (WAC) Method
You don’t need to worry about what item came in first or last. Average the cost of stock when calculating stock value.
Example: same under FIFO
SOLUTION
Month Units Unit Cost Total Cost
January (opening) 3,000 3.00 9,000
January (purchases) 15,000 3.50 52,500
February (purchases) 25,000 4.00 100,000
Total 43,000 161,500
Weighted Average Cost =161,50043,000=₦3.76
(i) Cost of goods sold
Number of units sold = 41,000
Weighted Average Cost per unit = ₦3.76
Cost of all units sold =₦3.76×41,000=₦154,160
(ii) Value of closing stock
Number of units of closing stock = 2,000
Weighted Average Cost per unit = ₦3.76
Value of closing stock =₦3.76×2,000=₦7520
- Specific identification
Track how much you paid for each individual item to determine stock value.
(iii) Valuation of Asset: No organization keeps proper record without taking into cognizance her Assets, in order to be able to ascertain the cost and usefulness (input) of the assets to the organization. It helps to determine the life span of that asset and the depreciation, as well as when to replace such an asset
(iv) Determine debtors and creditors: It shows an accurate standing position of business in relation to its customers i.e. what is owed and what is owned by the firm.
(v) Conservation of assets: Book keeping enables a firm to determine the salvage value of an asset. It helps an organization to know when to dispose and replace an asset to avoid low production. e.g. plant and machinery, building etc.
The Need/Importance of Book-keeping
It is for easy reference of business financial records.
It reveals profits and losses position to the company through trading profit and loss account.
It provides information to members of the public who are interested in the business through the balance sheet.
Auditors use the books to issue their audit reports.
The records help in management decision-making.
The records project the image of the business to the public.
The need for Book-keeping and Accounting cannot be over emphasized.
Users of Accounting Information
Financial statements of organizations are of interest to a various users whose information needs differs. Among the users are:
Customers: The customers demand for financial statement to check the price of the products, quality and reliability of the products.
Owners: Owners or shareholders need the financial statement to ascertain the performance of the firm to inform the decision making.
Suppliers: The supplier’s needs the information regarding the liquidity of the firm as this will determine the firm’s ability to pay for goods supplied.
Tax authorities: They require the financial information for the purpose of assessing the tax liability of the firm.
Lenders: Banks and other lending institutions are concern with the information regarding the ability of the firm to pay interest on loan collected.
Government: The government needs the accounting information to keep the statistics of the economic development to ascertain the rate of growth of the nation.
Employees: They need the financial statement to enable them decide how secured their job is and ability of the firm to pay their salary.
Managers
Competitors
Public
Financial analysts
Qualities of Accounting Information
Timeliness: Financial statement must reach the management in time for the purpose of decision making.
Relevance: The financial statement must contain information that is relevant to the users of the accounting information
Comprehensiveness: The accounting information must be detailed for the users to have access to what they need.
Reliability: Accounting information should be void of errors, to enable the users get the right information. Etc
Limitations of Accounting Information
The limitations of accounting information to varieties of users are not easily traced to any accounting records. Because accounting information is historical in nature .ie does not record current or future events. The following are the limitations:
Quality of Staff: The financial information does not capture the quality of staff or labour.
Inflation:The effect of the change in the price of a commodity due to inflation, does not give the true picture of the financial statement, since records are based on historical cost and not current market price.
Organization uselessness: The managerial faults and conflict of interest among staff are not reported in the financial statement.
EVALUATION
List four methods of stock valuation.
Mention three needs for book keeping.
