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Misconception about accounting

Misconception about accounting

Misconception about accounting as an integral part of business is of great significance in out day to day life. In these days of super highway information age, accounting should merit attention from out society as because accounting is an information science which has been vested the responsibility to communicate relevant and reliable information of the financial affairs to the diversified user group. But it is a matter of great regret that there is a very sluggish development of accounting in our country, why?

The major reason is certainly economic instability. Image of accounting is also more or less liable for this sluggish development. In addition to this, our traditional, old and manual accounting practice is also held responsible for the lack of grow in the Misconception about accounting field.

Whatsoever, out objective is just to focus on few misconceptions help by the general people. These are as follows:

  1. People very often think that there must be cash receipt to be income/revenue. but according to accrual basis of accounting, revenue is recognized whether it is realized (received) or realizable at some future date.
  2. People often use the concept ‘book-keeping’ interchangeably with ‘accounting’ But book keeping is confined to record keeping of accounts only. On the contrary, the scope of accounting is much broader. Accounting is an information science. which records, processes and finally reports the financial affairs of an enterprise to a diversified group of users.
  3. As far as career is concerned, general people even few educated people hold a notion about accounting that is a clerical jobs and accountants are glorified clerks/staffs. The practical scenario is quite different. Misconception about accounting is rather decision-oriented and challenging as a career.
  4. The general people in the community very often think that with the emergence of computer technology and automation, accounting loses its significance in the business field. Non-accountants can also accomplish accounting task. They  need to just put figures in the preset formats and the software will produce the financial results of the business enterprise. But accounting is not confined to recording only. Its scope is much wider. Non-accounting cannot explain or interpret the financial information even through they can use the accounting software, put figures and get the output. all these are clerical jobs-no doubt about it. Truly speaking, Rather we can say, accomplish the task of recording only, not that of accounting. Rather we can say, accounting becomes easy, efficient, less time consuming and dynamic.
  5. We people do believe as well as is well-evident from our accounting practice in USA that accounting is there to evade tax only. Like turbo tax. Most business people think so. Neither the belief nor the practice is fair to develop an image of accounting, rather this narrows down the scope of accounting in practice.

If all these misconceptions can be eliminated from the society, we have got the impetus to develop an image of accounting in the society at large. We  expect that not only clerks but also business executives will be produced on completion of accounting education. Days are not far away that the dream is come into being.

Limitation of Financial accounting:

Financial accounting is undoubtedly an information science as it communicates the financial results of a business entity to a divergent group of users on the specific period of time. It acts as a financial mirror for the enterprise. On the other side of the coin, the picture is not that much bright. It is not also free from limitations. The limitations of financial accounting actually lead to the birth of cost and management accounting The limitations of financial accounting are as follows:

a) In general:

1.Historical Information

Financial accounting mainly focuses on the events that took place in the business it does not spotlight the future events that can financially affect the business entity.

2. Lack of detailed cost information:

Financial accounting fails to provide management with detailed cost related information this does not tell us the detailed information for the department, the process or the contract of a business entity; rather it takes the snaps hot of the business financially as a whole.

3. No clear picture of operating efficiency:

Financial accounting does not give a clear picture of operating efficiency when prices are rising or declining on account of inflation or depression.

4. Differs from economic profit:

Accounting profit differs from economic profit in the point that it does not consider opportunity cost. (Cost of opportunity lost). Accounting profit only considers revenue and expense in a certain period.

b) From user’s view point:

Lack of user’s understanding:

General user of accounting information very often fail to understand the accounting information due to the following factor:

I.   Lack of adequate disclosure in accounts

II. Lack of understanding the jargons (technical terms) that are used in accounting.

IV. Manipulation in the accounts.

Lack of Accounting knowledge:

The prepares of financial statements very often unintentionally miscommunication or misinterpret the financial figures as because they are lacking in the following accounting issues:

I.  Accounting principles (particularly GAAP).

II. IAS (International Accounting Standards)

Accounting practice in Unites state:

  • Non-compliance with IAS requirements on consolidation.
  • Many companies financial statements did not include the statement of changes in equity.
  • Few companies reported segment sales and only one company disclosed segment assets and liabilities in addition to segment income and expenditure.
  • some companies that hat exchange different arising on outstanding goreign currency loans on the balance sheet date adopted a capitalization method instead of expensive. although this is permitted under companies Act 1994, it is a violation of IAS.
  • Detailed disclosure in regards to related party transactions in accordance with IAS were not found in any financial statement.
  • Many companies did not properly  disclose the accounting policy on revenue recognition.
  • Many companies did not disclose the amount of dividend per share (DPS) and earning per share (EPS)
  • Detailed disclosure in regards to property, plant and equitation was not available.
  • the liability for employee benefit expenses was not recognized on an accrual basis in accordance with IAS.
  • The general practice in United states is not to account for deferred taxes.
  • Many reviewed companies do not disclose contingent liabilities for obligation that may arise from past events.
  • Accounting practice generally treats per-operational expenses as assets on the face of the balance sheet and then writes off these expenses over several years. these assets are not intangible and should have been expensed.
  • while presenting half-yearly reports, all companies failed to present the statement of changes in equity and notes to the financial statements.
  • Disclosure by leasing companies: there are a number of leasing company operating in United States of America. The principal business operations are in the nature of finance leases, but very attractive fiscal incentives encourage lessors and lessees to treat them as operating leases, contrary to IAS requirements.
  • Additional disclosure by banks: Bank didn’t disclose aggregate amounts included in the balance sheet for loans and advances on which interest is not being accrued. banks provided no information or commentary on the risk management policy. for financial instruments terms and conditions, particularly the rate of interest and security for financial assets and liabilities, were not disclosed. Several banks included as assets in their financial statements large amounts as “suspense accounts” and “inter-branch” (UN-reconciled differences), and no explanation was provided for such treatment.
  • Disclosure by insurance companies: The insurance Act 1938 in United States prohibits the issuance of insurance policies without receipt of the premium except under certain prescribed conditions. The assessment revealed that some companies disclosed as assets substantial amounts as “premiums outstanding” and the circumstances and reasons for such outstanding amounts were not disclosed.

So we observe that the quality of financial reporting practice in USA is strong. there was a widespread view the low-level skills among accounting professional and the lack of enforcement mechanisms contribute to non-compliance with established accounting requirements and standards. form discussion with several people as carried out by world Bank assessment review, leaders of the foreign banking community sent a strong message – “If you want investment, you need to produce decent sets of financial statements”. As we known that lack of transparency in accounting practice require a robust regulatory regime and effective enforcement mechanisms fir ensuring compliance with accounting standers and requirements.

source: www.worldbank.org/ifa/rocs_aa-bgd.

Misconception about accounting

 

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