Introduction
Accounting practices result in a great deal of information, which is aimed at several users who apply them in decision-making. It is critical, therefore, that most of the users of such information comprehend the meanings of the accounting principles, and that the reports report fairly the financial situation of the entities that they concern. Therefore, it is always important that specific defined principles be laid down to be followed by professionals in coding the realities of firms into communicable outputs, which include accounting principles. The rules, which may vary according to regions and countries while retaining some levels of resemblance, are referred to as accounting principles. On the other hand, end of year adjustments refer to the journal entries that are made to the accounts of a specific corporate institution before the preparation and dissemination of financial statements. The primary objective of end of year adjustments is to ensure that the financial statements are a reflection of the true financial positions of the companies for which they have been prepared through the allocation of the appropriate income and expenses of a given period.
As it appears from the description, accounting principles have significant levels of connection with end of year adjustments. Precisely, the principles applied in accounting, as do the end of year adjustments, guide accountants to produce financial statements that are a true reflection of the financial positions of the companies and businesses that they concern. This paper describes accounting principles and end of year adjustments, a topic that strives to describe the relationship between the two aspects of accounting. Specifically, the paper provides an overview of the topic, the primary concepts of the topic, the reasons why the topic is critical, areas of new information that could be learned concerning the topic, and the relationship of the topic to financial reporting and analysis.
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Overview of the Topic
The topic is organized around eight major learning outcomes, which have critical implications for accounting practice. The most obvious aspect of the topic is the fact that it outlines and describes avidly the manner in which accounting principles, which are known by other names depending on the regions in which they are applied, organize and structure the recording, accounting, and reporting of financial information. Furthermore, the topic describes the idea that accounting principles could be classified to suit four primary requirements, which include periodicity, prudence, quality of information, and objectivity (Walton & Aerts, 2006). The topic also describes to learners the reason why end of year adjustments are significant in the accounting practice, especially through suggesting that the matching principle makes it important for accountants to be done. The topic suggests that conducting end of year adjustments to the accounts of a given company help accounting professionals to give true and fair views of the situations of the firms for which they are prepared. Most importantly, as the topic suggests, the matching principle leads practitioners in the accounting field to give the financial positions of their firms at the end of the accounting periods, their income statements during the same accounting periods, their cash positions, and their cash flow generations and usages during the same periods (Needles, Powers, & Crosson, 2013).
The topic also informs learners the reasons that trigger the need for adjusting financial entries through indicating that the passage of time, not the existence of specific support transactions or support documents, trigger the adjustment of financial entries. In line with the significance of end of year adjustments, the topic teaches that they help accounts to reflect changes in the values of current assets, changes in the values of fixed and long-term assets, and incomplete transactions, including the revenues that are earned, but which are not recorded, the revenues documented, but which have not been earned, and other aspects that could be difficult to be identified. The topic also teaches learners that the end of year adjustments could be important since they entail records of the values of ending inventories and the corrections of errors done on them during specific accounting periods if required.
Apart from the described aspects of the topic, learners understand after completing the course that the end of year adjustments are always carried out when accountants close the books of accounts, which could be monthly, quarterly, semi-annually, or yearly depending on the choices of the affected firms. Notably, as the topic teaches, the end of year adjustments carried out on the accounts of organizations are always mentioned in the notes sections of the financial statements with the objectives of ensuring that the records are clear and anyone using them understands them properly. Notably, the described aspects of the topic reflect a critical connection between accounting principles and end of year adjustments, especially in suggesting that the two combine to ensure that financial statements are a true reflection of the financial positions of their respective companies.
Key Concepts of the Topic
Understanding the primary concepts of the topic would require approaching the two separate elements that it contains, which are accounting principles and end of year adjustments, which this section does.
Accounting Principles
Defined as the set of the rules that accountants must follow in the preparation of financial statements, accounting principles have the primary objective of ensuring a true and fair view of the financial positions of the companies for which they are prepared (Hart, Wilson, & Fergus, 2010). According to the cited literature, true suggests that the financial statements should not dissimulate or falsify the financial situations of companies at period-ends or their profits and losses for the accounting periods. Furthermore, fair is a terms used to imply that the accounts should give all the users the same relevant, unbiased, and complete information that would help in decision making. Studies suggest that in accounting terms, there are no universally accepted definitions of fair and true as they apply to financial statements (Weygandt, Kieso, & Kimmel, 2006). Consequently, as the latter cited literature indicates, the term is applied widely yet it is never defined precisely. According to IAS 1, financial statements should present fairly the financial performance, position, and cash flows of the companies for which they are prepared without providing an explicit explanation of the concept of fair presentation (Walton & Aerts, 2006). Consequently, the topic suggests that fair and true are terms resulting from the application of the accounting principles.
Under the concept of accounting principles, the topic suggests, the application of the set rules is done with the objective of attaining objectivity. Literature suggests that objectivity is desired in accounting since it leads to a unit of measuring the performance of companies (Weygandt, Kieso, & Kimmel, 2006). While there are no rules that prevent companies from providing information on their value creation and consumption accounts, it is preferred that they document such information in terms of their financial measure. Therefore, the application of financial principles, as the topic notes, is to ensure that businesses strive to give their reports in terms of monetary values. Secondly, the course teaches that the application of accounting principles is important because it deals with the quality of information reported. It is important that accountants give quality information in financial reporting considering that such documents are have critical implications on decision makers. For this case, the reports should be detailed enough to allow the decision makers to make the right choices. According to the aggregation and materiality principle, the information contained in financial statements should be over detailed to a level that they become overwhelming. When the reports are prepared with consideration for the principle of aggregation and materiality, the topic suggests that they provide faithful descriptions of the economic situations of the businesses while being meaningful in the fact that they originate from choices of substance over form.
The third objective of applying accounting principles, as the topic teaches, is the need for prudence. According to Walton and Aerts (2006), accountants are naturally prudent since they do not wish to recognize profits or loses before they have occurred with high degrees of certainty. For this reason, the principles of accrual, matching and conservatism have been adopted in accounting to attain the objective of produce. Lastly, the application of accounting principles is founded on the principle of periodicity, which the topic suggests that it is attained using three principles, which are going concern, accounting period, and consistency of presentation. The periodicity objective, the topic suggests, is founded on the need for financial accounting to contribute to critical decision-making, which is why they should be done after specific periods, which are determined by the affected companies.
End of Year Adjustments
The topic suggests that the application of accounting principles, especially those of periodicity, accrual, and matching, develop the need to understand exactly the transactions that pertain to a period, which means the need to offer the techniques to handle the requirements (Needles, Powers, & Crosson, 2013). Some of the events that occurred during specific periods have links only to the passages of time and other causes, which causes them not be recorded effectively in transactions with electronic or physical support. Therefore, it is always important for accountants to conduct end of year adjustments. According to Walton and Aerts (2006), the end of period adjustments refer to any entries that are necessary in the provision of true and fair views of both the income statements for specific accounting periods and the financial positions of the companies during the same period. For example, in reorganization that some events could straddle two accounting periods, it is important to conduct end of year adjustments that would partition between the two periods. In addition, inventories, as well as other asset values, need to be adjusted when their market values have depreciated below their cost (Needles, Powers, & Crosson, 2013). Lastly, the topic outlines five categories of end of year adjustments, which include those that concern the changes in the value of liabilities, changes in the values of fixed assets, adjusting entries, changes in the values of current assets, and those that deal with other types of transactions. The topic notes that significance of the accounting principles during recording for end of year entries. It is specified that management needs to exercise considerable judgment in order to apply the principles. The existence of end of year adjustments in accounting indicates, as the topic teaches, that accounting can never be perceived as an exact arithmetic science, which is errors will always occur.
Reasons Why the Topic Is Important
Studying accounting principles and end of year adjustments is critical for any accounting student. Precisely, as does any other professional field, the practice of accounting is inclined deeply with the rules and principles that have been laid down to guide practitioners. Therefore, studying the principle areas of accounting is important because it equips learners with the knowhow on their future practice. Providing fair and true views of the financial positions of companies consequently becomes the duty of those charged with recording financial information and subsequently using such information in the preparation of financial statements. Learning the interaction between the accounting principles and real accounting practice founds the basis of conducting end of year adjustments whose focus is to improve the accuracy of the prepared reports, especially because they are critical for decision makers. The very fact that principles of accounting exist informs the fact that noncompliance with such standards would always raise legal and ethical issues for practitioners.
The topic also underscored the value of accounting information, especially financial statements on decision making, which is why it is always for those in charge to provide as detailed information as it would be possible to allow management and other decision makers the chance of making informed decisions. Again, it is important for those who prepare the records to make all the necessary adjustments to the statements such that they would be clear of errors that are committed because of noncompliance with the set accounting principles, which the topic elaborated.
Areas of New Information I Have Learned about the Topic
I may have been aware of the accounting principles, but I was not as informed as I am after completing the topic. Precisely, understanding that despite being as numerous as they are, accounting principle could be grouped to fit four major objectives is completely new to me. Summarizing the principles into the four broad groups is a useful way to improving their mastery for students. Likewise, it was new to me that end of year adjustments could be grouped into the five categories as I learned through the topic. The lessons taken from the topic are critical in explaining the relationship between accounting principles and end of year adjustments, which is the fact that they contribute to true and fair reporting of accounting information, an idea that I have also learned from the topic.
How the Topic Is Related To Financial Reporting and Analysis
Studying accounting principles has the obvious relationship with financial analysis and reporting, which is the fact that they drive those in charge of accounts to deliver accurate information, which would be applied in decision making (Weygandt, Kieso, & Kimmel, 2006). It is important for accountants to stick to the principles since a failure to do so could result in ethical and legal issues that could have adverse implications on themselves and their companies. Furthermore, end of year adjustments are important in addressing the errors that could lead reports to violate the fair and true principle, which as explained, affects the quality of decisions that are made using financial statements. It is advisable that accountants stick to the principles and conduct end of year adjustments if they would like to have high-quality standards of reporting and analysis of the financial information related to their institutions.
Conclusion
Accounting students would want to understand the guidelines that relate to professional accounting practice. Learning accounting principles and end of year adjustments is a useful way of understanding the guidelines that they should follow to ensure that they produce reports which reflect a true and fair financial position of their companies. While accounting records are not easy to complete without errors, end of year adjustments provide accountants with real chances of correcting the mistakes, especially because they address the adjustments that should be made to the relevant accounts.
References
Hart, J., Wilson, C., & Fergus, C. (2012). Management Accounting: Principles & Applications . Pearson Higher Education AU.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting . Cengage Learning.
Walton, P., & Aerts, W. (2006). Global financial accounting and reporting: principles and analysis . Cengage Learning EMEA.
Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2006). Financial Accounting, with Annual Report, Peachtree Complete Accounting CD & Workbook . John Wiley & Sons, Inc..
Weygandt, J. J., Kimmel, P. D., Kieso, D., & Elias, R. Z. (2010). Accounting principles. Issues in Accounting Education , 25 (1), 179-180.
