Paper Example on Accounting Practices: Assumptions & Traditions

Introduction

As a discipline, accounting is the practice of managing financial data of individuals and organizations. This exercise entails recording and retrieval of accounting information, and amidst these two activities, accountants also store, sort, and retrieve accounting data whenever users of financial information need them (Thomson & Camp, 2018). As such, the following discussion evaluates the various accounting practices as applicable to accounting assumptions and traditions that accountants adhere to in the preparation of accounting statements.

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Double Entry Bookkeeping

The first such aspect is the double-entry rule. This law applies to the dualism concept of accounting transactions. This concept holds that every financial undertaking has an impact on more than one item (Schroeder et al., 2019). The accountants should accord accountability to all the affected assets and liabilities. In practice, the double-entry rule applies by posting debit entries together with contrasting credit entries.

Recognition of Non-Current Asset at Cost

How to record non-current assets is another accounting adjustment. Most professionals adhere to the cost principle of accounting, and by this code, they register asset valuation at the original cost of purchase (Jeter & Chaney, 2019). Moreover, this expense is recorded gradually over the useful life of the non-current asset. It is allocated over time in line with the matching principle of accounting. The utility is expended against return on assets for every financial year.

Depreciation

Depreciation is an accounting phenomenon that considers the utility value of an asset. Through depreciation, an asset's useful life gets to be accounted for by the accountants. They henceforth dispense the same against the company's revenue for that accounting period, and this adjustment reduces the total income of the organization (Weetman, 2019). Subsequently, the company's tax obligations are reduced by the value of depreciation. Accountants debit the asset's depreciation account as per the duality principle of accounting and treat cumulative or accumulated depreciation as the contra. Besides, the matching policy is as well practicable as depreciation is pitched against profits within a particular period.

Writing off of Irrecoverable Assets

The matching principle presents the financial year concept in organizations. The accounting period is an essential concept as all expenses and earnings should be analyzed and evaluated to specific timelines (Christensen et al., 2019). Irrecoverable debts are deferred assets of the company. Obligations that take too long to materialize are foregone by the company, and this debt clearance is what is referred to as writing off irrecoverable debts (Weetman, 2019).

Creation of an Allowance for Receivables

An allowance for receivable is the monetary value owed to the company that the company foresees hardship to collect. A receivable allowance also falls in the same cluster of concepts application, in addition to the principle of dualism. To record this adjustment, accountants present the total company's receivables minus the allowance for doubtful accounts.

Provision of Accruals

The provision and accrual of business expenditures is an accounting concept adhering to the conservatism principle of accounting. Provisions are monies set aside for probable future spending of the company to safeguard against potential cash flow shortage (Weetman, 2019). On the other hand, accruals are services and goods already utilized by the company, but payment on the same is not yet remitted. Accounting conservatism displays its practicality and the same as well relate to the recognition of prepayments.

Recognition of Prepayments

This principle also dictates that a company's management consider the lowest possible values for future profits, and the highest figure to anticipate losses and expenditures (Jeter & Chaney, 2019). Regarding the recognition of prepayments, the prepaid expenses are assets to the organization until they are expended. Matching principle, realization, and conservatism all come into play to guide this accounting adjustment to present the financial position of the company explicitly.

Inventory Valuation

Valuation of inventory entails computation of all company's stock at the end of an accounting period. Also, inventory valuation expresses the cost of doing business at a particular point in the accounting period. The disclosure principle and money measurement concept guides the monetary judgment to all activities and costs associated with the quantity of inventory held by the company.

Sales Revenue Recognition

The accounting principles state that sales should be recognized by the business when considerable evidence support closure of sale. The customer ought to have been delivered with goods and services. Christensen et al. (2019) informs that sales revenue recognition follows the realization principle. Its practicability dictates that accountants record sales or profits only when there is significant certainty that such earnings will come or is already in possession by the company.

Withdrawal

Lastly, monies occasionally withdrawn by business partners from their company are treated by accountants on the principles of dualism, and materiality. As withdrawals are cash outflows, the withdrawer's withdrawal account is debited as accountants credit the respective asset account. The materiality aspect of the transaction relates to personal use and not business-related expenditure.

Summary and Conclusion

Accounting principles, concepts, and assumptions have a seamless transition as they interrelate to form a collective stable accounting profession. The accounting practices detailed herein safeguard investors, the government, and the general public from exploitation by unscrupulous managers and accountants through the presentation of misleading financial statements. As such, everyone should be vigilant and conversant with accounting principles and their application in the world of business. This awareness will ensure more transparency and accountability of the accounting profession.

References

Christensen, T. E., Pei, H., Pierce, S. R., and Tan, L. (2019). Non-GAAP reporting following debt covenant violations. Review of Accounting Studies, 24(2), 629-664. https://doi.org/10.1007/s11142-019-09492-

Jeter, D. C., and Chaney, P. K. (2019). Advanced accounting. John Wiley & Sons.

Schroeder, R. G., Clark, M. W., and Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Thomson, A., and Camp, L. (2018). No Small Change: Why Financial Services Needs a New Kind of Marketing. John Wiley & Sons.

Weetman, P. (2019). Financial and management accounting. Pearson UK.