The Critical Accounting Tools and Practices Overview of Accounting Tools Accounting, in a wider perspective, has undergone various transformations which seeks to modernize the accounting processes in order to suit the organization’s needs

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The Critical Accounting Tools and Practices

Overview of Accounting Tools

Accounting, in a wider perspective, has undergone various transformations which seeks to modernize the accounting processes in order to suit the organization’s needs. Accounting is no longer considered to be a field of arithmetic only but it is a process in which the captured arithmetic figures, which represent an economic event, are manipulated to generate information that can be utilized to make informed decisions. This information is obtained in form of reports which include statement of financial position, cash flow statements and Income statements (Christensen, et al., 2013). All these financial reports form the accounting tools.

 

Accounting Tools in the actual context

Accounting tools are normally synthesised by the managers and other relevant stakeholders in order to present information which contributes to company’s critical decision making. Additionally, every organization or a company aims to maximise profit and minimise costs. Therefore, managers exclusively concentrate or put focus on cost such as advertising costs, website development cost and the store opening costs. Their main aim is to access the impact that the alterations of these costs may on the overall net profit for the firm (Christensen, et al., 2013).

Therefore, an understanding of these tools including its aspects such as the cost and revenue is very critical. This manual shall focus on the following cost drivers that normally impacts the company’s net income:

· Advertising costs

· Web development costs

· Store opening costs.

The manual shall reference the Apple Inc annual financial reports for the year 2015 -2016 to exclusively describe these cost drivers as well as examine the impact it has on the financial statements.

· Advertising cost

Treatment of Adverting costs:

a) The Current practice

b) Selective treatment

Advertising costs are expenses that are associated with the promotion of a product, entity, brand, industry and services. The integrate all the costs incurred in the broadcast time, print media, radio time and all the online venues. In a company’s financial statement particularly the income statement, advertising costs are normally categorized or grouped under general and administrative expenses as illustrated in Fig. 1 below.

 

Fig 1. Treating the advertising costs as an expense item in the income statement.

Accountants have different perceptions regarding the treatment of the advertising costs. Among the proponents, some urges that the advertising cost should be expensed immediately when they are incurred while others propose that advertising costs are associated with both the long-term and short-term benefits that a firm enjoys.

a) The current Practice

SOP, also stipulates that advertising cost should be treated as expense as or when it is incurred. This is because the benefits that the firm enjoys are short -term and cannot be enjoyed again in the foreseeable future. Therefore, the advertising costs in this case should appear in the income statement as general and administration expenses as illustrated in the fig. 1 above.

b) Selective treatment

However, according to the Standard Operating Procedure that was approved by AcSEC, advertising cost should be separated such that those that correlates to the long-term benefits of the firm are capitalized. According to Zéghal (2011), advertising cost are considered as the intangible assets should be showed on the asset side of the balance sheet as illustrated in Fig 2 below.

 

 

Fig. 2 Capitalization of the advertising costs (treated as intangible assets).

· Web development costs.

Unlike advertising costs, web development costs are expenses incurred in the development of an organization’s platform or website. The development undergoes various stages which include:

· Planning

· Development

· Operating costs

Planning costs

Planning costs refers to such expenses that are incurred during the planning stage of the web development. At the planning stage, benefits associated with such costs are deemed to be zero and hence there is no any economic benefit attached to it. This means therefore, the costs are treated as an item of expenditure which should appear in the income statement under expenses section as illustrated by fig. 1 above.

Development costs

Development costs has direct correlation with the final product. This means, therefore, that it has, to some extent, the influence on the future economic benefits associated with the product. In this way, such costs are capitalized and hence considered as an intangible asset which should be disclosed and taken to the balance sheet as shown in fig. 2 above.

Operating costs.

From the general perspective, operating costs are generally considered as an item of expenditure. Such costs are recorded as it is incurred. Therefore, operating costs falls under the expense category in the income statement.

· Store opening costs

Store opening or rather start-up cost, are expenses incurred at the beginning of the business. For instance, costs incurred in constructing a building in which the business operates, cost of purchasing the machine used by the business, and many other. These costs reflect the cost prices of the fixed assets and therefore, it qualifies to be capitalized. Such cost should be shown on the assets side, particularly the long-term asset side of the balance sheet.

Additionally, these costs also attract the amortisation process in order to determine the depreciation expenses over the life of an asset it represents. Amortisation depends on the entity and the accounting system as well as the accounting methods applied by an entity.

Depreciation for these costs are normally provided for on an annual basis. The depreciation is then subtracted from the original cost to determine the net costs of an asset. The net costs are taken to the balance sheet whereas the depreciation is treated as the expense item in the income statement.

Importance of the notes to financial statement in the interpretation of financial statements.

Notes to financial statements provide a quick glimpse over the accounting policies and procedures that are being applied or utilized by an entity. It discloses the accounting methods and principles applied by the entity. It also shows the revenue recognition methods and the methods used by the entity in the preparation and presentation of financial statements (Collings et al., 2016).

Accounting methods and the financial statements of an entity

Various accounting methods presents various ways in which revenue is recognized. For instance, the cash basis of accounting advocates for the recognition of revenue when it is earned rather than when is realized.

On the other hand, an accrual basis of accounting requires an entity to record or recognize revenue when it is realized rather than when it is earned. The methods of accounting affect the preparation of financial statements since accrual basis inflates, for instance the profit figure of the entity whereas the cash accounting basis deflates the profit figure of the firm.

In regard to store opening cost, web development and advertising cost, capitalization should be preferred. This is because the cost directly correlates to the long-term benefits that will accrue to the business at a later date.