Analysis of Accounting Principles: Ethics, Ratios & Budgeting Process

This report provides a comprehensive overview of accounting principles, focusing on the role of accounting in organizations, ethical considerations, and financial statement analysis. It begins by outlining the purpose and scope of accounting, emphasizing its importance in decision-making and meeting stakeholder needs. The report then evaluates accounting functions, discusses the main branches of accounting and required skill sets, and explains accounting systems, including the role of technology. Ethical issues, regulations, and compliance are addressed, highlighting their potential impact on organizations. The report also includes financial statements of different clients, calculates profitability, liquidity, asset usage, and investment ratios to analyze these statements. Furthermore, it covers the preparation of a cash budget and the importance of budgets in an organization, including budgetary planning and control processes. The case study revolves around Smith and Williamson, providing practical insights into the application of accounting principles.

Accounting Principles

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
The Role of Accounting in an Organisation...........................................................................3
What is the purpose and scope of Accounting?......................................................................3
Evaluate the accounting functions in decision making and meeting stakeholder and societal
needs and expectations...........................................................................................................4
What are the main branches of accounting and skill sets required?.......................................5
Explain the accounting systems and what is the role of technology in accounting...............6
Issues of ethics, regulation and compliance and the extent to which they are constraints or
threats to the organisation.......................................................................................................7
TASK 2............................................................................................................................................7
Financial Statements...............................................................................................................7
Calculation of profitability, liquidity, asset usage and investment ratios including the.........9
following:...............................................................................................................................9
Benefits of contemporary accounting software packages, with example.............................12
TASK 3..........................................................................................................................................13
Cash budget..........................................................................................................................13
Budget...................................................................................................................................14
Budgetary planning..............................................................................................................15
Budgetary control process....................................................................................................16
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The process of documenting and encapsulating the transactions with interpreting and
reporting (Bailey and Samuels, 2018). The report revolves around the company Smith and
Williamson, leading provider of investment management, accountancy and financial advisory to
name a few. It gives details about the purpose and scope of accounting in the complex working
environment and the skill set required in accounting. It also consists of the justifications on how
accounting helps the group of shareholders to make informed decisions. Furthermore, it
comprises of accounting system and the use of technology in present day accounting. Along with
this it also highlights the issues of ethics, regulation and compliances and to what extent they can
harm the company. It also holds the preparation of cash budget for 6 months and importance of
budgets in an organisation. It encompasses the financial reports like income statement and
balance sheet of three clients. Moreover, it also provides the analysis of the financial statements
through the computation of various financial ratios.
TASK 1
The Role of Accounting in an Organisation
What is the purpose and scope of Accounting?
The process of documenting and encapsulating the transactions with interpreting and
reporting. The purpose of accounting is to collect and report the financials of Smith and
Williamson which shows the financial performance, financial position and cash flows of the
company. The information collected is then analysed in detail and decisions are made.
Scope of Accounting
Accounting plays a crucial role in keeping a systematic and till date records with several
transactions. It comprises of a number of services that have been incorporated by Smith and
Williamson. Following are the uses of accounting:
 Details about the past performance of business and the corrective measures that were
taken in order to correct the diversions.
 It is an art, as it helps in achieving the goals and how to fulfil the goals in the best manner
(Bhatia and Tripathy, 2018).
 It's a science, since reading, analysing is done with some accounting principles which are
universally accepted.

 It is necessary for forecasting and forecasting helps in identifying profits and the business
concerns that are profitable.
 Accounting helps in taking decision about capital structures, cost of capital, financial
ratios, budget, managing inventory, etc.
 Finding out the efficiency of each and every department.
Evaluate the accounting functions in decision making and meeting stakeholder and societal needs
and expectations.
Accounting functions involves the tracking, recording, summarising and reporting the
financials. The relation between accounting and decision making is that the company cannot
make decisions without accounting information. The stakeholders need to know about the
working and decisions made by the organisation. The accounting functions are as follows:
1. Investment decision - The most important function of finance is to diversify capital by
investing in long term assets and investments. It can also be termed as capital budgeting.
The two main components of investment are evaluation of every new investment in terms
of profitability, difference between the cut off rate of the previous investment and current
investment. It is important for Smith and Williamson to take investment decisions wisely
in order to grow (Bouvin, 2022).
2. Financial Decision - It is yet another very important function which is performed by the
finance manager of Smith and Williamson. It is used wisely to make decisions about
when, where and how a business should acquire funds. The firm benefits most when the
market value of the company's share reaches peak which represents that the wealth of the
shareholders has also increased.
3. Investment appraisal - In accounting and finance, applying the capital budgeting
techniques and investment appraisal techniques in Smith and Williamson will aid in
succeeding every major project through tests to make sure that it is worthy. It is the
examination which is done for the consideration of the profitability over an investment
over the life of an asset in relation to the affordability and strategic.
Stakeholder's and societal needs can be fulfilled by:

 Lenders: If the firm needs a loan, the lender looks at the financial information of the
organisation and according to that the loan is disbursed. The financial institutions
examine the credence of the company to provide credit (Cohen and Karatzimas, 2018).
 Investors and stakeholders: For a start up to receive funding requires accounting
information to get potential investors. They use the information to value the company.
Evaluating the financials, the stakeholders can see the profitability and the risks involved.
 Accountants: They help in decision making as they are certified professionals and can
help in giving a bigger picture of the company.
 Owner: The budget needs to be prepared and this can only be done when accounts are up
to date. The budget tells everything regarding the working and whether an asset should be
purchased or not.
What are the main branches of accounting and skill sets required?
Accountant is a person who is responsible for keeping, inspecting and analysing financial
statements. Accounting is diversified in a number of branches to focus on an aspect of business.
1. Financial accounting - Simplifying transactions of the business and keeping a book of
the financial statements. Financial accounting provides crucial information to the
creditors, banks, suppliers and investors.
2. Managerial accounting – It provides information to the internal management of the
company. Like financial accounting, managerial accountant also keeps a track of the use
of money. Managerial accounting focuses on the needs and wants of the management.
3. Cost Accounting – It focuses on examining the cost of a venture. It takes into account all
the factors of manufacturing to accurately determine the cost of the project (Costa and
Pinheiro, eds., 2021).
4. Auditing - It is done in both the formats internally and externally. Auditors take a look
into the businesses for the correct and accurate reporting, in accordance with the rules,
laws, obligations and financial integrity. External auditing is taken by some outside
auditor who examines financial statements of the company.
5. Tax Accounting – It takes into account both the central & state and federal tax. The
branch has to report the after effects of the tax on the businesses and has to provide
advisory services for the reduction of taxes and further decisions of the management.

Skills required to be an Accountant
 Knowledge of the Accounting principles - It is very crucial to have knowledge about
the regulatory standards which are related to the finances and the corporate sector ensures
the needs of the financial reporting.
 Proficiency in Accounting software – Software is difficult to grasp, so in order to be
efficient with technology, a person needs to understand and learn to use the programme
and give ample time to it (Fontenelle and Sagawa, 2021).
 Ability to prepare statements – The most important thing for a company is financials
which includes both present and past. Smith and Williamson require these financials to
analyse and formulate plans to grow. The professional must be proficient enough with the
formats and items of the statements to prepare an accurate book of accounts.
 Time management skills - This skill is very important for every professional,
accountants have to work on tight deadlines so time management skills are a must. Smith
and Williamson has a huge number of employees which require immaculate time
management.
Explain the accounting systems and what is the role of technology in accounting.
The accounting system is used in managing the financial interests of the company. Smith
and Williamson has a lot of data to be stored and managed and to keep it safe the company uses
different tools. The below mentioned points gives an explanation on how the technology plays an
important role in today’s scenario:
 Cloud – based systems: Smith and Williamson uses cloud-based system to compile the
data. Through this, the companies can access their data anytime by a simple login. The
manager can organize and recover the files whenever needed. This provides backup,
security and is proven to be really beneficial for the organizations (Gao, 2021).
 Mobile Accounting: Everybody is dependent on cell phones. Many applications have
been created to fulfil the purpose of accounting like making and sending bills, clicking
pictures of receipts etc.
 Specialized accounting software: Many software has been launched that provide
efficient tools which makes calculations quicker. This helps the business in providing

correct and reliable computation without wasting time. Smith and Williamson uses
Bravura Solutions Rufus Software.
Issues of ethics, regulation and compliance and the extent to which they are constraints or threats
to the organisation
Ethics in accounting focuses on making good and moral choices when preparing
statements. Ethical issues that take place in an organization are as follows:
 Discrimination: It means when the employee is discriminated and are not treated with
equality. This can happen in any kind of business organization. Discrimination is not just
ethical but also illegal. The employees are discriminated on the basis of age, gender,
religion and much more. This might lead to the mental harassment of any employee and
can lead to negative consequences.
 Unethical Accounting Practices: There are many business firms that neglects or do not
follow proper accounting standards. They make fake reports to mislead the interested
party. The management can also influence the accounting experts to prepare false
statements in the fiscal year by paying high fees. This will result in the disruption of a
firm's image. In some scenarios, the business leaks the financial data to another company
(Garcia, Katsuo, and van Mourik, 2018).
 Abuse of Leadership Authority: There are employers in the company that take
advantage of their power and authority in the inappropriate manner. This will result in
bringing the conflicts and misunderstanding among the subordinate.
 Corporate Espionage: Workers can also misuse the data of a company. They may steal
the intellectual property or even give the data to their competitors. All this leads to the
loss of customer interest and faith in the organization.
TASK 2
Financial Statements
Trading and Profit and Loss A/c Of Adam Smith
Particulars Amount Particulars Amount
To Opening Stock 40000 By Sales 547000
To Purchases 410000 By Closing Stock 42000
To Wages 33500
To Gross Profit 105500

589000 589000
To Rent 7500 By Gross Profit 105500
To Telephone
Expenses 500
To Interest Paid 600
To Net Profit 96900
Total 105500 Total 105500
Balance Sheet Of Adam Smith
Particulars Amount Particulars Amount
Capital 146100 Land and Building 200000
Loan 150000 Shop Fittings 40000
Creditors 14000 Debtors 10500
Bank 16400
Cash 1200
Closing Stock 42000
Total 310100 Total 310100
Trading & P&L Account of Tim and Ali
Particulars Amount Particulars Amount
To Purchases 210000 By Sales 345000
To Gross Profit 156500
By Closing
Stock 21500
366500 366500
To Office
Expenses 11900 By Gross Profit 156500
To Salary and
Wages 57500
To Bad Debts 600
To Net Profit 86500
Total 156500 Total 156500
Balance sheet of Tim & Ali as on 31st December 2021
Particulars Amount Particulars Amount
Capital A/c 125000 Building 160000
Net Profit 86500 Fixtures and Fittings 15000
Creditors 25000 Debtors 40000
Current A/c 7000 Cash 7000
Stock 21500

Total 243500 Total 243500
Income and Expenditure A/c of Ox Charity
Particulars Amount Particulars Amount
To Staff wages 4500
By Provision for
depreciation 2000
To Insurance expenses 1800
By Subscription
received 16100
To General expenses 2800 By Donation received 19280
To Telephone Expenses 440
To Depreciation On
equipment 425
To Surplus 27415
Total 37380 Total 37380
Balance Sheet Of Ox Charity
Particulars Amount Particulars Amount
Accumulated
Funds 42000 Equipment 8075
Add: Surplus 27415 Premises 31000
Furniture 5300
Cash 1200
Bank 22040
Prepaid Expenses 200
Unearned Income 1600
Total 69415 Total 69415
Calculation of profitability, liquidity, asset usage and investment ratios including the
following:
Return on Capital employed= Operating profit / Capital employed * 100
Capital employed = Total assets- current liabilities
Years Operating profit Capital employed
2020 37500 116250-32250 = 84000
2021 41250 142500-111000 = 31500

2020,
=37500/ 84000 *100
= 44.64%
2021,
= 41250/ 31500 *100
= 130.95 %
Analysis: the company has shown excellent growth when it comes to getting return on its capital,
the ratio has increased from 44.64% to 130.95% from 2020 to 2021. The operating profit has
increased with the decrease in capital employed which shows that the company is earning is
earning more with less investment (Kaya and Yazan, 2019).
Current ratio = Current assets / Current liabilities
Years Current assets Current liabilities
2020 223500 32250
2021 403500 111000
2020,
= 223500 / 32250
= 6.9:1
2021,
= 2110 / 512
= 36.35:1
Analysis: The current ratio of the organisation in 2020 and 2021 is 6.9:1 and 36.35:1 respectively
which shows an increase of six times. This shows that the company has excessive current assets
but the current liabilities of the company are very less as compared to the current assets. It shows
that the company is not utilising its assets to their full optimisation and should work on the same.
Receivable collection period = accounts receivable from trade/ sales *365

Years Accounts receivable from trade Sales
2020 45000 240000
2021 60000 300000
2020,
= 45000 / 240000 * 365
= 68.43 days
2021,
= 60000 / 300000 *365
= 73 days
Analysis: The company's collection period ratio has increased which means that the company is
not able to receive payments from customers on timely basis. The company is not taking correct
steps to ensure that the debtors pay on time whether it's by putting interest rate on payments or
discounting (Kumala, Mangruwa and Dewi, 2021).
Payable payment period= accounts payable from trade / cost of sales * 365
Years Accounts payable from trade Cost of sales
2020 28500 240000
2021 105000 300000
2020,
= 28500 / 240000 * 365
= 43.34 days
2021,
= 105000 / 300000 * 365
= 127.75 days
Analysis: The company's payment period ratio has increased which means that the company is
not making payments to creditors on timely basis. The company is taking 84 days to pay its

creditors which suggests that the company is losing liquid cash to pay that is why there is delay
in the payments.
Net Profit Margin = Net profit / Sales *100
Years Net Profit Sales
2020 30000 240000
2021 26250 300000
2020,
= 30000 / 240000 * 100
= 12.5%
2021,
= 26250 / 300000 * 100
= 8.75%
Analysis: It can be observed that the profit margin fell in 2021 by around 4%, even though the
sales of the company has increased but the net profit has fallen which means that the company's
expenses have increased comparatively. The management should analyse the extra expense and
try to cut it down.
Benefits of contemporary accounting software packages, with example
When accounting software were not in use, it used to take a lot of time to analyse the reports
already made but with the introduction of software the analysis is just a click away. The benefits
of accounting software are:
 Optimization: Speeding up of calculations as it doesn't require manual work. The books
are stored at a single place and not spread over the desk and office.
 Reduction in operation cost: Ecobase performs its accounting operations in house. By
installing the software and working on it, the company saves the money of outsourcing
without compromising on the quality of the data. Moreover, using the cloud to store the
books, it reduces the amount spent on paper and stationary.