Overview of Accounting Theories
The paper will provide an understanding of different accounting theories and models that would be beneficial for the organization to deal with accounting issues effectively. Generally, the accounting theories do not present the economic events that affect the business. The paper will provide a clear understanding of the concepts of the accounting theories and how it could be applied within the business organization. Moreover, the paper will discuss the accounting issues of Amcor Limited in Australia. Amcor Limited is considered to be a global packaging company that creates and manufacturer’s flexible packaging, closures, specialty cartons and rigid containers and services for personal care, medical device, pharmaceuticals and beverages and other such products. It has been listed on the Australian Securities Exchange (ASX). Additionally, it also provides information regarding the concepts of financial accounting that must be followed by the organization in Australia. Therefore, the paper will help in identifying and analyzing relevant accounting theories and models.
Accounting is an important part of a business within an organization. Detailed record-keeping enables a business to furnish accurate financial reports to the internal revenue Service, lenders, and shareholders, among others. Constant changes to the hiring and retaining employees, tax system and the impact of technology are the challenges for the modern accounting industry, especially in Australia (Stewart, Kent and Routledge, 2015). Thus, the accounting theories and models are applied by Amcor Limited in Australia. The accounting theories and models helps the organization to explain the existing procedures and practices to get a better understanding and to facilitate an appropriate set of logical principles.
Cost Principle theory:-The theory of cost principle records all the assets on the books as each asset is acquired. Assets could be real property or equipment. According to this theory, transactions must be listed on the financial records as a historical cost, such as the real value of cash at the period the asset was bought, rather than the current value of the market. It is defined as one of the fundamental guidelines for accounting and bookkeeping and also known as the concept of historical cost. Cost principle is more straight forward and much quicker to record the assets at their real value than to constantly update financial reports to understand present market value (Zyznarska-Dworczak, 2018). As this theory is easy and quick to verify the assets value, auditors and accountants don’t require to spend more time in verifying financial records and also make it inexpensive for the organization who hire them.
Issues Faced by Amcor Limited in Australia
Matching principle theory:-This theory of an accounting holds a transaction as a unit means it books all expenses related to a detailed revenue. Under the theory of matching principle, the expenses are presented as the revenue generated at the same time such as a year or month. In other word, the theory directs the organization to match the expenses and revenues at the same time to the possibility of the highest extent, regardless of when subsequent events happen. Such as, a sales commission might be paid in March for the products sold in February. Therefore the expense in the theory accounts for the commission in February not in March when it is paid. If the organization is using the theory of matching principle they must be consistent with the monthly recording costs related to revenues. This theory exists only in the accrual method of accounting. For example, if an organization has a salesperson who earns 2000 dollars in commissions for work done in February, the expense for this should be recorded in the same month, even if the company does not pay the staff until the next month. Matching Principle wants accountants to be always consistent and careful in their documentation.
Materiality theory:-The theory express that the standard of accounting could be ignored if the net outcome of doing so will have a small enough effect on the books that no one reviewing them would be missed. When the owners of an enterprise can get caught up in the counting pending monetary transactions before they are recorded. The theory ensures an enterprise only records monetary deals which are finished (Lee and Green, 2015). This stops an owner from getting a wrong sense of security when factoring in pending contracts they might not come to an end. The principle of materiality is mainly vital when determining whether a transaction must be noted as a part of the final procedure, as eliminating some of the transactions can considerably decrease the required time amount to problem financial statements. It is also beneficial to discuss with the auditors of an organization what comprise a material item, hence, there will be no problem with these items when the reports of financial are audited.
Stakeholder theory:-It is a theory of business ethics and organization management that states values and morals in managing a company. In addition, it also suggests that the purpose of an enterprise is to make as much value as the potential for stakeholders. In order to be sustainable and succeed, managers should keep the interests of suppliers, consumers, staffs, communities, and shareholders going and aligned in the same direction. The innovation of keeping these interests aligned is more vital than the easy strategy of trading off the stakeholder’s interest against each other. Therefore, by managing for stakeholders, executives would also make value as possible for financiers and shareholders. Stakeholder theory explains the behavior of the supermarkets to their stakeholders such as suppliers and customers. It provides an insight as to how the organization operates in a rapidly changing business environment.
Key Accounting Theories
Budget Model:-It is a finance plan of expected cash outflows and inflows that an enterprise creates. A sound budget provides information to the managers based on effective spending of the funds and funds at hand. Having a strict budget policy is crucial for any company that needs to succeed. With this model, an enterprise may as well be shooting in the dark. It sets the boundaries for any company. It also represents the maximum financial resources at their disposal using which they should achieve all targets of business. With a budget policy, the organization will always be aware of the cash on hand and save itself from running into debt. Different types of budget models are static budget, zero-based budgeting, rolling budget, and flexible budget. In addition, it uses a set of assumptions as well as historical data to forecast a future state of a business. Budget is usually utilized in firms and it is essential to know where staffs are likely to meet them. Budget model is also utilized to assess special ventures (Hocke, Meyer and Lorscheid, 2015). If an organization is seeing the price of a special order whether to buy or make a manufactured good or even to expand operations, in many cases the management accounting function would make a budget forecast to regulate if the proposed action is gainful.
Consolidation model:-This model involves the financial results of many business units supplement into a single model. Normally each enterprise unit is its own tab, with consolidation tab that basically adds up the other business units. This model is typically utilized when a parent entity owns more than 50% of the shares of another entity. This model can only be utilized when the stockholder has real control of the subsidiary, which frequently, assumes the stockholder owns at least 50.1percent of the subsidiary shares. This method works by present the balance of subsidiary in a joint statement along with the balance of main industry, therefore consolidated. Under this method, a parent organization joints its two revenue with hundred percent of the subsidiary revenue.
The major organization would present the ‘investment in subsidiary’ as an asset with the subsidiary presenting the equivalent equity owned by the main organization as equity on its personal accounts. At the level of consolidation, an elimination adjustment should be added so that the statement of consolidation is not excessive by the equity held by the main company. The adjustment of elimination is made with the determination of offsetting the intercompany transaction so that the values are not counted double at the level of consolidation.
Accounting Models
In today’s business context, Amcor Limited is facing issues related to accounting. The auditing and accounting systems of the company are considered to be the control systems that need maximum reliability along with minimum cost. The issues related to accounting puts a negative impact on the financial conditions of the business to a great extent. Such types of negative impact due to accounting not only hampers organizational activities but it also decreases employee revenue. The organization is facing various issues based on accounting such as sustainability, ethics, Key performance indicator (KPI), employee tax, environmental factors and corporate social responsibilities (CSR) (Tucker and Schaltegger, 2016). These issues put a great impact on performance management, interfirm relationships, management control systems, and education management. Such types of issues put a direct impact on the financial statements of the company. Amcor Limited have recognized the importance of addressing a wider group of stakeholders, thus, reporting relating to corporate social responsibility (CSR), has become a significant issue for the company. As a result, in order to deal with this issue, Amcor Limited in Australia is applying accounting theories and models. Accounting theories comprise of certain standards and rules that set limits, function, and nature of financial statements and accounting. Therefore, the organization is implementing accounting theories and models to overcome accounting related issues. The accounting theories such as cost-principle theory, matching principle theory, materiality theory and stakeholder theory could be applied within the organization (Ratcliff et al., 2016). Moreover, not only theories but accounting models also help in overcoming with accounting issues. The accounting models such as the budget model and consolidation model would help the organization to manage accounting issues effectively.
Amcor Limited must apply cost principle theory as it helps in identifying the historical cost instead of reselling cost of an item. Additionally, by applying matching principle theory the organization in Australia would be able to match each item of revenue with an item of expense. When the organization would start applying matching, expense and revenue principles in practice than they are executing their business under the accrual accounting method. The cash principle theory could be applied within the organization with the help of two basic methods such as accrual method and cash accounting method. It has been observed that the KPI of the company is little stale that affects the strategies based on decision-making process. Thus, the accrual method where profit is considered by matching the earned revenues with incurred expenses would be beneficial for Amcor Limited (Howieson, 2017). Cash accounting where profit is measured by matching received revenue with paid expenses. Hence, applying this theory would help the company to manage the accounting problems effectively. The KPI of the company is considered to be outdated hence, applying stakeholder theory to analyze the environmental performance of the business would be helpful. Implementation of this particular theory helps in addressing the changing demands in an organizational environment. The organization requires three measures to implement stakeholder theory such as government power, creditor power, and shareholder power. Applying this theory within the organization would help in measuring the economic performance of the firm and get better results. Therefore, the organization implement materiality theory to materialize expense or item, hence the theory judges the material based on its nature, cost and examining whether the material is a single item or combination of other items. Therefore, the items would create a separate disclosure of expense and income of items (Cuozzo et al., 2017). As the company is in need to disclose any item separately that were present outside the normal operations of an entity and are determined to be abnormal. Thus, it becomes significant for the organization to apply materialistic theory to determine the minimum relative size of an item before considering itself abnormal. For example, during the pre-2000 period, Australian companies were required to disclose abnormal items separately in their financial reports where the firms got a unique opportunity to apply materialistic theory. This clearly states that the organization is making use of this theory in order to overcome KPI based accounting issues.
Importance of Addressing Broader Stakeholder Concerns
Applying the consolidation model within the organization helps in understanding and fulfilling consolidation requirements such as a consolidated financial requirement. Amcor Limited is facing problems related to Safety Environment and Sustainability that puts a negative impact on creating innovative packaging. As a result the organization applies this model in relation to Accounting Policies and changes in accounting errors and estimates. During the annual period of the company, the model is applied by the organizations to disclose the essential factors. If the company implements the consolidation model than it is considered to apply the acquisition method without identifying any goodwill for the investor. The model helps the organization to recognize non-controlling interests, liabilities and the cost of assets. It also helps in identifying the carrying cost investor’s engagement with the investee (Lemishovska, 2018). Accounting issues also affects the employees of the organization that causes poor performance. Therefore, based on Australian Accounting standards the model could be applied to manage performance of the organizational employees. The organization also faces tax related issues due to accounting. Thus, an efficient use of the model reduces the need for disclosure as per Australian Accounting Standards that solves tax related issues. On the other hand applying budget model also helps Amcor Limited in creating a budget for the organization. The budget model would help in developing a time frame, variable costs, fixed costs, and income effects. By applying a budget model the organization could evaluate the actual expenses and income at the time of the budget period. It also helps in calculating the difference between the actual expenses and income and budgeted amount.
The accounting principles and accounting policies of Australia state that all the monetary terms data and accounting information must be consistent, comparable, reliable and relevant with the accounting rules. In order to deal with accounting issues, it is highly recommended to Amcor Limited that it must make use of an accounting framework that gives clear guidance on how to follow accounting concepts and principles while preparing the financial statements. The organization in Australia must make efficient use of accounting discipline while executing a business for recording the needed data. It has been observed that the company is facing accounting issues, hence it is significant for the organization to make compliance while preparing general accepting financial statements. This could be done by complying with assumptions such as CSR, KPI, environmental performance and sustainability. It would help the organization to prepare a financial statement on annual basis.
In order to overcome the accounting issues, the organization must create an account of a provision in its business functions. Thus, the organization must take into account that accounting theory should be evolved consistently for preparing financial statements and avoid the occurrence of any issues related to accounting. It is strongly recommended that the organization must create a direct nexus with companies such as international accounting standard board. As a result, it would help the firm to make relevant changes in the accounting theories according to the required changes in the business within ramification of the economy. Along with the accounting policies, the firm should follow the rules and regulations of Generally Accepted Accounting Principles (GAAP). Such rules and regulations, as well as other GAAP policies, would help the organization to manage financial statement systematically and overcome the issues such as, CSR, KPI, environmental, tax and employees. Therefore, the company must increase their reporting guidelines based on international accounting standards. Following this strategy would help the company to manage their accounting issues effectively.
Conclusion
In this paper, various accounting theories and models are discussed that helps in overcoming Australian accounting issues within the oragnization. It provides a critical evaluation of the accounting theories and models to deal with accounting issues. It has been observed that applying different accounting theories helps the organization to manage accounting related issues and prepare appropriate financial statements effectively. It has provided a deep understanding of basic accounting theories, models, standards and concepts. It can be seen that the organization is making efficient use of accounting theories to deal with certain situations. Therefore, the paper provides an analysis of accounting theories and models that would be beneficial for the organization.
References
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