Accounting is the language of business. However, it is not easy for most people to learn the language. Accounting is considered a very dry subject by most people. All those debits and credits usually put people to sleep. However, accounting is easy to learn if you keep some basic principles and concepts in mind. Accounting services Brisbane keeps the following principles in mind while making accounts.
- Time value of money – A dollar earned tomorrow is worth less than a dollar earned today. Sounds simple enough but this principle is often forgotten in practice. For example, capitalization of certain interest costs pushes dollar expenses into the future thus saving money.
- Compounding and Cumulative advantage- Compounding is one of the wonders of the world and compounding of good things should not be interfered with. Small differences of money accumulated over time can lead to big differences in the overall results in the long term. Accounting services Brisbane keeps the compounding principle in mind while making accounts.
- Investment versus Speculation – This is a much debated topic in finance and accounting. There are many definitions of investment and speculation. One forwarded by Benjamin Graham the founder of value investing is that investment operation is one which promises safety of principal and promise of an adequate return. Another definition of investment is that if you are thinking what the asset will yield over time, you are investing. If you are thinking what you can flip the asset for to someone else, you are speculating
- Mr Market- Perhaps the most important concept in accounting and finance is Mr Market. Think of stock market as a manic depressive creature that will propose prices to you. You have the option of rejecting and accepting those prices. What you should not do is get carried away by the enthusiasm of Mr Market.
One would expect that most firms across countries will follow these principles including Accounting Services Brisbane. However, accounting standards differ a lot across countries. The quality of disclosures varies a lot too. A savvy analyst is one who can reconcile accounting standards made in one country to those made in another country.
Accounting can also be very misleading while staying within the rules of the language. In particular firms can use a lot of discretion in determining what the income can be. They may or may not include non-current losses like profit on sale of fixed asset, profit on loss or sale of marketable security, discount or premium on retirement of corporate obligation, proceeds on life insurance policies, tax refunds and interest thereon, gain or loss as a result of litigation etc.
Company can tweak the earnings by extra ordinary write down of inventories. Inventory losses are directly related to the cost of doing business and must be included in the operating results. Depreciation and amortization is another area where management can use of lot of discretion in manipulating earnings.
To sum up, analyst needs to be skeptical of management while evaluating accounts.