Accounting is regarded as one of the important element which will enhances the role of financial categories as every business entity required finance to strengthen their business. Domino's has been selected for this project report in order to define the accounting assumptions and concepts used by an enterprise. This report is all about explaining various concepts such as prudence and accrual cum matching concept used by the business environment in assessing their internal business efficiency.
1. Usefulness of information provided on assets, liability and Equity
The balance sheet is also recognized as the statements of financial position which will define the position of an entity which determines the actual position of an entity based on their existing financial condition as compared to the external market competitors (Choi, 2013). The balance sheet has three major components such as Asset, liabilities and the equity. The usefulness of all the three elements lies in the annual report of Domino for the year 2015 which are given as below:
The investment in associates and joint ventures has increases by this entity from 2014 to 2015 with an increment of £538000 which is done to increase their overall market share in order to fight against their competitor's like subway and the burger King. The current share of domino's in the restaurant plc is 41% as it is mandatory to link up as this place is only in the UK who delivers pizza in the UK. The share of an entity in the joint ventures is lasso increases as an enterprise need to incorporate external support of joint ventures to maintain the brand image of an entity to remain ahead in the race.
Loan to provided to all the individuals who take franchisee of this brand on rate of 3.0% at the LIBOR which are available on a payment system of paying debt in monthly or quarterly installments.
The trade receivables are also incorporated in the current assets of an entity which igained receivables from franchise of business operations from Group's Irish operations. The payment system will be design of 7 to 28 days.
It includes various components which are further segmented into divisions such as current and non-current assets. The current assets are held with an enterprise for short period which can be used in meeting short term obligations. The non-current asset on the other hands which is held with an enterprise for long period (Edwards, 2013). The fixed asset or non-current asset of domino's are divided into two different parts such as tangible asset which includes property, plant and equipment, operating leases, investment in finance leases, joint venture investment and deferred tax asset. On the contrary, the intangible asset which cannot be touched but whose presence can be felt such as brand image of the business in terms of goodwill and software. The major components of current asset includes cash, inventories, prepaid charges, asset held for sale. The asset held for sale are those which are divided by an entity in different category to gain money by selling that asset which are of no use for an enterprise.
- Bank loans will be taken by this entity will form under the category of non-current liabilities as this Loan has taken for 5 years. The interest rate charged on the amount taken as loan is 1.10 interest which is above the LIBOR rate. The lower interest rate facility is available for an entity till 2017. This facility is provided to this entity due to unlimited cross-guarantee agreement between domino's pizza and DP group ltd.
- The finance lease has also taken up by this entity which is essential for an enterprise in order to operate their business undoubtedly. The rate of borrowing for this lease was 1.8% which has decreases from the previous rate of 3.2%.
- Contingent liabilities are taken into consideration in the liabilities which is regarded as higher amount which needs to be incorporate into account.
This is the burden for an enterprise which needs to be reduced by raising the level of all the assets of an entity. The liabilities of the business are similarly segmented into two major categories like current liabilities and the non-current liabilities (Colson, 2010). The primary factor of the current liabilities includes trade payable who all are the trade creditors which needs to be controlled in order to strengthen the business entity. The deferred income will be current liabilities for an entity which needs to be reduced over the years. It also includes financial liabilities, deferred and contingent consideration, current tax liabilities and provisions. The provisions are prepared by an organization in order to meet the future uncertainties imposed on an enterprise. These provisions will be reduced as this will decrease the sales and the revenue earned by an enterprise in a particular year. The current liabilities will assess the business efficiency of an entity. The business efficiency will be determined by comparing it with the current asset held with an enterprise as current ratio will determine the success or failure of an entity.
The current group has acquired 100% ordinary shares of Dresdner Kleinwor as this company is the famous entity of England. The ownership will lend an enterprise in order to strengthen their current business performance.
The current group has acquired the trade assets which will help an entity in order to initiate their business. The firm has utilized capital allowances of £7,032,000 in order to reduce their deferred assets.
The shareholder's equity is regarded as one of important aspect of an entity as it lends ownership to an individual. The equity is the basic source of finance which every organization uses in order to strengthen their business entity (Edwards, 2013).The equity shareholder are further classified into various divisions such as called up share capital and paid up which help an enterprise owner in order to decide whether to pay dividend to all the equity shareholder. The share premium are the profit which will be earned by an entity by charging additional amount added in the existing share prices. The company also need to determine specific share of capital redemption reserve which is determined by the external legal authority as this whole process is legalized by taking consent of the external party. The capital reserve also form part of this equity held within an entity as it is obtained while selling of property with high amount of profit. The property in the equity context is the shares held by an enterprise.
2. Explain prudence and accrual concept
The domino's has used prudent concept in minimizing their future risks by using different variety of techniques which are given as below:
Foreign currency risks
The group has invested in advance in increasing their business operations by investing in Germany and Switzerland which will increases the revenue of Group's non-sterling by investing financial assets by investing in Euro currency to take advantage in case of increase of currency values.
The credit terms are decided in advance which will help an entity in order to reduce the payment of operating and finance lease to boost the level of sales and the revenue. The policies are framed in advance to give credit to all customers without affecting the revenue of an enterprise.
It is regarded as one of the accounting concepts which helps an entity in order to prepare financial statements by using professional judgment in adopting different variety of accounting policies and different estimates (Henderson, 2015). It is that concept which assist the accountant while exercising degree of risk while estimating asset and income of an entity in order to increase as compared to the liability and expenses incurred in an enterprise. It is that concept in which future risks that may arises in an entity will be assessed in advance by using different accounting statements. The reason behind selecting this particular whose primary focus is on recognizing the value of asset which is higher in the value that the amount expected to be recovered in near future buy selling that asset.
On the other hand the same principle applied in an entity while treating with the liabilities incurred in the business enterprise. The future expenses are firstly recognized in order to avoid all kinds of expenses in near future without affecting an organization to get shock of increased expenses which will result into higher losses (Gassen, 2014). It can be used in order to analyses inherit risks arises in the asset of an enterprise. The risks arise from facts and figures that domino's can get benefit from good profitability conditions of this enterprise. The prudence concept is currently used by Domino as the inventories are valued at the lower of selling price or net realizable value.
The provisions are used for the leases taken by this enterprise of both the category of finance or operating leases. The 7-28 days of trade receivables period currently uses by an enterprise in order to carried forward the recovered amount generated from the trade receivables in the defined time frame. The capital reserve kept by an enterprise is based on the shares personally owned by Domino's Pizza Group Plc.
In the double entry accounting system used by an enterprise will enhance the role of accrual accounting concept of the business (Li, 2010). The accrual concept is also regarded as the matching concept in which all the business transactions are taken into consideration without actually received their amount in real business context. This principle refers to all the expenses incurred in an enterprise which is charged with the income statements in the particular accounting period which will involve all income and expenses incurred in an enterprise. The application of this concept is different in this particular organization which are given as follows:
- The IAS 19 revenue recognition has used which defines the sources of sales of gods such as revenue from pizza delivery, Supply chain centers (Macve, 2015). It also includes revenue and income from royalties, rental income and finance income.
- IAS 16 borrowing costs will capitalize all kidskin of costs incurred in an enterprise such as expenditures for asset, expenses related to work in progress assets.
- IAS16 guidelines used by an entity which will help an enterprise in order to manage all their expenses and income earned from all kinds of leases.
It can be summarized from the above project report that the accounting is integral part of the financial aspects which enhances the existing role of an enterprise. This report also stresses on complying with different rules and regulations in order to prepare their financial statements.
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