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Importance of accounting in overall accounting systemIts to
communicate to various users of financial statements the financial
position/economic position of the business. Who are the users of
financial statements?
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Users of financial statements Owners /investors Management
Government Banks and other creditors Employees Cuomers and
suppliers
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According to Smith and Ashburne Definition of accounting is the
science of recording and classifying business transactions and
events, primarily of financial character and the art of making
significant summaries, analysis and interpretations of those
transactions and events communicating the results to persons who
must make decisions or form judgements
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different types of accounting works involved Constructing:
formulation of policy recording: Book Keeping following basic rules
of Accountancy classifying: the process of grouping or sorting of
the businesstransactions to get meaningful information. Done using
ledger. summarizing: provides a result for the transactions
undertaken by the company. (all revenue willgive profit or
loss)
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different types of accounting works involved Reporting:
preparation of logical reports and statements - decision making.
Thefinancial statements, budgetary reports etc Interpreting:
understand financial matters and relationships between variables.
Ratio analysis, trend analysis, cashflow. Auditing: verification of
authenticity, accuracy and correctness of bookkeeping activity and
reports drawn from those records.
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The accounting systems are Cash system: normally used by
charitable institutions, doctors etc, Single entrysystem:
incomplete books of records which recognizes only cash and personal
aspects and ignores impersonal aspects .eg. Sole-Proprietor. Double
entry system
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accounting activities 2. 3. 4. 5. Financial/stewardship
accounting: identify financial events/ transactions, measure them
in terms of money (highly successful manager recruited), toorganize
the data in to meaningful info and to analyse, interpret and
communicate to the various stakeholders.
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Limitations financial accounting Historical in nature and
reflects the present position Does not reflect the qualitative
aspects of business Gives only overview but detailed business plans
require in depth analysis Requires accounting knowledge
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Accounting activities Management accounting:/ MCS: uses
financial and cost data to evaluate the entirebusiness or various
departments in relation to pre determined targets For corrective
action in case of deviation. (differences xerox given)
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Limitations of management accountancy: depends on financial and
cost data the validity of the reports is dependent uponthe
historical data. principle of objectivity is not followed as is
based on intuition and managers go for short term benefits than the
long term ones.
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Limitations of management accountancy: heavy on time as its is
continuous development of the process heavy on manpoweras the
person dealing should have comprehensive knowledge of all
accounting activities and all subjects like engineering, taxation,
statistics etc.
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Accounting Activities Management Reporting It is the process of
communicating the right information tothe management at the right
time and in the right manner for effective decisionmaking.
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Accounting activities Income tax accounting preparation of the
necessary records required for filing returns for tax purposes. For
ex. The depreciation shown under financial accounting is not
acceptable by the income tax authorities
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Objectives of financial reporting: to provide information on
financial position (Balance Sheet) to provide information on
financial performance (profit and loss ) changes in financial
position( cash flow)
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Qualitative Characteristics of Accounting Information
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relevance Relevance for decision making and timeliness Must have
predictive capability( isthe central of Quality of Earnings
concepts) and feed back value For example ifNet income statement
gives the investor any idea about the future cash flows has feed
back value. Can be used for investing and predicting invt cash
flows
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Reliability Verifiability implies a consensus among different
measurers. Representational faithfulness exists when there is
agreement between a measure or description and the phenomenon it
purports to represent EX: allowance for uncollectible accounts
previously was reserve for doubtful accounts
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reliability neutrality is highly related to the establishment of
accounting standards. Accounting standards should be established
with overall societal goals and specific objectives in mind and
should try not to favor particular groups or companies.
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SECONDARY QUALITATIVE CHARACTERISTICS Comparability is the
ability to help users see similarities and differences between
events and conditions consistency of accounting practices over time
permitsvalid comparisons between different periods. The predictive
and feedback value of information is enhanced if users can compare
the performance of a company overtime
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THANK YOU FOR YOUR ATTENTION AND INTERACTION.
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