Importance Of Accounting In Overall Accounting System

Importance of accounting in overall accounting system It’s to communicate to various users of financial statements the financial position/economic position of the business. Who are the users of financial statements?

Users of financial statements • • • • • •

Owners /investors Management Government Banks and other creditors Employees Customers and suppliers

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”

different types of accounting works involved • • •

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Constructing: formulation of policy recording: Book Keeping following basic rules of Accountancy classifying: the process of grouping or sorting of the business transactions to get meaningful information. Done using ledger. summarizing: provides a result for the transactions undertaken by the company. (all revenue will give profit or loss)

different types of accounting works involved •

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Reporting: preparation of logical reports and statements - decision making. The financial statements, budgetary reports etc Interpreting: understand financial matters and relationships between variables. Ratio analysis, trend analysis, cash flow. Auditing: verification of authenticity, accuracy and correctness of book keeping activity and reports drawn from those records.

The accounting systems are • Cash system: normally used by charitable institutions, doctors etc, • Single entry system: incomplete books of records which recognizes only cash and personal aspects and ignores impersonal aspects .eg. Sole-Proprietor. • Double entry system

accounting activities • 2. 3. 4. 5.

Financial/stewardship accounting: identify financial events/ transactions, measure them in terms of money (highly successful manager recruited), to organize the data in to meaningful info and to analyse, interpret and communicate to the various stakeholders.

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

accounting activities • Cost accounting extension of general accounting. Accumulates the costs of certain activity and gives cost information to the management See the Xerox areas of decision making like cost control, identify profitable areas of business (sales mix).

Accounting activities • Management accounting:/ MCS: uses financial and cost data to evaluate the entire business or various departments in relation to pre determined targets For corrective action in case of deviation. (differences xerox given)

Limitations of management accountancy: • depends on financial and cost data the validity of the reports is dependent upon the 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.

Limitations of management accountancy: • heavy on time as its is continuous development of the process • heavy on manpower as the person dealing should have comprehensive knowledge of all accounting activities and all subjects like engineering, taxation, statistics etc.

Accounting Activities • •

Management Reporting It is the process of communicating the right information to the management at the right time and in the right manner for effective decision making.

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

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)

Qualitative Characteristics of Accounting Information

relevance • Relevance for decision making and timeliness • Must have predictive capability( is the central of Quality of Earnings concepts) and feed back value • For example if Net 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

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

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.

SECONDARY QUALITATIVE CHARACTERISTICS • Comparability is the ability to help users see similarities and differences between events and conditions • consistency of accounting practices over time permits valid comparisons between different periods. The predictive and feedback value of information is enhanced if users can compare the performance of a company over time

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