SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
Table of Content
Table of Content ........................................................................................................... 2
Accounting as a Financial Information System: .................................................................. 3
Scope of Accounting: .......................................................................................................................................... 3
Role of Accounting: ............................................................................................................................................ 4
Accounting as an Information System: ............................................................................................................... 5
Role and Activities of an Accountant: ................................................................................................................ 6
Accounting Personnel: ........................................................................................................................................ 6
Final Comments: ................................................................................................................................................. 7

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
Accounting as a Financial Information System:
A company can communicate its reports and results of its business operation in the form
of accounting only. There are several definitions of accounting available, but as per one
of the commonly used definition, "Accounting is the art of recording, classifying and
summarizing in a significant manner and terms of money, transactions and events which
are; in part at least, of a financial character and interpreting the results thereof”.

Scope of Accounting:
The scope of accounting can be represented with the help of the following diagram:

Date creation and collection: This is the place that provides the raw material for
accounting. The data is historical since it refers to the events that have already happened.
Once the data is collected, it gets recorded as per the accounting principles, hence the
transactions or events are recorded in the books in the of a journal and ledgers. This step
of recording and processing of information usually forms a substantial part of the complete
accounting work, and so it may also be called as recordative. To process these
transactions, the method employed can be manual, mechanical or electronic. In the
current era, companies mostly use computers for this kind of job.

Data evaluation: One of the most important activities in accounting, it includes

controlling the business activities with the help of budgets and standard costs, evaluation
of business performance, analysis of the flow of fund, and analyzing the accounting
information to decide by choosing among alternative courses of action. The analytical and
interpretative work of accounting can be used for both internal and external purpose and
may range from snap answers to elaborate reports produced by extensive research reports
which can be used for activities such as Capital project analysis, financial forecasts,
budgetary projections and analysis for reorganization, merger or acquisitions. The other
aspect of data evaluation is Auditive as it focuses on verification of transactions as entered
in the books of account and authentication of financial statements done by professional
chartered accountants.

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM

Data reporting: This consists of two-part, namely, external and internal reporting.
External reporting refers to the communication of financial information to outside
stakeholders, such as shareholders, governments, agencies and regulatory bodies, while
the internal reporting is more concerned with communicating financial analysis results to
the management to decide with regards to the business.

Role of Accounting:
The following can be some of the roles of accounting:

Financial Accounting: It is a process of recording, summarizing, and reporting various

transactions that occur over a period of time during the business. The daily transactions
are converted into financial statements, balance sheets, income statements, and cash flow
statements.

Cost Accounting: This refers to a process of recording, summarizing, analysing, and

allocating the cost over the process of manufacturing a product or providing services. It
helps the management to compute the cost involved in manufacturing a product or
services by use of different cost accounting method.

Management Accounting: This helps managers to make and implement business

policies for better results. Although financial accounting information is used for this
purpose, management accounting is a different analysis tool for analysing accounting
information.

Social Responsibility Accounting: It is a new phase in the development of accounting.

The social responsibility accounting widens the scope of accounting by considering the
social effects of business decisions in addition to the economic effects

Human Resource Accounting: It is a branch of accounting that seeks to report and

emphasize the importance of human resources in a company’s earning process and total
assets. It involves accounting for investment in people and replacement costs as well as
accounting for the economic values of people to an organization.

Inflation Accounting: This type of accounting is concerned with the adjustment in the
value of assets and of profit in the light of changes in the price level. In other words, it
tries to overcome the limitations that arise in financial statements on account of the cost
assumption and the assumption of a stable monetary unit. Thus, it aims to correct the
discrepancy in the reported results caused by the price level changes. For instance, a
rising price during inflation has the distorting influence of overstating the profit.

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
Accounting as an Information System:
As already mentioned, that accounting involves a series of activities inter-related to each
other, starting from collecting, recording, analysing and evaluating the data, and finally
communicating information to its users, who can be both internal and external. Since
accounting is considered as social science, it can be viewed as an information system as
it has all the features of a system. There is an input (raw data), processed (men and
machines/equipment), and outputs (reports and information). Hence, if we consider
accounting as an information system, then some important observations can be made.
First, the objective of the system is to give information that will meet the need of the
users, and so if the user’s need can be correctly identified, then the nature and character
of the outputs of the system can be specified. Second, it is the output requirements that
determine the type of data which would be selected as the inputs for processing into
information output.
Since several stakeholders may be interested in the financial information of the company,
however, the objective of each of these stakeholders may vary. These stakeholders may
include the following:

• Management: It helps the management to ascertain the overall and segment-wise

efficiency of the business. Further, it also helps them in decision making and evaluation
of the performance of the business.
• Employees and Trade Unions: Employees are interested in their welfare and so they
would be interested in the profitability, sustainability and financial strength of the
business, while the trade unions are interested because this may help them negotiate
and enter into wage contracts with the employer.
• Shareholders or Owners or Investors: Since they invest their money into the
business, they would be interested in knowing whether the business is profitable and
has growth potential or not.
• Potential Investors: They are interested in the financial statement because they will
invest their money into the company only if they find the company profitable and has
good growth potential.
• Supplier or Creditors: They are more interested in knowing the short-term solvency
position of the company, as they would provide goods and/or services on credit only
they find that the company can repay them.
• Bankers and Lenders: They are interested to know whether the company can service
the interest payment and also repay the principal, in case they grant a loan to the
company. For this, they would look at the long-term and short-term solvency of the
firm.
• Researcher: They are interested in knowing the profitability, growth, financial position
and future prospects of business and industry.

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
• Government: The government is interested because they would like to understand
which industry is progressing and which ones need protection and incentive. It also
helps them in formulating relevant policies and law.
• Tax Authorities: The tax authorities want to ensure that the tax liabilities calculated
are correct and that the firm is not evading taxes.
• Customers: They mostly look at the fact whether the company can continue or not,
especially when they have or intend to have long-term involvement with the company.

Role and Activities of an Accountant:

The following statements can best describe who an accountant is what role they perform
in this entire process.
1. An accountant is one who is engaged in accounts-keeping.
2. An accountant is a functionary who aids control.
3. An accountant keeps the conscience of an organization.
4. An accountant is a professional whose primary duties are concerned with information
management for internal and external use.
5. An accountant is a fiscal adviser.
6. An accountant produces an income statement and a balance sheet for an accounting
period and maintains all supporting evidence and classified facts that lead to the final
accounting statements.
7. An accountant verifies, authenticates, and certifies the accounts of an entity.

Accounting Personnel:
Every organization will have an accountant as his role is all-pervasive and is involved in a
number of activities, especially in a large and complex organization. Although the exact
responsibilities of the person may vary from organization to organization, a broad
spectrum of responsibilities can be identified.
The accountant can be broadly categorized into two categories, namely:

1. Those who are in public practice: They offer their services for conducting the financial
and or cost audit, and so they are known as auditors. The auditor, appointment by the
shareholders of the company has the primary responsibilities of examining the books
of accounts and financial statements (such as Balance Sheet and Profit and Loss
Statement) of the company and state whether they give a true and fair view of the
state of affairs of the company or not. Besides conducting the audit of the company,
these accountants may also provide consultancy/professional services for designing
and improving the accounting and management control systems of the company. In
India, the public accounts will have to be a member of professional accounting bodies
like the Institute of Chartered Accountants of India or the Institute of Cost and Works
Accountants of India.

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 SEBI GRADE A 2020: ACCOUNTING AS A FINANCIAL INFORMATION SYSTEM
2. Those who are in private employment: In this case, the accountant may be in various
business or non-business organizations to perform a range of accounting and
management control functions. Generally, the accountants at higher levels will belong
to the professional accounting bodies, while those at lower levels may not be so. The
accounting heads in an organization, depending upon their nature of work, maybe
designated as finance officers or internal auditors or chiefs accounts officers, etc. Of
late, the term ‘controller’ as the head of the accounting and finance function is gaining
traction in India as several large organizations, both in the public and private sectors,
now have controllers. A controller may work as an Internal Auditor, Treasurer, or even
Finance Officer of the company.

Final Comments:
Thus, it is evident that accounting is an important service activity of any business as it
can be perceived as an information system that has its inputs, processing, and outputs.
However, the usefulness of accounting lies in its capacity to provide information to
business stakeholders so that they can take correct decisions depending on their
objective/goals.

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