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Importance of accounting in overall accounting system

It’s to communicate to various users of financial statements the financial positio


n/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 Cus
omers and suppliers
According to Smith and Ashburne Definition of “accounting
• is the science of recording and classifying business transactions and events, • pr
imarily of financial character and the art of making significant summaries, • anal
ysis and interpretations of those transactions and events • communicating the resu
lts to persons who must make decisions or form judgements”
different types of accounting works involved
• • • Constructing: formulation of policy recording: Book Keeping following basic rule
s of Accountancy classifying: the process of grouping or sorting of the business
transactions to get meaningful information. Done using ledger. summarizing: pro
vides a result for the transactions undertaken by the company. (all revenue will
give profit or loss)

different types of accounting works involved
• Reporting: preparation of logical reports and statements - decision making. The
financial statements, budgetary reports etc Interpreting: understand financial m
atters 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 asp
ects and ignores impersonal aspects .eg. Sole-Proprietor. • Double entry system
accounting activities
• 2. 3. 4. 5. Financial/stewardship accounting: identify financial events/ transac
tions, measure them in terms of money (highly successful manager recruited), to
organize the data in to meaningful info and to analyse, interpret and communicat
e to the various stakeholders.
Limitations financial accounting
• Historical in nature and reflects the present position • Does not reflect the qual
itative aspects of business • Gives only overview but detailed business plans requ
ire in depth analysis • Requires accounting knowledge
accounting activities
• Cost accounting extension of general accounting. Accumulates the costs of certai
n activity and gives cost information to the management See the Xerox areas of d
ecision making like cost control, identify profitable areas of business (sales m
ix).
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 corre
ctive 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 in
tuition 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 acti
vities 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 r
eturns for tax purposes. For ex. The depreciation shown under financial accounti
ng is not acceptable by the income tax authorities
Objectives of financial reporting:
• to provide information on financial position (Balance Sheet) • to provide informat
ion on financial performance (profit and loss ) • changes in financial position( c
ash 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 ha
s feed back value. • Can be used for investing and predicting invt cash flows
Reliability
• Verifiability implies a consensus among different measurers. • Representational fa
ithfulness exists when there is agreement between a measure or description and t
he phenomenon it purports to represent EX: “allowance for uncollectible accounts” pr
eviously was reserve for doubtful accounts
reliability
• neutrality is highly related to the establishment of accounting standards. • Accou
nting standards should be established with overall societal goals and specific o
bjectives 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 betw
een events and conditions • consistency of accounting practices over time permits
valid comparisons between different periods. The predictive and feedback value o
f information is enhanced if users can compare the performance of a company over
time
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