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Week 1

The Role of Accounting Information in


Business Organisations

The Role of Accounting Information in


Business Organisations
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Aim

To introduce students to the purpose and scope of Financial


Accounting
Learning outcomes
After studying this session, you should be able to:(1) Define accounting and the information it provides
(2) Identify users of financial accounting information
(3) Identify the desirable qualities of accounting information
(4) Understand the differing roles of the accounting profession

Accounting
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What is accounting? Or
What do you do as an accountant?
Why do you do that?
Recording, analysing and summarising the

transactions of an entity to provide information for


decision making.

The scope and objectives of financial accounting


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The Purpose of Accounting:

Why do you keep accounting records?


How much profit or loss has the business made?
How much money do I owe?
Will I have sufficient funds to meet my commitments?

Accounting as an information system


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Accounting is an information system which

provide useful information to the decision makers.


Mainly, there are two types of accounting system

according to their users:

Financial
To the external users.
accounting system
Managerial
To the internal users
accounting system

Types of information
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Financial accounting
Recording the day to day activities of business
Producing periodic summaries
End result is for external users
Prepared in accordance with law and accounting

standards
Historical nature

Financial accounting system


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Financial accounting is an information system which

processes financial transactions to provide useful financial


statements to
Current and prospective investors,
Financial analysts and
All the public interests.
Financial accounting system:
Inputs:
Set of
financial
transactions

Processing:
Recording,
summarizing data

Outputs:
Set of financial
statements

Types of information
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Management accounting - The supply of accounting


information to internal management in order that
It can attempt to plan and control its future business

activities.
Internal Users
Not a legal requirement
Historical and future planning.

Differences between
Financial and Managerial accounting
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Financial accounting

Managerial
accounting

Type of information

Historical
information

Forecasting for the


future

Type of users

External users

Internal users

Outputs

Financial statements

Budgets

Type of figures

Quantitative only

Quantitative and
qualitative

Why we provide them

Mandatory

Optional

How could we prepare According to IFRS or


them
national accounting
standards

According to the
management request.

Types of information
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Financial management
Concerned with raising finance and
Controlling financial resources,

For example:
- Dividend payment decision
- Bank loans
- Credit Management

Types of information
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Auditing
Limited company accounts must be audited by an

independent, qualified external auditor


The auditor reports on whether the accounts show a
true and fair view.
Internal auditors have a role defined by
management, usually reporting on the effectiveness
of controls

Users of accounts
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Equity Investor Group - e.g. shareholders


Management decision making and examining results of their

efforts
Loan Credit Group - e.g. debentures
Employees - existing, potential
Analyst Advisor Group give advise to investors
Business Contact Group - Customers, suppliers
Government - Tax authorities, local authorities, Company House
Competitors comparing their position.
Auditors True and Fair view.
Public - Taxpayers, ratepayers, consumers.

Users of Accounting information system


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External users:

1.
2.
3.
4.
5.
6.
7.

Investors
Banks
Government
Capital markets
Customers
Suppliers
Financial analysts

Internal users:

1.

Management

2.

Employees

Characteristics of useful information


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Information that is most useful for decision making.


Primary qualities:

1- Relevance
2- Reliability.
Secondary qualities:
3- Comparability
4- Understandability
5- Timeliness/ Consistency

Primary qualities:
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1. Relevance
Information must be relevant to the decision-making
needs of users.
Relevance is closely related to timely information.
For example:
A potential investor to predict future profitability and
dividend levels will be at least partly based on the
financial statements.

Primary qualities:
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2. Reliability
(a)Faithful representation information provided must represent
faithfully.
(b ) Neutrality/objectivity
Information must be neutral, that is free from bias and provided in an
objective manner.
(c) Prudence
- Assets or income are not overstated and
- Liabilities or expenses are not understated.
(d) Completeness
It must be complete within the bounds of materiality and cost.
An incomplete information can cause to be false or misleading and thus
unreliable.

Secondary qualities:
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3. Comparability
Users need to be able to compare financial statements
of a business through time to identify trends in its
financial position and performance.
Users also need to be able to compare one business
with another.

Secondary qualities:
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4. Understandability
Information provided to users must not be so complex
that a user with a reasonable knowledge of accounting,
would not be able to understand it.
To ensure that all information relevant to users is

given to them even though it may be complex.

Secondary qualities:
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5. Consistency:
The presentation and classification of items in the
financial statements should stay in the same form
from one period to the next.
For example:
Depreciation method.
Stock valuation method.
Note: A change is allowed if there is a significant
change in the nature of the operation or a change is
required by IFRS.

Business organisations
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Sole traders
Partnerships
Companies - private and public
Club/Society
Charities

Identify the basic characteristics in your group.


Enjoy drag and drop activity.