Unit-01

Analyses Accounting and

Its need.
Learning Outcomes
After studying this unit you should be able to ;
 Define “Accounting”
 Explain the main functions of accounting and the
relationship between each function.
 Identify the attributes of Accounting
 Explain the objectives of Accounting
 Explain the difference between Financial Accounting
and Management Accounting
 Identify the stakeholders involved in a business
organization and their respective information.

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1.What is Accounting ?
“Accounting is a process of identifying, measuring
and communicating economic information to permit
informed judgments and decisions by users of
information”
American Accounting Association (AAA)

“Accounting is a system that collects and processes

(analyses, measures and records) financial information
about an organization and reports that information to
decision makers”
Robert Libby and Daniel Short

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3.

Accounting Entity
Accounting entity is the entity for which accounting
activities or functions are carried out. Accounting
entity may be an individual, an institute, a state or a
nation.
Accounting functions are carried out on behalf of
the Accounting entity.
Example: Mr.A, ABC partnership , Sri Lankan
economy, PQR PLC or Limited liability
company.

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4. Objectives of Accounting
Main objective of Accounting is to communicate
economic information about the entity that will
enable interest stakeholders to make economic
decision based on such information.
 Accounting provides economic information
regarding the Accounting Entity through
financial statements which includes information
about assets, liabilities, Equities, Incomes and
Expenses.

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Objectives of Accounting cont.…
Other objectives of Accounting
Controlling economic resources
Decision making on resource utilization
Calculation of economic result
Legal requirement

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 5. Significance of Accounting
Significance of Accounting

As a Social As a Source of As a Mean of

Phenomenon Information control

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6. Accounting Information
“ Data that is accurate and timely, specific and organized for a purpose,
presented within a context that gives it meaning and relevance, and can lead
to an increase in understanding and decrease in uncertainty.” (
www.businessdictionary.com)

“ Any fact which enhances the knowledge about something is known as

information”
Information is valuable because it can affect behavior, a decision, or an outcome.
For example,
if a manager is told his/her company's net profit decreased in the past month, he/she
may use this information as a reason to cut financial spending for the next month.
A piece of information is considered valueless if, after receiving it, things remain unchanged.

DATA PROCESS INFORMATION

 Economic information
INFORMATION

Quantitative Qualitative
Information Information

Non-Financial Financial Operating Activities

Information Information
Financing Activities

Investment Activities
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 7. Classification of Accounting
Accounting

Based on the necessity

Based on the
of Information and
Accounting Entities
parties

1.Personal Accounting
1. Financial Accounting 2. Business Accounting
2. Management Accounting 3. Government Accounting
4. National Accounting

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 Accounting

Financial Management
Accounting Accounting

Provision of financial information Provision of relevant information that

about the past transactions and will assist and support all levels of
events of an entity to the external management to plan, control, make
parties in a manner that will enable economic decisions in order to fulfill
them to make economic decisions. their responsibilities.

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 Differences between FA and MA
Financial Accounting Management Accounting
FA deals with historical information only. MA deals with historical information as
well as budgeted information.

FA provides information for both internal MA provides information to the internal

and external parties. parties only.

Information is provided for a specific Information is provided when the

period of time. requirements come as per the demand
of the mangers.

Accounting concepts, standards, rules and Accounting concepts, standards, rules and
regulations are used in preparing regulations are not used in preparing
financial reports. financial reports.

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 08. Stakeholders of an Organization and their
information needs
Interested Information needs
Stakeholders
Owners/ Partners/ - Profit and Loss of the business
Shareholders - Utilization of funds for Different investments
- Financial position of different investments
- To determine the management efficiency
- Liquidity and solvency position
- for further investments
Management / Directors - For various management decision
- measure the result of pervious management decisions
- Resource control
- Information for future plans
- Liquidity and solvency position
Employees - Job security of the employees
- Salary and other benefits
- Protect and control the resources of the business
- Liquidity and solvency

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 Stakeholders of an Organization and their
information needs
Interested Information needs
Stakeholders
Government institutions - Income taxes and other statutory payments
- Other legal requirements
- Correct values of national income
- Formulates the economic policies
Lenders /banks - Business performance of the entity
- Loan recovery purpose
- Granting more facilities
Customers - Quality of goods and reasonable price
- Customer loyalty and reputation of the organization
- Consumer protection
Competitors - competitive information
- Imitate product , service and management
- competitive position
General public - Various reasons

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 Financial Accounting Process
F I N A N C I A L A C C O U N T I N G

INPUTS PROCESS OUTPUT

Transaction FINANACIAL
Identification &
s STATEMENTS
Measurement -Income Statement/
and Profit and Loss A/C
Events Recording -Statement Financial
( Financial Position /BS
-Statement of Change
and Internal Classification in Equity
& External ) -Statement of Cash
Summarizing Flow
-Notes to the Accounts
& Accounting policies
Analyzing &
Interpretation

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 Management Accounting Process
M A N A G E M E N T A C C O U N T I N G

INPUTS PROCESS OUTPUT

REPORTS
Historical Planning -Budget Statements
Information -Accounting Ratios
and -Overhead Analysis
Budgeted
Budgeting -Marginal Cost
Information
Information -information For
Controlling Investment
Decision

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 Functions of an Accounting
System
Collection of
data Recording Classifying
(Identification)

Communication
Analyzing and Summarizing
Interpretation

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01.Collection of data/ Identification
of accounting transactions
The first function of accounting is to collect or
identify financial transactions or events which will
affect assets , liabilities and equities of an
organization.
Financial transactions and events are being recorded in
source documents at the time of proceeding.
Financial transactions are collected from source
documents/prime documents such as Invoices, Vouchers ,
Bills , Receipts , Statements
 These documents are written evidence of transactions

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 02. Recording
Financial transactions and events should be recorded
systematically in a consistent way in day books.
The process of recording financial transactions in Day Books
and posting into the Ledger is known as Book-keeping .
Subsidiary /day Books are sets of records(Books) which are
used to record identical transactions subject to the nature of
business.
 Subsidiary /Day Books: Cash Book, Sales day
Book, Purchase Day Book, Petty Cash Book, Sales
Returned Day Book, Purchase Returned Day Book , General
Journal

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 03. Classifying
Accounting information recorded in day books or
journals must be classified into related groups or
categories of transactions. Identical and similar
transactions must be put into the similar group. The
Ledger includes following categories of accounts .
Assets
Liabilities
Equities Elements of Financial
Revenue /incomes . Statements
Expenses

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 04. Summarizing
To be useful to decision makers, accounting
information generally must be highly summarized.
This function involves the preparation of Trail
balance and Financial statements.
Main techniques of summarizing are,
Trial Balance
Financial statements

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 05. Analyzing and interpreting
Financial statements provide information about the Net
result and Financial Position of the enterprise. Net result
and Financial Position should be analyzed and
interpreted in such a way of meeting the users needs.
Main techniques of summarizing are,
Ratio Analysis
Financial Statement Analysis

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 06. Communication
The main objective of accounting is to communicate
financial information to interested parties to help in
the making of specific business decisions. This is
the final stage of an accounting system and the
function which demonstrates the overall
responsibility of accounting .
Financial information is transmitted through ,
The General purpose financial statements
The Special purpose financial statements
The Management and performance reports

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 The objective of Financial
Statements
“ The objective of financial statements is to provide
information about the financial position( Change
in financial position as well) , financial result
(performance) and cash flow of an entity that is
useful to a wide range of users in making economic
decisions ”
- Financial Statements do not provide all information
,they do not necessarily provide non-financial
information
- Financial statements also show the results of the
stewardship of management or accountability of
management for the resources entrusted to it.

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The Structure and Components of the Conceptual Framework of
Financial Accounting cont…
Components of Financial Statements
A complete set of Financial statements comprises of
following components.
 A statement of financial position as at end of the
period .
 A Statement of profit or loss and other
comprehensive income for the period.
A statement of changes in equity for the period
A statement of cash flow for the period.
 Notes to the financial statements , comprising the
summary of significant accounting policies and
other explanatory information.

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The Structure and Components of the Conceptual Framework of
financial Accounting cont…
Elements of Financial Statements
To meet the objective of financial statements, following information is
provided about the entity.

Elements of Financial Statements

Assets Liabilities Equities

Income Expenses

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Qualitative Characteristics of Financial Statements
Understandabilit
y

Relevance Materiality

Faithful
presentation

Prudence

Reliability Neutral

Comparability Completeness

Substance over
form

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Thank you !

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