Accounting
Chapter #1
Accounting Information
A MEANS TO AN END
A MEANS TO AN END
• The primary purpose of accounting is to provide
information that is useful for decision-making
purposes.
• The final product of accounting information is the
decision that is ultimately enhanced by the use of
accounting information, whether that decision is
made by owners, management, creditors, government
regulatory bodies, labor unions, or many other groups
that have an interest in the financial performance of
an enterprise.
• Accounting is widely used to describe all types of
business activity, it is sometimes referred to as the
language of business.
Accounting
The systematic and comprehensive
recording of financial transactions
pertaining to a business
Or
The systematic recording, reporting,
and analysis of financial transactions of a
business
Financial and Management
Accounting
• Accounting’s role is divided into two
categories
1. Management accounting
2. Financial accounting
3. Tax accounting
• The functions of both categories
overlap
• Primary difference between the two is
the principal users of the information
Management
Accounting
• Focuses on internal decision makers
• Managers and employees
• Reporting format is flexible and
based on the type of information
needed, such as budgets and sales
forecasts
• Used to report past performance and
expected future performance
• A company’s managers constantly need to
know such information in order to run daily
business
• Amount of cash in company bank account
• Types and quantities of merchandise in the
companies warehouse
• Amount owed to specific customers
Financial Accounting
• Focuses on external decision makers
• Stockholders
• Banks and other creditors
• Government regulators
• Financial information of company is
reported in the financial statements
• Used to report directly on goals of
profitability and liquidity
Tax accounting
• Tax Accounting refers to
accounting for the tax related
matters. It is governed by the tax
rules prescribed by the tax laws
of a jurisdiction.
• Often these rules are different
from the rules that govern the
preparation of financial
statements for public use (i.e.
GAAP).
• External Users Of Accounting Information
• External users of accounting information are
individuals and other enterprises that have a
financial interest in the reporting enterprise, but
are not involved in the day-to-day operations of that
enterprise.
• Owners or an investor(he is not an owner-manager)
• Creditors
• Labor unions
• Governmental agencies
• Suppliers
• Customers
• Trade associations
• General public
Internal users of accounting
information
• Board of directors
• Chief executive officer
• Chief financial officer
• Vice-presidents (information systems,
human resources, treasurer, and so
forth)
• Business unit managers
• Plant managers
• Store managers
• Line supervisors
External Users
… are external users of accounting
information
• Investors
• Put money into a business in order to
make money (by purchasing and
selling stocks and receiving dividends)
• Use financial statements to judge the
prospects for profitable investments
External Users (cont’d)
• Creditors
• Loan money to a business in order
to make money (by charging
interest)
• Use financial statements to judge
whether a company will have
enough cash to
• Pay interest charges
• Repay debt at appropriate time
External users (cont’d)
… are external users of accounting information
• Tax authorities
• Use accounting information to determine
amount of tax due
• Procedures for tax reporting mandated by law
• Government regulatory agencies
• Federal, state, and local levels
• Either the enterprise meet certain government
regulations that apply e.g PEMRA,
NEPRA,OGRA,SECP
External users (cont’d)
• Other groups
• Labor unions
• Those advising investors and creditors
• Financial analysts and advisors
• Brokers
• Underwriters
• Lawyers
• Financial press(Newspapers, magazines, or other
media specializing in financial news.)
• Customers
• Assess the quality and fulfilling warranty obligations
• General public
• Organization is socially responsible
Economic planner
• Suppliers
• Permitted the reporting enterprise to purchase
goods and to pay for those goods later.
