Financial Accounting 1

Chapter 1 Accounting (Information for decision making)

As we studied in principles of accounting that accounting is the language of business, in the sense that the financial reports regarding a business talks about that business, thats why we can say that these reports helps us in decision making and are of three types: Financial accounting information Managerial accounting information Tax accounting information The above three will be provided through professional accountants to the followings: External parties (who have interest in the business but are not part of the operations) Internal parties (who might have interest in the business but are part of the operations) Information provided to external parties namely, owners, creditors, suppliers, customers, government and other stake holders is called FINANCIAL ACCOUNTING INFORMATION Information provided to internal parties namely; BOD, BOM, CEO, CFO, production manager, supervisor, etc is called MANAGERIAL ACCOUNTING INFORMATION

Accounting information: A means to end:

We know that the objective of accounting is to provide information to decision makers and as the information is provided its out put will be Final decision by external and internal parties.

Accounting Process

Economic activities

Accounting process

Decision
makers

Accounting information

Types of accounting information

There are three types of accounting information Financial Accounting Information Managerial Accounting Information Tax Accounting Information

Accounting Systems:
Accounting system refers to the personal, procedures, technology and records, which provide information to its users for decision making. Main functions of an accounting system 1, interpret and record the effects of business transaction 2, prepare and develop accounting information 3, interpreting and communicating this information to decision makers The accounting systems vary from organization to organization with respect to their need for the accounting information and their ability to se up an accounting information system depending upon the size of the business, their activities and users. The systems can vary from a cash book to certain advanced accounting systems, containing many or one accounting professional/s, accounting soft wares, computers and databases. Factors affecting structure of accounting system 1. need for accounting information 2. resources available for operations of accounting system

Need for accounting information

Accounting information is needed for the following purposes To know about the position of a business To know about the results of a business To know about the tax charges of a business To know about the cash position a business

Cost of accounting information

Every organization must have a cost effective accounting system (CEAS), it is that system the value of whose information is more than the value of producing it.

Financial Accounting Information

FAI is that type of accounting information which describes the resources, obligations and
activities of a business for the use of external parties. Accountants use: Financial position, to represent resources and obligations of a business Results of operations, to describe financial activities of a business The purpose of external financial reporting External financial reporting is used to let external users know: 1. how much is return of their investment 2. how much is return on their investment The above two information will be given to the external users so they can decide about 1. their investments 2. whether the company will be able to pay them what they expect The purpose of external financial reporting will be achieved through: 1. information about the resources, claims against them and changes and resources and claims 2. assessing amounts their timing and uncertainties about the future cash flows 3. general information in making investment and credit decisions

Management Accounting Information

MAI is that type of accounting information which is used for giving accounting information too internal parties, for controlling and monitoring the operations of a business; The purpose of internal financial reporting To achieve the objectives and goals of a business To evaluate the performances of different departments / individuals To decide about products (introduce new products, expand the existing, shrink the existing)

Characteristics of MAI
Must be timely Must be reported to authorized persons Must be in consistency towards the goals and objectives Must measure efficiency and effectiveness

INTEGRITY OF ACCOUNTING INFORMATION

AI must be complete AI must be unbroken AI must be honest and sincere AI must be sound

Tax Accounting Information

That type of accounting information which is used to evaluate the tax payments and its effects on the business and its transactions