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Importance of accounting in

overall accounting system

It’s to communicate to various users of
financial statements the financial
position/economic position of the
Who are the users of financial statements?
Users of financial statements
• Owners /investors
• Management
• Government
• Banks and other creditors
• Employees
• Customers and suppliers
According to Smith and Ashburne
Definition of “accounting
• is the science of recording and classifying
business transactions and events,
• primarily of financial character and the art
of making significant summaries,
• analysis and interpretations of those
transactions and events
• communicating the results to persons who
must make decisions or form judgements”
different types of accounting
works involved
• Constructing: formulation of policy
• recording: Book Keeping following basic rules
of Accountancy
• classifying: the process of grouping or sorting
of the business transactions to get meaningful
information. Done using ledger.
• summarizing: provides 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 matters 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 aspects and ignores impersonal
aspects .eg. Sole-Proprietor.
• Double entry system
accounting activities
• Financial/stewardship accounting:
2. identify financial events/ transactions,
3. measure them in terms of money (highly
successful manager recruited),
4. to organize the data in to meaningful info
and to analyse,
5. interpret and communicate to the
various stakeholders.
Limitations financial accounting
• Historical in nature and reflects the
present position
• Does not reflect the qualitative aspects of
• Gives only overview but detailed business
plans require in depth analysis
• Requires accounting knowledge
accounting activities
• Cost accounting
extension of general accounting.
Accumulates the costs of certain activity and
gives cost information to the management
See the Xerox
areas of decision making like cost control,
identify profitable areas of business (sales
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 corrective action in case of deviation.
(differences xerox given)
Limitations of management
• 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 intuition and managers go
for short term benefits than the long term
Limitations of management
• 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 activities 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 returns for tax purposes.
For ex. The depreciation shown under
financial accounting is not acceptable by
the income tax authorities
Objectives of financial reporting:
• to provide information on financial position
(Balance Sheet)
• to provide information on financial
performance (profit and loss )
• changes in financial position( cash flow)
Qualitative Characteristics of
Accounting Information
• Relevance for decision making and
• 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 has feed back value.
• Can be used for investing and predicting
invt cash flows
• Verifiability implies a consensus among
different measurers.
• Representational faithfulness exists when
there is agreement between a measure or
description and the phenomenon it
purports to represent EX: “allowance for
uncollectible accounts” previously was
reserve for doubtful accounts
• neutrality is highly related to the
establishment of accounting standards.
• Accounting standards should be
established with overall societal goals and
specific objectives in mind and should try
not to favor particular groups or
• Comparability is the ability to help users
see similarities and differences between
events and conditions
• consistency of accounting practices over
time permits valid comparisons between
different periods. The predictive and
feedback value of information is enhanced
if users can compare the performance of a
company over time