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Accounting Information:    A means to an End

Bookkeeping:    the recording routine transactions in proper books

Accounting:       provides information that is useful for decision making purpose

Investors, creditors, managers and others who have a financial interest in an enterprise need a clear understanding of accounting terms and concepts if they are to understand and communicate about the enterprise.

 

Accounting from a User's Perspective:

Accounting information is simply the means by which we measure and communicate economic events.

Types of Accounting Information:

Financial Accounting

Information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual).

FA information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. It is also used in income tax returns.

Management Accounting

Management accounting involves the development and interpretation of accounting information intended specifically to aid management in running the business.

Managers use the information in setting the company's overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products and in making virtually all types of managerial decisions.

Management accounting information often includes evaluations of non-financial factors, such as political & environmental considerations, product quality, customer satisfaction, and worker productivity.

Tax Accounting

The preparation of Financial accounts as per income tax rules and regulations. It is most challenging aspect of tax accounting, in which accountant has to make a TAX PLAN by anticipating the tax effects of business transactions and structuring these transactions in a manner that will minimize the income tax burden.

ACCOUNTING SYSTEMS

The basic purpose of the accounting system is :

to meet the organization's needs for accounting information as efficiently as possible.

It consists of Personnel, Procedures, Devices, and Records used by an organization:

The design and capabilities of these systems vary greatly for organization to organization according to:

Accounting system should be cost-effective is the only criterion for producing that information.

 

Basic Functions of an Accounting System

  1. Interpret & record the effects of business transactions;
  2. Classify these records in statement form as prescribed by accounting procedures which provide information to managers; and
  3. Summarize and Communicate the information contained in the system to decision makers.

Who designs and Installs Accounting System?

Experts in management, information systems, marketing and computer programmers with the supervision of qualified accountants.

DECISION MAKING BY EXTERNAL PARTIES

External users of accounting information are individuals and other enterprises that have a financial stake/interest in the reporting enterprise, but they are not involved in day-to-day operation of that enterprise.

External users are: Owners, Creditors, Labor Unions, Government Agencies, Suppliers, Customers, Trade Associations,    General Public

Objectives of External Financial Reporting:

Both Investors and Creditors are concerned with:

Financial Statements

Characteristics of Externally Reporting Information

Financial Reporting - A Means:

Provide ground for decision making to external parties.

Financial Reporting Vs. Financial Statements:

Stock reports, Industry analysis Vs. Company statements

Historical in nature:

Statements are based on historical values, whereas, Reports provide current and future scope.

Inexact & Approximate Measures:

Estimates about the life of Plant, Equipment etc. (Judgment)

General-Purpose Assumption:

One information serves more than one type of users.

Usefulness Enhanced Via Explanation:

notes and explanations

 

DECISION MAKING BY INTERNAL PARTIES

Internal Party are Managers, employed by enterprise.

eg.: BODs, CEO, Chief Finance Officer, Departmental VPs, Plant Manager, Store Manager, Line Supervisors etc.

 

Objectives of Management Accounting Systems

Depends upon nature of business, for profit or not-for-profit.

It is divided in 3 ways:

  1. assign decision making authority to employees by allocating them budget & internal accounting responsibility;
  2. furnish those decision makers with financial reports to make rationale decisions; and
  3. Evaluate and reward managers as per their performance by matching plans & budgets with actual outcomes.

Characteristics of Management Accounting Information

Importance of Timeliness:   decisions must be taken in time without delay to capture the opportunity.

Identity of Decision Making Authority:   Monitor and control the process which clearly mention the decision maker

Oriented Towards the Future:   Due to non-financial aspects it measures past actions and plan for future objectives

Measures of Efficiency and Effectiveness:    It measures the usage of resources by specific manager and its outcome

Managerial Accounting Information - A Means:    It provides means to design a program to achieve goals & objectives

 

INTEGRITY OF ACCOUNTING INFORMATION

Integrity refers to complete, unbroken, unimpaired, sound, honest and sincere presentation of accounting practices.

It can be enhanced by 3 ways:

  1. standards (GAAP) {FASB & SEC}, internal control structure (error free system), audits by CPA   
  2. professional Accounting Organizations (ICAP, ICMA etc.); and
  3. personal competence, judgment & ethical behavior of professional accountants.

CAREERS IN ACCOUNTING