WHAT IS ACCOUNTING ?
Accounting is simply an art of record keeping. It means putting into writing or in print suitable transactions and events of financial character reasonably soon after their occurrence in the records maintained by the organisation (e.g. general journal, subsidiary books and the ledger.) as well as their summarisation for their ready reference. However, this definition does not reflect properly the role of accounting in the modern society. The scope of accounting is wider at present than that described in this definition.
WHAT IS ACCOUNTING AS AN INFORMATION SYSTEM ?
It is a called as "language of business". The primary function of a language is to serve as a means of communication among people in a society. Accounting is the common language used to communicate financial information to individuals, organisations, Government agencies and so on about various aspects of business such as its financial position, Accounting should be viewed as an information system for the simple reason that it would help focus attention on the information provided by it. Accounting helps users in taking better decisions by providing relevant, reliable and timely information on the financial and operational position of an enterprise.
It would be found in practice that almost all business enterprises maintain detailed or comprehensive accounting records. The main reason is that these records are often required by law e.g. Companies Act, Income Tax Act, Sales Tax Act, Securities and Exchange Board of India (SEBI) etc.
WHAT IS THE PURPOSES OF AN ACCOUNTING SYSTEM ?
An effective accounting system provides information for three broad purposes :
(i) Internal reporting to managers for use in planning and controlling current operations,
(ii) Internal reporting to managers for use in strategic planning, that is, making of special decisions and in the formulating of over all policies and long term plans, and
(iii) External reporting to stockholders, Government and other outside parties.
The accounting information, which is always in money terms (or of financial nature), must be designed or classified in such a manner as to make it suitable for different types of users and decision makers possessing even limited knowledge. The information system must be flexible enough to report the operating results and financial position more frequently, keeping in view the special and complex needs of the internal management on a continuing basis. The internal management needs accounting information primarily for planning and to control responsibilities of the managers of the enterprise. So is the case of some of the external users especially the lenders and investors.
The following decisions are generally based on the accounting information :
(i) When to buy, hold or sell the investments especially in equity capital of an enterprise ?
(ii) Assessment of the accountability of the management
(iii) Assessment regarding the ability of the management to pay salaries, and other benefits like bonus to its employees
(iv) Assessment of the security for the amounts lent to the enterprise
(v) Determination of the ability to distribute dividends and bonus shares
(vi) Preparation and use of national income statistics
(vii) Determination of taxation policies
(viii) Regulation of the activities of the enterprise
The list is in no way an exhaustive one and the nature of the decision would depend upon the type of enterprise and particular circumstances.
WHO ARE THE USERS OF FINANCIAL ACCOUNTING INFORMATION AND THEIR NEEDS ?
The information generated by final reports (Income statement, Balance sheet and cash flow statement) of an enterprise is called financial accounting information. Such information has a vast scope to meet the information needs of various groups of people who have contact with the business enterprise. There are two broad categories of users of financial accounting information, namely : External Users and Internal Users and Internal Users.
Individuals and organisations who have present or future economic interest in the business but are not part of management team are external users. They make use of external financial reports included in the company' annual reports such as profit and loss account, balance sheet and cash flow statement known as general purpose financial statements. The external users are : Shareholders, lenders, Suppliers of goods and services (creditors), Customers, Employees (Labour unions), the Government and its regulatory agencies, the general public, Analysts and advisors and Donors/ Sponsors.
Internal users who are directly involved in managing and operating the business enterprise such as officers and other decision makers commonly referred to as management or in the case of small business, owner(s)/sole traders and partners. The internal role of accounting is to provide information to help improve the efficiency and effectiveness of their organisation in supplying goods or rendering service. Management accounting provide internal (or unpublished) reports to help internal users of accounting improve the activities of an organisation. Internal users have direct access to a lot of private and confidential reports which contain valuable accounting information not meant for external users. Internal reports generally provide information relating to the manufacturing cost of a product; pricing of products for different levels of sales; whether the product should be manufactured or purchased from outside; whether new products should be introduced or a particular product should be discontinued etc.