2. Chapter 1: Introduction to Accounting (Continued)

Chapter 1: Introduction to Accounting (Continued)

Learning objectives:

 *Meaning of accounting

 *Characteristics or Features or Attributes of 

   Accounting 

 * Accounting Process 

 * Objectives of Accounting

 *  Advantages of Accounting

 *  Limitations of Accounting 

 *  Users of Accounting Information

 *  Qualitative Characteristics of Accounting Information

 *  Systems of Accounting

 *   Role of Accounting in Business


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Recapitulation from the Previous Class

Advantages of Accounting

1. Provides information about financial performance.

2.  Provides assistance to management.

3.  Facilitates comparative study:  intra firm comparison and inter firm comparison.

4. Replaces memory: it maintains systematic records.

5.  Helps in settlement of tax liability.

6.  Helpful in raising loans.

7.  Evidence in Court.

8.  Helps in sale of business.

9.  Helpful in decision making.

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Advantages of Accounting

Limitations of Accounting:

1. Accounting is not fully exact: not completely free from personal bias or judgement.

2.  Accounting does not indicate the realisable value: accounting is 'historical' in nature i.e. it records the assets at their original cost (historical cost) and does not reflect the current market value.

3. Ignores the effect of price level changes: value of money is found to change from time to time, which is not taken into consideration while preparing financial statements.

4.  Ignore the qualitative information: It is only concerned with the monetary transaction, it ignores qualitative aspects like good labour relations, management's reputation, etc.

5. Affected by window dressing: window dressing refers to the practice of manipulation of accounts to present a more favourable position of the business than the actual position. In such a situation, financial statements fail to provide a true and fair view of financial position of the enterprise.

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Limitations of Accounting

Users of Accounting Information:

 Internal Users

 i) Owners: are exposed to the maximum risk in the business as they invest capital in the business. So they always interested in the safety of their capital. They also want to know the profitability and financial soundness of the business.

 ii) Management: Accounting Information helps them in ensuring that the money invested in the organisation is generating and adequate return and that the organisation is able to pay its debts and remain solvent. Accounting Information is used by the management for taking various decisions.

 iii) Employees: They are interested in the financial statements to assess the ability of the business to pay higher wages and bonus. Employees are also interested in knowing whether the various amounts due to them such as provident fund, employee state insurance etc. are being deposited regularly.

External Users:

I) Banks and Financial Institutions: to ensure the safety and recovery of the loan advanced and regularity of the interest amount.

ii) Investors and Potential Investors: Present investors use accounting information as they are interested in knowing the earning capacity of the business and safety of the investment. Prospective investors use the accounting information in assessing whether or not to invest their money in the organisation.

iii)  Creditors: they provide goods on credit to the business. So they need accounting information to ascertain financial soundness of the firm and to ensure creditworthiness of the firm.

iv) Government and their Agencies: government need accounting information to assess the tax liability of the business entity. 

v) Researchers: they use accounting information to undertake research in various economic, business and other related areas.

vi) Consumers: they are interested in getting good quality goods at reasonable prices. So, they require accounting information for establishing good accounting control which will reduce cost of production and less price is to be paid by them.

vii) Public: Business is an indispensable part of the society and gets its manpower and other resources from society. The general public is interested in its accounting information to know the contribution of business towards the welfare of the society.

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Users of Accounting Information

Qualitative Characteristics of Accounting Information:

 1. Reliability: reliability implies that the information must be free from material error and personal biasness and verifiable.  

 2. Relevance: it means unnecessary and irrelevant information should not be included in financial statements.

 3. Understandability: it means decision makers must interpret accounting information in the same sense as it is prepared and conveyed to them. An information should be presented in such a manner that users can easily understand it.

 4.  Comparability: it means that the users should be able to compare various aspects of a firm over different time periods (known as intra firm comparison) and with other firms (known as inter firm comparison).

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Qualitative Characteristics of Accounting

Role of Accounting in Business:

 Accounting is often termed as 'Language of Business' as it communicates so much meaningful information to the users which help them in evaluating the performance of the business enterprise and taking better business decisions.

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Systems & Role Of Accounting

Conclusive Notes