INTRODUCTION TO ACCOUNTING
NATURE AND PURPOSE OF ACCOUNTING
Accounting is the language of business. Accounting can be defined as the process of identifying, measuring, and reporting economic information to the users of the accounting information to permit informed decision making.
Accounting falls into two distinct categories; financial accounting and management accounting. Financial accounting is concerned with the recording of data, classifying, and summarizing the recorded data and communicating the results thereof to interested parties.
Management accounting on the other hand analyses and interprets financial statements in order to make managerial decisions that affect the financial position of the firm. Management accounting begins where financial accounting ends.
FUNCTIONS OF ACCOUNTING
Some of the functions of accounting include;
Accumulation, selection, and recording of data.
Summarizing, analyzing, and interpreting financial information.
Planning and controlling the day-to-day operations & activities of the business enterprises.
Making proper decisions that affect the financial position of the enterprises.
OBJECTIVES FINANCIAL ACCOUNTING
Financial statements that is comprised of income statements (T, P&L), statement of financial position (B/S), cash flow statement, and notes to the accounts; accounts and proper book keeping records are designed to fulfill the following objectives;
Provide and communicate useful info to various interested parties such as investors, creditors, money lenders, employees, trade unions, management, etc. to aid in making rational business and investment decisions.
Provide and information bank about the past and future prospects of the enterprise as regards to its ability to generate net cash inflows through its earning and financial activities.
Provide speedy and objective information on the activities of the enterprise in order to permit informed judgement and decisions.
Provide information about the volume of economic resources available to the enterprises (Assets),obligations to other parties (liabilities), changes in financial position , firms financial plan budgets.
Provides interpretative information to allow prediction, comparison, and evaluation of the performance in terms of its earning power, solvency, gearing, efficient utilization of time and resources.
Account for resources placed at the disposal of management to those who entrusted them with the resources.
QUALITIES OF FINANCIAL STATEMENTS.
Financial statements must have certain basic minimum qualities in form of content, measurement, analysis, communication, etc. in order to meet the objectives. The following are key qualities of as set of good financial statements.
OBJECTIVITY AND CLARITY
Accounting should provide information which is valid, verifiable, and which is based on objective evidence. Information contained in the financial statements should be free from preparers biasness. The intended users of accounting information should find it easier to understand to facilitate sound decision making.
Accounting information should meet the needs of user(s) in order to enable them make an informed judgement and decision. The information contained in the accounting statement should influence the decision making process of the user.
Matters that are materially significant to the financial position and performance of the enterprise should be reported. Information is material if its omission or mis-statement would influence the economic decisions of users on the basis of the financial statements.
The accounting information in the financial statements should be free of errors, bias, and mis-statements, as its to be relied upon for rational decision making. Information is neutral if it is free from bias.
All transactions and other events for the period of reporting must be faithfully represented.
The information contained in the financial statements should be capable of being understood by users with a reasonable, knowledge of business and economic activities and accounting.
Financial statements should not overstate assets and incomes nor understate liabilities, expenses, and losses.
Time is money and financial statements should be timely and promptly presented to users to enable decisions to be made rapidly on the basis of up to date information. Monthly, Quarterly, half yearly, and annual accounts and statements should be prepared and presented to users as and when they are required.
Accounting policies upon which financial statements are prepared should be consistent from year to year. These accounting policies adopted by an organization should be disclosed.
The information in financial statements should permit comparison with information about alternative opportunities and past experience. The users should be able to compare the position of the firm over time with similar businesses.
USERS OF FINANCIAL INFORMATION
The users of financial accounting information are many and varied. Each user has his or her peculiar objective.
The users of financial accounting information include;
Investors/proprietors/shareholders:- They use financial information to decide on the amount of capital to invest and also check on profitability of the firm.
Suppliers and trade creditors:- They base the ability of the firm to pay their accounts and firms creditworthiness on financial statements.
Customers:- They use financial statements to study the reliability of the firm to supply, especially in bulk purchases/sales.
Trade unions:-The information contained in the financial statements helps the trade unions in making collective bargaining of their member employees salaries, pensions, fringe benefits, redundancy, scheme, etc. The employees must be members of the union.
Financial analyst and statisticians:- They use financial statements information to analyze the firm and evaluate their credit rating in order to provide reference to their clients.
Tax and other regulatory authorities:- They use financial information to determine amount of tax to impose on a firm, the tax authorities assess the financial position and income statement.
Employees:- They study the current remunerative policies and generally decide on other employment opportunities.
Loan creditors:-The firm will use the financial statements to apply for loans. The loaning institutions assess the firms ability to pay back the loan using these statements.