CHAPTER ONE

INTRODUCTION

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 Contents

Definition of Accounting

Accounting Information

Users of Accounting Information

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 What is Accounting?

 Accounting is the process of identifying, measuring, recording,

and communicating an organization’s economic activities to
users.
 Users need information for decision making.
 Accounting is often called the Language of Business because it
uses a unique vocabulary to communicate information to decision
makers.

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 What is Accounting?
 The area of accounting known as managerial
accounting serves the decision-making needs of
Internal Users.
 External users do not work for the organization and
include investors, creditors, labour unions, and
customers. Financial accounting is the area of
accounting that presents financial information of
interest to External Users.
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 What is Accounting?
The systematic recording, reporting, and analysis of financial
transactions of a business.
 Which type of organisation need accounting?
 Sole trader. This means one person who runs a business on his/her own, or
perhaps with a few employees. The main aim is to make a
profit.
 Partnership. This is two or more people who carry on a business in
common, intending to make a profit.
 Share company. A limited company is a legal organisation set up under the
Companies. The owners are called the shareholders, and it
is run by directors, who are appointed by the shareholders.
 Public sector bodies. Traditionally, these bodies have not existed to make a
profit, but to provide a service.
 Clubs and societies. Again the intention club is not to make a profit, but to
provide services for members.
 All of these organisations require some form of accounting
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 What are the reasons that Accounting is undertaken
by organisations?
 To record what money has come into the organisation and
what has gone out.
 To tell other people about the activities and consequent profit
or loss of the organisation during the past year, or other
period.
 To tell other people about the present financial state of the
organisation.
 To provide a basis for taxation.
 To provide a basis for planning future activities .
 To help managers make decisions about how to run the
organisation.

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 The
accounting
process

Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities  and
with the results of
their decisions.

Actions
(decisions) Decision
makers
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 Accounting Information :

What is information?
 It is a stimuli that has meaning in some context for its user.

 When it is entered into and stored in a computer, it is

generally referred to as data.
 The output data can again be perceived as information.

Thus, the first objective of accounting is to provide

information that is useful for decision making purpose.

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 Con,t........

 To make Economic Decision based on accounting

information, decision makers need to understand;
A. The nature of economic activities that
accounting information describes.

B. The assumptions and measurement techniques

involved in developing accounting information.

C. The information that is most relevant for making

various type of decisions.

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 Con,t
 Broadly speaking Accounting Information can be placed into one
of three categories;
 Financial Accounting Information that is primarily used by
External Parties.
 Managerial Accounting Information is used by persons within
the organization to help manage and control business processes.
 Tax information is used to help organizations complete
obligations to report to the Tax authorities and other
regulatory agencies.
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 Accounting Information System
 AIS is methods, procedures, and standards followed
in accumulating, classifying, recording, and
reporting business events and transactions.
 It is a system of collection, storage and processing of
financial and accounting data that is used by
decision makers.
 Accounting system includes the formal records and
original source data.
 The information should meet the needs of users of
information.

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 Basic Functions of an
Accounting System
 Interpret  Classify
and record similar
business transactions
transactions. into useful  Summarize
reports. and
communicate
information to
decision
makers.

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 The Three Basic Functions Performed
by an AIS
1 To collect and store data about the organization’s
business activities and transactions efficiently and
effectively: (Record & interpret the effect of business transactions)
 Capture transaction data on source documents.
 Record transaction data in journals, which present a
chronological record of what occurred.
 Post data from journals to ledgers, which sort data by
account type.

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2. Classify the effects of similar transactions in a
manner that permits determination of the various
totals and subtotals useful to management and used
in accounting reports

3. Summarize and communicate the information

contained in the system to decision makers
 In manual systems, this information is provided in the
form of reports that fall into two main categories:
– financial statements
– managerial reports

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The Accounting information system

1) Income
e s s n Inputs Process Outputs
1) Income
Statement
s i n act i o
Statement
2) Balance Sheet
u
B ns
2)
3)
3)
Balance Sheet
Cash Flow
Cash Flow
a
Tr
1. Accounts
1. Accounts
2. Journal
2. Journal
3. General
3. General
Ledger
Ledger
4. Trial Balance
4. Trial Balance

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 The
The Process
Process of
of Providing
Providing
Information
Information
STAKEHOLDERS
Owners, Customers,
Identify
managers, creditors,
1 stake-
holders.
employees government

Assess
stakeholders’
2 informational
needs.

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 The
The Process
Process of
of Providing
Providing
Information
Information

Design the
Record accounting
economic Accounting
4 data about
business
Information
System
3 information
system to meet
stakeholders’
activities and needs.
events.

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 The
The Process
Process of
of Providing
Providing
Information
Information
STAKEHOLDERS
Owners, Customers,
managers, creditors,
employees government

Prepare
accounting
5 reports for
stakeholders.
Accounting
Information
System
 Financial Accounting
Information
 Financial accounting provides information about
the Financial Resources, Obligations and Activities
of an enterprises that is intended for use
primarily by external decision makers.
 Mainly for External users

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 External Users of Accounting Information
 External users of accounting information are individuals and other
enterprises that have a financial interest in the reporting enterprises, but
they are not involved in the day to day operations of that enterprise.
 External users of financial accounting information include the following
users with a direct & indirect Financial Interest
 Investors
 They
Creditors have direct interest
 Labor union
 Governmental Agencies.
 Suppliers They have indirect interest
 Customers.
 General public, etc

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 Objectives of External Financial Reporting

 The accounting profession has identified certain objectives of

external reporting to guide its efforts to refine and improve the
reporting of information to external decision makers.
 These general objectives are;
 to provide information that is useful in making investment &
credit decision.
 to provide information that is useful in assessing the amount,
timing & uncertainty of future cash flow.
 to provide information about the enterprise’s resources, claims
to those resources and how both the resources and claims to
resources change over time.

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The Primary Financial Statements

Balance Sheet
Income Statement
Statement of Cash Flows
These statements are used
to meet the objectives of
external financial reporting

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These
TheseFinancial
Financial
Statements
Statementsare
are Lens
Lensto
to i ng
o rt
View
View Business
Business ep
al R
nci
a
Fin

Financial
Statements
Fin
anc
ial R
epo
rt i ng

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 Characteristics of Externally
Reported Information
Usefulness
Usefulness Broader
Broaderthan
than
Enhanced
Enhancedvia
via Financial
Financial
Explanation
Explanation Statements
Statements

Based Historical
Historicalin
in
Basedon
onGeneral
General
Purpose Nature
Nature
Purpose
Assumption
Assumption
Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures

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 Management Accounting
Information
 Management accounting is the preparation & use
of accounting information to achieve the
organization's objectives by supporting decision
makers inside the organization.
 Internal decision makers are employed by the
organization

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 Internal Users of Accounting Information
 Every internal employee of the organization uses
accounting information.
 Example of internal users of accounting
information system are
 Board of directors
 Chief executive officer (CEO)
 Chief finance officer (CFO)
 Business unit managers
 Plant managers
 Store managers
 Line supervisors etc

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Objectives of Management Accounting Information

 It helps the organization to achieve its mission and

goals
 It helps to assess both the past performance and the
future directions of the enterprise and
 It helps the decision making authority to make
decision; and to evaluate & make reward for better
performance

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 Characteristics of Management
Accounting Information

Timeliness
Timeliness
Identify
Identify
Decision
Decision
Maker
Maker

Measures
Measuresof of
Efficiency
Efficiencyand
and Oriented
Oriented
Effectiveness
Effectiveness Toward
TowardFuture
Future

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END OF THE INTRODUCTION

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