The compilation of these Introduction to Accounting Notes makes students exam preparation simpler and organised.
Accounting as a Source of Information
Accounting is regarded as the language of a business. It is used as a means of communication between a business organization and its shareholders. The accounting process is a source of information, it uses business data and processes it to generate relevant information. Let us have a look.
Accounting as a Source of Information
Accounting is the management information system of any organization and is concerned with providing necessary information to the management, i.e it is a source of information. In the account, every step involves either generation or processing accounting information. It serves as a means as well as an end of providing information to all stakeholders who need the information to make a proper decision.
Accounting serves the following purposes relating to generating and processing information:
- The accounting records business transaction which is the source of generating information.
- A proper accounting system makes information more reliable.
- Accounting ensures it is a reliable source of information.
- Accounting works as a management information system to the organization. It helps the management to manage the organization in a proper way.
- Accounting systems generator various information in the form of different accounts. These documents have to be to true and fair.
- Accounting shows the performance of any business organization. Oil anyone who wants to know about the progress of an organization can only not through the use of accounting.
- Accounting provides information on activities that affect society.
As we know all titles in accounting are done by a person known as an accountant. An accountant generates accounting information by observing, screening, and recognizing events and transactions in the business.
He measures and processes information and compiles reports comprising accounting information that is communicated to the users. Then these are interpreted and uses by management and other user groups. It is the responsibility of the accountant that the information provided must be relevant adequate and reliable for decision making.
Users of Accounting Information
Accounting information is used by many parties for making decisions in business. All those who use accounting information about the business to make decisions are called Users. They are basically users of accounting information. These are different parties in the business who have some stake in the business. Users have a stake in the business in the form of
- Investment in business
- Loans to the business
- Goods sold on credit to the business
- Job in the business.
- Consumers of goods and services produced by the business etc.
But the main purpose of all the users is that all of them want to know about the performance, progress, and working of the business organization. The users of accounting information are divided broadly into two categories:-
- Internal Users
- External Users
Internal Users
These are the parties who have been directly involved with the management and working of the organization. They work with the organization and have the power to influence the working of an organization. For them too, accounting is a source of information.
Internal uses include owners, partners, directors, managers, and employees, etc. Different users need different information from the accounting. It can be discussed in the following manner:
1. Owners/Proprietor/Partners
They want to know about the probability of an organization. These are interested in getting a good return on their investment. These are all interested to know how the financial position of the business organization is. e It is their responsibility to make a decision about the future policies and performance of the business in the future according to this data.
2. Management
The success of the management depends on the success of an organization. The performance of the management is evaluated according to the profits of a business.
If the business grows, the salaries of management staff will also grow. Management is also responsible to know whether a business is able to pay its liabilities or not. The management will be interested to know if the business is showing overall growth and performance of the business. Their source of information, in this case, will be the accounts of the company.
3. Employees and Workers
These are interested to know that business is earning profits or not. If the business is at loss then it is the possibility that some employees may be removed from a job. These are also interested to know if they should continue the same organization. This will depend on the future prospect of an organization.
External Users
All those parties and individual who are not directly involved in the management and operation of the business now is external users. These do not have the power to influence the working of the organization. Such users include investors, creditors, suppliers, customers, banks, financial institutions, government, existing shareholders, potential shareholders, and suppliers of raw materials, etc.
Every different user needs a different kind of accounting information. It can be discussed in the following manner:
1. Bankers/Lenders
These want to know the interest on their loans. They will be able to get interested when the businesses are earning profits. The financial position of the business is good then it will be able to pay back the loans.
2. Creditors
These want their money back from the business and it depends upon the financial position of the business.
3. Customers
These want to know the future policies of the business. If the business will continue in the future then the demand for customers increases.
4. Government
Government is interested to know how the trade-in industry is doing in the country. The government departments collect data related to revenues, sales, production, the number of employees, etc. of business to know the condition of the economy. It is also interesting to know how much taxes have been paid by the business
5. Society
The business organization uses the resources of society. Therefore society expects the business to generate employment for them. Therefore society would like to know how many people are employed in the business.
Society is also interested to know how many welfare activities are done by a business organization for them. Societies want to know the policies of CSR (corporate social responsibility). A successful business provides a lot of services to the people in the society like hospitals, schools, thinking water, food to school children, making roads, etc.
Thus accounting as the language of business is used to exchange information between business and its partners.
Example:
Question:
List down the external users.
Answer:
- Bankers
- Consumer
- Society
- Creditors
- Government