Professional Documents
Culture Documents
Aim
Accounting
3
What is accounting? Or
What do you do as an accountant?
Why do you do that?
Recording, analysing and summarising the
Financial
To the external users.
accounting system
Managerial
To the internal users
accounting system
Types of information
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Financial accounting
Recording the day to day activities of business
Producing periodic summaries
End result is for external users
Prepared in accordance with law and accounting
standards
Historical nature
Processing:
Recording,
summarizing data
Outputs:
Set of financial
statements
Types of information
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activities.
Internal Users
Not a legal requirement
Historical and future planning.
Differences between
Financial and Managerial accounting
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Financial accounting
Managerial
accounting
Type of information
Historical
information
Type of users
External users
Internal users
Outputs
Financial statements
Budgets
Type of figures
Quantitative only
Quantitative and
qualitative
Mandatory
Optional
According to the
management request.
Types of information
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Financial management
Concerned with raising finance and
Controlling financial resources,
For example:
- Dividend payment decision
- Bank loans
- Credit Management
Types of information
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Auditing
Limited company accounts must be audited by an
Users of accounts
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efforts
Loan Credit Group - e.g. debentures
Employees - existing, potential
Analyst Advisor Group give advise to investors
Business Contact Group - Customers, suppliers
Government - Tax authorities, local authorities, Company House
Competitors comparing their position.
Auditors True and Fair view.
Public - Taxpayers, ratepayers, consumers.
External users:
1.
2.
3.
4.
5.
6.
7.
Investors
Banks
Government
Capital markets
Customers
Suppliers
Financial analysts
Internal users:
1.
Management
2.
Employees
1- Relevance
2- Reliability.
Secondary qualities:
3- Comparability
4- Understandability
5- Timeliness/ Consistency
Primary qualities:
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1. Relevance
Information must be relevant to the decision-making
needs of users.
Relevance is closely related to timely information.
For example:
A potential investor to predict future profitability and
dividend levels will be at least partly based on the
financial statements.
Primary qualities:
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2. Reliability
(a)Faithful representation information provided must represent
faithfully.
(b ) Neutrality/objectivity
Information must be neutral, that is free from bias and provided in an
objective manner.
(c) Prudence
- Assets or income are not overstated and
- Liabilities or expenses are not understated.
(d) Completeness
It must be complete within the bounds of materiality and cost.
An incomplete information can cause to be false or misleading and thus
unreliable.
Secondary qualities:
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3. Comparability
Users need to be able to compare financial statements
of a business through time to identify trends in its
financial position and performance.
Users also need to be able to compare one business
with another.
Secondary qualities:
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4. Understandability
Information provided to users must not be so complex
that a user with a reasonable knowledge of accounting,
would not be able to understand it.
To ensure that all information relevant to users is
Secondary qualities:
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5. Consistency:
The presentation and classification of items in the
financial statements should stay in the same form
from one period to the next.
For example:
Depreciation method.
Stock valuation method.
Note: A change is allowed if there is a significant
change in the nature of the operation or a change is
required by IFRS.
Business organisations
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Sole traders
Partnerships
Companies - private and public
Club/Society
Charities