Notes

What is ACCOUNTING ?
- It is a systematic process of identifying, recording, measuring,

classifying, verifying, summarizing, interpreting and communicating
financial information. It reveals profit or loss for a given period, and
the value and nature of a firm’s assets, liabilities and owners’ equity.
- In a practical sense, the main objective of financial accounting is to
accurately prepare an organization’s financial accounts for a specific
period, otherwise known as financial statement.
- It is commonly called the “Language of Business” wherein it
delivers financial information to different users through financial
statements.
NATURE OF ACCOUNTING
According to Accounting Theory: “Accounting is a systematic recording of
financial transactions and the presentation of the related information to
appropriate persons.”
Based on this definition we can derive the following basic features
accounting:
ACCOUNTING IS A SERVICE ACTIVITY

- Accounting provides assistance to decision makers by providing
them financial reports that will guide them in coming up with sound
decisions.
ACCOUNTING IS A PROCESS
- A process refers to the method of performing any specific job
step by step according to the objectives or targets. Accounting
is identified as a process, as it performs the specific task of
collecting, processing and communicating financial information.
In doing so, it follows some definite steps like the collection,
recording, classification, summarization, finalization, and
reporting of financial data.
ACCOUNTING IS BOTH AN ART AND A DISCIPLINE
- Accounting is the art of recording, classifying, summarizing and
finalizing financial data. The word ‘art’ refers to the way something is
performed. It is behavioral knowledge involving a certain creativity
and skill to help us attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper
application requires skill and expertise. So by nature, accounting is
an art. And because it follows certain standards and professional
ethics, it is also a discipline.
ACCOUNTING DEALS WITH FINANCIAL INFORMATION AND

TRANSACTIONS
- Accounting records financial transactions and data, classify these and
finalize their results given for a specified period of time, as needed by
their users. At every stage, from start to finish, accounting deals with
financial information only. It does not deal with non-monetary or non-
financial aspects of such information.
ACCOUNTING IS AN INFORMATION SYSTEM

- Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes and
communicates financial information of any entity. This discipline of
knowledge has evolved to meet the need for financial information as
required by various interested groups.
HISTORY OF ACCOUNTING
Accounting is as old as civilization itself. It has evolved in
response to various social and economic needs of men.
Accounting started as a simple recording of repetitive exchanges.
The history of accounting is often seen as indistinguishable from
the history of finance and business.
Following is the evolution of accounting:
THE CRADLE OF CIVILIZATION
 Around 3600 B.C., record-keeping was already common for
Mesopotamia, China and India to Central and South
America.
 The oldest evidence of this practice was the “clay tablet” of
Mesopotamia which dealt with commercial transactions at
the time such as listing of accounts receivable and accounts
payable.
14th CENTURTY- DOUBLE ENTRY BOOKKEPING
 LUCA PACIOLI- The father of Accounting and Bookkeeping.
 DOUBLE ENTRY BOOKKEEPING- The most important
event in accounting history is generally considered to be the
dissemination of double entry bookkeeping by Luca Pacioli
in 14th century Italy.
 SUMMA DE ARITHMETICA- The first book published that
contained a detailed chapter on double-entry bookkeeping
wrote by Luca Pacioli.
Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo de Vinci. The Italians of the 14th to
16th centuries are widely acknowledged as the fathers of
modern accounting and were the first to commonly use Arabic
numerals, rather than Roman, for tracking business accounts.
FRENCH REVOLUTION
 The thorough study of accounting and development of
accounting theory began during this period.
 Social upheavals affecting government, finances, laws,
customs and business had greatly influenced the
development of accounting.
THE INDUSTRIAL REVOLUTION (1760-1830)
 Mass production and the great importance of fixed assets
were given attention during this period.
19th CENTURY
 The Beginnings in Modern Accounting in Europe and
America.
 1854- The modern, formal accounting profession emerged
in Scotland when Queen Victoria granted an Royal Charter
to the Institute of Accountants in Glasgow, creating the
profession of the Chartered Accountant (CA).
 Late 1800’s- Chartered Accountants from Scotland and
Britain came to the U.S to audit British investments.
 1887- The first national U.S accounting society was set up.
The American Association of Public Accountants was the
forerunner to the current American Institute of Certified
Public Accountants (AICPA).
In this period rapid changes in accounting practice and reports

were made. Accounting standards to be observed by accounting
professionals were promulgated. Notable practices such as
mergers, acquisitions and growth of multinational corporations
were developed. A merger is when one company takes over all
the operations of another business entity resulting in the
dissolution of another business. Businesses expanded by
acquiring other companies. These types of transactions have
challenged accounting professionals to develop new standards
that will address accounting issues related to these business
combinations.
THE PRESENT
 The Development of Modern Accounting Standards and

Commerce
 The accounting profession in the 20th century developed
around state requirements for financial statement audits.
 Beyond the industry’s self-regulation, the government also
sets accounting standards, through laws and agencies such
as the Security and Exchange Commission (SEC).
 As economics worldwide continued to globalize, accounting
regulatory bodies required accounting practitioners to
observe International Accounting Standards. This is to
assure transparency and reliability, and to obtain greater
confidence on accounting information used by global
investors.
Nowadays, investors seek investment opportunities all over the
world. To remain competitive, businesses everywhere feel the
need to operate globally. The trend now for accounting
professionals is to observe one single set of global accounting
standards in order to have a greater transparency and
comparability of financial data across borders.
INTERNAL USERS OF ACCOUNTING INFORMATION

Internal users are that individual who runs, manages and
operates the daily activities of the inside area of an
organization.
Accounting's goal is to provide necessary information for the
management or can be defined as Internal users.
Internal users of accounting information are those individuals

inside a company who plan, organize, and run the business.
These include owners, marketing managers, production
supervisors, finance directors, and company officers.
• So who are the internal users of account information;
Owners and Stockholders.
• Directors,
• Managers,
• Officers.
• Internal Departments.
• Employees
• Internal Auditor
Internal Users of Accounting Information – (Primary)
MANAGEMENT
- Organization’s internal management includes all junior and
senior business managers.
 Budgeting, forecasting, analysis and take important financial
decisions.
 Investment decisions, identification of warning and
opportunity signals.
 Taking informed and evaluated decisions
 Compliance with all statutory, regulatory, and any other
external body.
OWNERS/PARTNERS
- Owners are the legal stakeholders of the business and the
ultimate signing authority.
 Tracking their investment and monitoring their return on
investment.
 Observing their capital invested and evaluating its upward
and downward move.
 Keeping an eye on the overall well-being of the business.
EMPLOYEES
- Full-time & part-time workers. They are essentially on the
company’s payroll.
 Checking the overall financial health of the company as it
affects their remuneration and job security.
 Examining the employer is depositing all required funds to
the appropriate authorities such as the provident fund.
EXTERNAL USERS OF ACCOUNTING
INFORMATION
An external user is a person outside of an organization who
does not directly run its operations and uses financial or
accounting information about that company to make decisions.
In other words, it’s someone who doesn’t manage or work for a
company but uses its financial information.
External users are the focus of accounting. The entire purpose
of financial accounting is to record business events and
communicate them with external users in a meaningful way.
Since external users have no first hand knowledge of a
company’s financial position or plans for the future, they are
dependent on the financial information that is provided to them
by the company.
Financial Statements are issued to external users to help them
understand the company’s financial position and past
performance. Investors, creditors, and other people outside the
company use these reports to develop business plans as well
as make business decisions about the company.
EXTERNAL USERS ARE;
• Creditors
• Investors
• Government
• Trading partners
• Regulatory agencies
• International standardization agencies
• Journalists
Creditors and Investors are the most regular example of
external users among many other external users.
Creditors
Creditors or lenders use the accounting information to find out
the ability of the borrower to repay the loan, the number of
assets and liabilities of the borrower, evidence of income,
economic position, etc. before he or she lend the money to the
economic entity.
Investors
• Investors are the capital providers of a business.
• Before investing, an investor sees the financial report for
figuring out the possibilities of the business in the future.
Financial information is important for an investor for making
sure that the investment is secure.
Trading partners
• Business needs business to do business, it is the truth.
• Associate trading companies look at the financial information
and decide to trade with the particular economic entity.
Government Regulatory Agencies
The financial information is vital for government regulatory
agencies as it allows them to monitor the economy and market.
Lawmakers and Economic planners
• It is important to keep a nation’s economic structure up-to-
date with global changes. It is a job for lawmakers and
economic planners.
• The accounting information provides information that is
necessary for making changes to the existing laws at the
right moment for the economy and society betterment.
• The financial reports or information are the result of the
accounting process that transferred to the users in two
forms-internal and external.
• These reports used for effective for operating the business
by the internal users, on the other hand, the external users
use the information to get a real picture of the financial state
of the organization.

Notes

Uploaded by

Copyright:

Available Formats

Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Notes

Uploaded by

Copyright:

Available Formats

What is ACCOUNTING ?

- It is a systematic process of identifying, recording, measuring,

ACCOUNTING IS A SERVICE ACTIVITY

ACCOUNTING DEALS WITH FINANCIAL INFORMATION AND

ACCOUNTING IS AN INFORMATION SYSTEM

In this period rapid changes in accounting practice and reports

 The Development of Modern Accounting Standards and

INTERNAL USERS OF ACCOUNTING INFORMATION

Internal users of accounting information are those individuals

You might also like