Introduction to Accounting
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers (Elliot, Barry & Elliot, Jamie: Financial accounting and reporting).
- Accounting has been defined as:
- the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.(AICPA)
Accountancy therefore encompasses the recording, classification, and summarizing of transactions and events in a manner that helps its users to assess the financial performance and position of the entity. The process starts by first identifying transactions and events that affect the financial position and performance of the company. Once transactions and events are identified, they are recorded, classified and summarized in a manner that helps the user of accounting information in determining the nature and effect of such transactions and events.
Users of Accounting Information - Internal & External
Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.
Internal users (Primary Users) of accounting information include the following:
- Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results.
- Employees: for assessing company's profitability and its consequence on their future remuneration and job security.
- Owners: for analyzing the viability and profitability of their investment and determining any future course of action.
Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.
External users (Secondary Users) of accounting information include the following:
- Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks.
- Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company.
- Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.
- Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.
- Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.
External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.
Accounting is a very dynamic profession which is constantly adapting itself to varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the different needs of the users.