10-11-2012, 06:02 PM
ACCOUNDING FOR MANEGERS
Accounting forManagers Notes ( Unit - I ).doc (Size: 325 KB / Downloads: 48)
Introduction to Financial Accounting
Accounting is the language of business. It requires the systematic record keeping of all that happens on a day – to – day basis in business and analyzing this information to aid business decision making. The primary intension of financial accounting is the preparation of the statement revealing the income and financial position of the business on the basis of the events. The major financial statements are Profit and Loss A/c, Balance Sheet, Cash Flow Statement etc…
UNDERSTANDING BUSINESS ORGANIZATIONS:
Business organizations offer goods and services in order to earn a profit. Receiving and paying cash are central to the activities of business organizations. Business organizations that provide goods are of two kinds:
Merchandising (Trading) Organizations: buy and sell goods without any processing.
Manufacturing Organizations: buy materials, process them into finished products, and sell them.
Service Organizations: are businesses that provide services. Unlike goods, services do not have either form or substance, and, therefore, the recipient of a service can only experience them and can not transfer them to another person.
Book-Keeping is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner. A book keeper may be responsible for keeping all the records of a business or only of a minor segment such as position of a customer’s accounts in a departmental store. A substantial portion of the book keeper work is of a clerical in nature and is increasingly being accomplished through the use of mechanical and electronical devices.
What is Accounting?
• Accounting is often called the language of Business.
• Accounting, as an information system, is the process of identifying, measuring, and communicating the economic information of an organization to its users who need the information for decision making.
The American Institute of Certified Public Accountants defines accounting 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 a financial character, and interpreting the results thereof.
This definition brings out the following as attributes of accounting:
• Events and transactions of a financial nature are recorded while the events of a non-financial nature cannot be recorded.
• The record should reflect the importance of the transactions so recorded both individually and collectively, which includes summarization, thereby making it amenable to analysis.
• The users of the financial statements should be able to obtain the message encompassed in such financial statements, and it is the knowledge of accountancy, which enables the user to understand the contents of the financial statements.
The Accounting Information System
Accounting Process:
Recording: Recording commences when a business transaction occurs and it has been quantified. A record of all these transactions is maintained in the order in which they occur in the Journal Book.
Classifying: It refers to the rational segregation of the recorded information into related groups so as to make the record useful. The book containing such classified information is called the Ledger Book consisting of a number of accounts each complete in its own way. For example, all the receipts forming inflows and the payments forming outflows are grouped to ascertain the net cash position of the firm. The arrangement in this case is better known as the Cash Book.
Summarizing:
After the Recording and Classification phases are complete the accounts containing relevant information in the Ledger Book are to be balanced and the balances listed. The Statement giving names of these accounts and their respective balances is called the Trial Balance. On the basis of the Trial Balance the summaries are generated to provide information about the Profit / Loss and the Position of the firm. The reporting of these summaries is done through Financial Statements.
Financial Statements can be defined to include the Balance Sheet, the Profit and Loss Account, Notes to the Accounts and other incidental statements and explanatory material which are identified as part of financial statements.
Information and the Accounting Process
• Identification—what’s relevant?
• Measurement—which yardstick?
• Classification and accumulation—how do you organize the
results of thousands of events?
• Summarization—how much information is enough, but not too much?
• Communication—how often, when, and to whom?
Qualities of Accounting Information
Information should be useful, but what does that mean? The two primary qualities of useful information are:
1) Relevance--the information must pertain to the decision at hand. That suggests it will have predictive and feedback value and should be timely.
2) Reliability--the information must reasonably reflect the real-world situation that it represents. To do so, it must be free of bias and verifiable.