Accounting as a Source of Information

Accounting as a source of information Class 11 notes

Accounting being a definite process of interlinked activities begins with the identification of transactions and ends with the preparation of financial statements.

Every step in the process of accounting generates information which facilitates the dissemination of information enables the interested parties to take appropriate decisions. Therefore, dissemination of information is an essential function of accounting.

Qualitative Characteristics of Accounting Information

Qualitative characteristics are the attributes of accounting information which tend to enhance the understanding and usefulness for its users. Main qualitative characteristics of accounting information are:

(i) Reliability The accounting information should be free error and personal bias of the accountants and owners. The financial information must be supported by the evidences so that the same can be verified (based on facts) at any point of time.

(ii) Relevance Accounting information should be made available to the users in time and disclose all relevant information apart from disclosing the statutorily required information. The information so provided must help them in prediction and feedback.

(iii) Understandable The financial information communicated should be understood by the users. The accountants/owners should present the comparable information in the most intelligible manner without sacrificing relevance and reliability.

(iv) Comparability The financial information provided by a business enterprise to its users must be comparable over the different time period and with other entities.

It is possible only if the business enterprises follow consistent policies and procedures while preparing financial statements.

Users of Accounting Information

Generally, users of accounts are classified in two categories:

(i) Internal Users or Insiders

All such users who have access to internal information and are interested in the overall financial performance of an organisation are internal users.

(a) Owners/Proprietors Owners are those persons who provide risk capital in the business e.g. sole proprietor, partner in a partnership business and shareholder in a company.

They are interested to know the profit or loss of business as well as security of the capital.

(b) Management Management consists of directors, chairperson, chief executive officer, etc. They require the financial information for the smooth and efficient function of the enterprise.

(c) Employees and workers They are interested to assess the ability the business  to  pay  higher  wages,  salaries,  promotion,  bonus,  etc.  This all can be had with the help of financial information of the business.

Note A shareholder is no doubt an owner in the company but he/it is an external user.

(ii) External Users or Outsiders

All such users who don't have access to the business operations and day-to-day activities of a business are external users. Such users are:

(a) Shareholders (Investors) The shareholders are the owners in a company and are interested in knowing about the regularity of adequate return in the form of dividend on their capital invested. They control the company with the help of voting rights.

(b) Potential investors Such investors provide loan to the organisation and include debentureholders, banks and financial institutions. They analyse the accounting information  to  know  long-term  solvency position of the company with  regard  to  regular  payment  of  interest and repayment of money lent.

(c) Suppliers/creditors Suppliers supply goods or raw material to a business organisation on the credit basis. So, such persons are interested to know the solvency position of the business in a

short-run usually one year for the repayment of their dues in time.

(d) Customers/debtors Though the customers are not financially dependent on the business as they have pay the money but they analyse the financial information to know the dependence on the business with regard to regular supply of goods and after  sale services.

(e) Government and its agencies The government collects taxes in the form of sales tax, VAT, excise duty, income tax, etc. So, government agencies need  accounting  information  to  assess  the  tax  liability  of the business entity.

(f) Social responsibility group The groups such as environmental groups require information on the impact on environment and its protection.

(g) Researchers Researchers also require accounting formation for their research work to make interfirm and intrafirm comparisons to know the operating performance and financial soundness of the business entity.

(h) Public The public is interested in the financial information of an enterprise as it may make a substantial contribution to the society like employment and fulfilment of social responsibility.

Accounting System

Ms Zapak retail stores., Delhi is a newly set up business entity which is owned and managed by Mr Alok Sharma, who is a science graduate. Mr Alok started his retail store with an amount necessary for acquisition of various resources for the proper functioning of the store.

For the past three months, the sales volume has increased and now the store has become popular in the local market. A large number of customers were visiting in the stores for fulfilling their demands. Mr Alok observed that in every department of the stores i.e. the sales team, purchase team, stock keeping team etc. were working in proper coordination. One  day, Mr Alok  called  up all  the  team members of the store to discuss the business activities carried over in the past.

During discussion with team members, Mr Alok, was surprised to face the following issues:

(a) What amount of goods have been purchased during the past three month?

(b) How much have been sold out during the period?

(c) Which of the team members sold maximum number of goods on monthly basis?

(d) How much cost have been incurred in office maintenance, stores maintenance and on selling and distribution activities?

(e) What are the results of the activities performed by the stores during the past three months?

Mr Alok found that all questions remain unsolved at the end of the discussion due to the following reasons:

(i) Proper records of the transactions have not been kept.

(ii) Records of inflow of goods, outflow of goods and stock of goods have not been maintained.

(iii) No records in respect of customer handling and conversion into sale by each team member have been maintained.

Mr Alok observed that for the betterment and growth of the business it would be necessary to have a  proper  accounting  system  which would ensure complete recording of transactions and at the end of a particular period it would be easy to determine the operational results and financial position of the business. Finally, an accountant was appointed to look after all the above issues.