Professional Documents
Culture Documents
Definition
Uses of Accounting
Investors
The investors are the major recipients of the financial statements of
business. Accounting information enables investors to identify promising
investment opportunities. They need information to decide which
investments to buy, retain, or sell, as well as the timing of the purchases or
sales of those investments. They also need information to monitor
management performance and to assess the ability of the enterprise to pay
dividends.
Lenders
Lenders such as banks and debenture holders need to know about the
financial stability of a business that approaches them for funds. They are
interested in information that would enable them to determine whether their
borrowers will be able to repay the loans and pay the related interest on
time.
Managers
Managers need information for planning and controlling operations, for
making special decisions, and for formulating major plans and policies. They
use to evaluate potential investment projects. Since managers are
responsible for reporting enterprise performance to owners and others, they
monitor the key financial indicators that appear in the financial reports.
Besides, they compare their firm’s performance with that of their
competitors’ performance.
Employees and Trade Unions
Employees are keen to know about the enterprise’s general operation,
stability and profitability.
Current Employees have a natural interest in the financial condition of the
enterprise because, often, their compensation income will depend on the
financial performance of the firm.
Potential Employees may use financial information in order to gauge the
enterprise’s prospects.
Past Employees, who depend on their former employer for their post-
retirement benefits.
Trade unions use financial reports for negotiating enhancements in wages,
bonus and other benefits.
Customers
Present, prospective and past customers use information about the financial
affairs of an enterprise in deciding whether business has anything to do with
it and how much.
Ex: Reserve Bank of India (RBI), Securities and Exchange Board of India
(SEBI) etc.
The Public
Enterprises affect members of the public in a variety of ways. Financial
statements assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range of its
activities.
Financial and Management Accounting
Principles of Accounting
Concepts
This concept implies that the business is distinct from the owners. If the
owner takes cash or goods from the business, the drawings account is
debited and cash or goods account is credited otherwise the personal &
business transactions will get mixed up and the accounting statements
become confused.
3) Cost Concept:
Usually all the transactions will be recorded as cost in books. However, at the
end of every year the accountant show the reduced value of the assets, after
providing for depreciation. This approach is preferred because it is difficult &
time consuming to ascertain the market values.
4) Dual Aspect Concept: This concept explains that each transaction has two
fold effect, the receiving of the benefit the giving of the benefit. The receiving
aspect is termed as debit and giving aspect is termed as credit. For every
debit there will be corresponding credit. A famous elictus says that every
receiver is also a giver and every giver also a receiver.
(Or)
Capital + Outsider Liabilities = Assets
5) Going Concern Concept: It is assumed that the business will continue for a
long time. With this assumption fixed assets are recorded in the books at
their original cost. Keeping this assumption in view prepared expenses are
not treated as the expenses of the year in which they are incurred. It is
assumed that the business derives and benefit out of it in the year to come.
6) Material Concepts:
Under this concept the trader recording important about the commercial
activities in the form of financial statements. If any unimportant information
is to be given for the sake of clarity. It will be given as footnotes.
7) Matching Cost Concept: The concept deals with matching of cost, first
being the revenue recognition, determining net income from business
operations, all costs which are applicable to revenue of period should be
charged against that revenue.
Conventions