What is accounting? Flashcards
Week 1
Suggest the role of accounting in the future.
- foundation of business
- understanding performance
- plan and support decisions
What is accounting and its purpose?
- accounting is concerned with collecting, analysing and communicating financial information.
- analysing financial transactions
- making informed decisions
- assess performance in company/ sectors/ individuals
5 reasons for accounting
- record money in and out
- support decision making
- record financial state
- control the company
- plan future activities
- basis for taxation
- reduce uncertainty about decisions
Accounting; relevance
- accounting information should make a difference
- help to predict future events
- help to confirm past events
Materiality
The quality of being relevant or significant
Accounting; faithful representation
- accounting information should portray what it is supposed to portray
- accounting information must contain both fundamental qualities if it is to be useful. There is little point in producing information that is relevant, but which lacks faithful representation, or producing information that is irrelevant, even if it is faithfully represented
Comparability
comparing performance over time or comparing aspects of performance
Qualities that influence usefulness
(fig 1.3)
QUALITIES
fundamental qualities
- relevance
- predictive value
- conformatory value
- meteraility threshold
- faithful representation
- completeness
- neutrality
- freedom of error
enhancing
- comparability
- timeliness
varifiaility
- understandability
Verifiability
information provided faithfully portrays what it is supposed to
Timeliness
less relevant and therefore useful further from data collection
Understandability
clear and concise
Cost v benefit
accounting information should only be produced if the costs of providing it are less than the benefits, or value, to be derived from its use.
Limitations of accounting
- requires a more holistic approach
- reflects the past
- non quantifiable
- may be based on unreliable information
Relationship between costs and value of accounting information
(fig 1.2)
accounting information should only be produced if the costs of providing it are less than the benefits, or value, to be derived from its use. (fig 1.2)
- value may decline due to relevance,
costs may increase due to additional information
timeliness
Who uses accounting?
Business wide - all stakeholders, different stakeholders may have conflicting interests
Different types of businesses.
Different types of businesses.
Accounting information system
- identifying and capturing relevant information (in this case financial information);
- recording, in a systematic way, the information collected;
- analysing and interpreting the information collected; and
- reporting the information in a manner that suits the needs of users.
Real world application - unreliable accounting
(RW 1.1)
Systems error!
Some of Metrobank’s largest customers left the bank after the discovery of a historic accounting error in the first quarter. Chief executive Craig Donaldson said ‘adverse sentiment’ had led to the departure of a ‘small number of large commercial and partnership customers’, contributing to a 4 per cent quarter-on-quarter reduction in deposits.
Metro Bank in January revealed that it had mis-categorised a large number of commercial loans, meaning that it did not have as much capital against them as it should. The discovery prompted a sharp drop in its stock – it is down 54 per cent since the start of the year – and forced the lender to cut its long-term growth plans.
Management accounting
(fig 1.5)
which seeks to meet the accounting needs of managers
- to aid planning, control and decision making
- financial and non financial
- past and future
- specific purpose reports
- considerable detail
- not subject to regulation
Financial accounting
(fig 1.5)
which seeks to meet the accounting needs of managers
- financial performance and position in a period
- general purpose and useful to a number of stakeholders
- broad view for a business period
- subject to regulations, financial statements
- mainly past
Reporting interval
- financial accounting reports may be produced on an annual, half-yearly and quarterly basis
- management accounting reports will be produced as frequently as needed by managers.
- special-purpose reports can also be prepared when the occasion demands: for example, where an evaluation is required of a proposed investment in new equipment.
Time orientation
- financial accounting reports reflect the performance and position of the business for the past period - backward looking.
- management accounting reports often provide information concerning future performance as well as past performance.
- businesses may release projected information to other users in an attempt to raise capital or to fight off unwanted takeover bids.
Range and quality of information
- financial accounting reports focus more on information that can be quantified in monetary terms
- management accounting also produces such reports, but is also more likely to produce reports that contain quantitative, non-financial, information, such as physical volume of inventories, number of sales orders received, number of new products launched, physical output per employee
- financial accounting places greater emphasis on the use of objective, verifiable evidence when preparing reports.
- management accounting reports may use information that is less objective and verifiable, but nevertheless provide managers with the information they need.
Changing competition;
- increasing sophistication of customers;
- availability of rapid and sophisticated forms of information and communication
- development of a global economy where national frontiers become less important;
- rapid changes in technology;
- deregulation of domestic markets (for example, the privatisation of electricity, water and gas);
- increasing pressure from owners (shareholders) for competitive economic returns; and
- greater volatility of financial markets.
