1.0 INTRODUCTION
Accounting is often called the language of business. The basic
function of any language is to serve as a means of communications. In this note,
the purpose of accounting is to communicate or report the results of business
operations and its various aspects to interested users of accounting
information.
2.0 OBJECTIVES
At the end of this note, you should be able to:
• define Accounting
• define Accountancy
• explain the relationship between the above definitions
• explain the importance of Accounting and describe the nature
of information which such accounting records furnish to various categories of
persons.
3.0 MAIN CONTENT
3.1 Definition of Accounting and Accountancy
3.1.1 Definition of Accounting
Though accounting has been variously defined, according to one
commonly accepted definition.
Accounting is the art of recording, classifying and
summarising in a significant manner and in terms of money, transactions, an
events which are, in part, at least, of financial character and interpreting
the results thereof".
Another definition which is less restrictive interprets
accounting as "the process of identifying, measuring and communicating
economic information to permit informed judgments and decisions by the users of
information".
3.1.2 Definition of Accountancy
One often hears the words "Accountancy" and
"Accounting" as if they are one and the same thing. Of course there
is some difference between them, at least in the Noteed Kingdom to which the
practice of accountancy in Nigeria is closely associated. Accountancy is the
work or profession of an accountant
3.2 Importance of Accountancy
While discussing the definition of Accounting, you must have
observed that accounting involves a series of activities linked with each other
beginning with recording, classifying, summarising, identifying, measuring and
finally communicating information to its users. Information has no meaning
unless it is linked with a certain purpose.
Accounting as a social science can
be viewed as an information system since it has all the features of a system.
If we consider accounting as an information system, then we are in a position
to make some important observations. First, the goal of the system is to
provide information which meets the needs of its users. Secondly, it is the
output requirements that determine the type of data which would be selected as
the inputs which would be selected as the inputs for processing into information
output.
We shall now briefly discuss what the information needs of
various users are.
3.2.1 Shareholders and
Investors
Since shareholders and other investors have invested their
money in a business enterprise, they are interested in knowing periodically
about the profitability of the enterprise, the soundness of their investments
and the growth prospects of the enterprise. Historically, business accounting
developed to supply information to those who had invested their funds in
business enterprises.
3.2.2 Creditors
Creditors may be short-term or long-term lenders. Short-term
creditors include suppliers of materials, goods or services. They are normally
known as trade creditors. Long-term creditors are those who have lent money for
a long period, usually in form of secured loans.
The main concern of the creditors is focused on the credit
worthiness of the firm and its ability to meet its financial obligations. They
are, therefore, concerned with the liquidity of the firm, its profitability and
financial soundness.
In order words, it can also be state that creditors are
interested mainly in information which deals with solvency, liquidity and
profitability so that they could assess the financial standing of the firm.
3.2.3 Employees
Employees are interested in the financial position of the
business they serve particularly when payment of bonus depends upon the size of
the profits earned.
3.3.4 Government
In a mixed economy, it is considered to be the responsibility
of the Government to direct the operation of the economic system in such a
manner that it subserves the common goal. Controls and regulations on the
operation of private sector enterprises are the hallmark of mixed economy.
Several government agencies collect information about various aspects of activities
of business organisations.
Much of this information is a direct output of the amounting
system. For example, levels of outputs, profits, investments, costs, and taxes
etc. All this information is very important in evolving policies for managing
the economy. The task of the Government in managing the industrial economy of
the country is facilitated if amounting information is presented as far as
possible, in a uniform manner. It is clear that if accounting information is
distorted due to manipulations and window - dressing in the presentation of
annual accounts, it will have ill — effects on the measures the government
intends to take and the policies it wishes to adopt.
3.4.5 Management
Organisations may or may not exist for the sole purpose of
profit. However, information needs of the managers of both kinds of
organisations are almost the same. All these functions have one thing in common
and it is that they are all concerned with making decisions which have their
own specific information requirements. The emphasis on efficient and effective
management of organisations has considerably extended the demands for amounting
information.
3.4.6 Consumers
Consumers are interested in the establishment of good
accounting control so that cost of production may be reduced with the resultant
reduction on the process of goods they buy.
3.4.7 Research Scholars
The financial statements, being a mirror of the financial
position of a firm are of immense value to the research scholar who wants to
make a study into financial operations of a particular firm.
4.0 CONCLUSION
In this note, the discussion perhaps has indicated to you that
the information needs of the various users may not necessarily be the same.
Sometimes, they may even conflict and compete with each. In any case, the
objective of accounting information is to enable information user to make
optimum decisions.
5.0 SUMMARY
Accounting is an important service activity in business and is
concerned with the collecting recording, evaluating and communicating the
results of past events.
Accounting is the language .employed to communicate financial
information to various categories of users (e.g. Shareholders, Creditors,
Employees, Government, Management and consumers etc.) who are interested in
such information.
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