Learning Objectives :
After studying the chapter, you will be able to :
Suggested teaching mehods : Discussion method
Meaning of Accounting -
Accounting is an information system that provides accounting information to the users for correct decision-making.
''Accounting is the art of recording, classifying , and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof..''
The American Institute of Certified Public Accountants -
Objectives of Accounting
Interested Users of Information
There are number of users interested in knowing about the financial soundness and the profitability of the business.
| Users | Classification | Information the user want |
| Internal | 1. Owner | return on their investment, financial health of their company/business |
2. Management |
to evaluate the performance, to take vari |
|
| External | 1. Investors and potential Investors | safety and growth of their investments, future of the business |
| 2. Creditors | assessing the financial capability, ability of the business to pay its debts | |
| 3. Lenders | Repaying capacity, credit worthiness | |
| 4. Tax Authorities | assessment of due taxes, true and fair disclosure of accounting information | |
| 5. Employees | Profitability to claim higher wages and bonus, whether their dues (PF, ESI etc.) deposited regularly. | |
| 6. Others | Customers, Researchers etc. may seek different information for different reasons. |
Qualitative Characteristics of Accounting Information
Accounting information is useful for interested users only if it possess the following characteristics :
1. Reliability
Means the information must be based on facts and be verified through source documents by anyone. It must be free from bias.
2. Relevance
To be relevant, information must be available in time and must influence the decisions of users by helping them form prediction about the outcomes.
3. Understandability
The information should be presented in such a manner that users can understand it well.
4. Comparability
The information should be disclosed in such a manner that it can be compared with previous years' figures of business itself and other firm's data.
Limitations of Accounting
The accounting information suffers from the following limitations :
