Accounting Theory : 'Satisfying multi users and their needs in accounting is easy to achieve' - Essay Example

?Finance and Accounting Introduction The birth of accountancy can be retraced to the early days of human (Simons, 2004). There was a great urge for recording and maintaining the information regarding the agricultural products along with their quantities. The need was so important that the trend for recordings the transactions emerged. Accounting information does not only include the daily transaction details, but also comprise of the annual bills and receipts that are made by an entity. Luca Pocioli has been regarded as the Father of Accounting and his book, “Summa on Arithmetic Geometry, Proportions and Proportionality” has been regarded as the main text for the children of the merchants. The book describes the double entry system of accounting along with the journal and ledger entries. Accountancy comprises of two parts accounting and book-keeping. Both of these are important to the merchants from the earlier days and later, it became the key source of financial information for the companies (Macintosh, 2002). Accounting has played an important role for the organisations as well as the public in providing information about the financial condition of the organisation. It has provided with a whole lot of information to a wide range of users whether internal or external to the organisation. This information satisfies the number of users who are dependent upon the information. The essay elaborates the use of accounting information for these users and states whether it is simple enough to achieve the satisfaction of the users (Broadbent, 2002). Accounting Accounting basically deals with the provision or measurement of assurance of the financial information that are used by a number of users such as, the lenders, investors, managers and the decision makers of a particular organization (Elmaleh, 2005). As per American Accounting Association, it is “a process of identifying, measuring and communicating information to permit judgment and decisions by the users” (Harrison, 2008). It also measures different economic activities that are responsible for affecting both the inflow and outflow of the resources of the economy. It serves as a language to the business as it helps to communicate the outcome to the business (Ingram, 2007). Accounting concerns only the financial transactions and is expressed in monetary terms. The information, which cannot be expressed in term of money, cannot be included in the books of accounts. After the identification of the financial information, these are recorded in the books of accounts. Journal is known as the primary book of accounts in which all the information is recorded at first. When the information is vast, then the book of accounts is sub-divided into a number of various other books such as, Sales book, Purchase Book, Sales Return Books, Cash Book and many more as such (Francis, 2010). After recording the financial data, they are classified into different groups of data which are of same nature. The book in which these are recorded are known as the Ledger. After classifying the data, they are summarized and presented in a manner that is to be understood by a layman. This process is concerned with the preparation of profit and loss account, trial balance and balance sheet (Kimuda, 2008). Multi-users of accounting information The accounting system is very useful to the parties who are interested in the information that are provided by it. The interested parties can be identified as the owners, creditors, management, investors, employees, shareholders and even, the government. The accounting information is of great importance to the managers and proprietors of the business. The figure below shows the users of the accounting information. Figure 1: Users of accounting information (Source: Edwards, 2008) From the above figure, it is clear that the users of the information can be divided into two parts: the internal and external users. Internal users The primary internal users of the accounting information are the management of the company. For the small enterprise, the user of the information is the owners or the partners of the enterprise who are small individuals (Bebbigton, 2001). However, in case of large companies like, British Airways, the user of the information is a group of individuals. It is not likely that the owners of British Airways would take part in the daily transactions of the company. The owners delegate the authority to groups of individuals within the company which are responsible for the analysis of the daily transactions from the regular business operations. i) Owners (i.e. shareholders, proprietors and partners): They form the backbone of the company and also, provide the necessary funds for the smooth running of the business as well as for its growth and development. The accounting information is useful for them as it gives details of the profits and the increase of turnover of the company. The accounting information also indicates rising dividend rate and the financial status of the company. It provides valuable data regarding the future earning of the organisation. It also evaluates the future prospects of business for expanding its operations. The information needs of the groups are satisfied by the publication of the details in the annual reports and accounts statements (Milad, 2009). Example: The owners of British Airways assign financial accountants for maintaining the daily accounts of the company. This information helps them to take decisions regarding their future prospects. ii) Management: The management comprises of the Board of Directors (top level management), the middle management and also, the departmental heads. They are actually entrusted with the work of making policies for the company, its execution strategies and the overall supervision of the operations. The accounting data provides them with a vast information base for any managerial decision. If the information is not available, then the objective of the company will not be successful (Narayananswamy, 2008). Example: The management of British Airways has the necessary information regarding the transactions of the company, which helps them to take respective decisions regarding the future prospects of the company. iii) Employees: Healthy relation is expected between the employers and employees of the companies for maintaining a successful operational system. To uphold the same, the employees need to be motivated and satisfied regarding their works. The accounting information helps the company to settle the industrial disputes and avert lockouts and also, seeks for a better working condition for the employees (Riahi-Belkaoui, 2004). Example: At times of industrial disputes, the financial statements are useful for the management to show the employees that the company has been doing well with their efforts and the performance are highly scrutinized by them. External users External users include the investors, creditors, government, researchers and the foreigners. These users find the accounting information helpful due to the respective reasons which are elaborated below. i) Investors: The decision of the investor towards any investment is dependent on three factors which are the safety of investment, regularity of return and consistency in the rate of return. The investor carries out analysis regarding the future, past and present profitability of the company along with the dividend calculation and yield. The only source of information for their analysis is the accounting data that are provided to them through the annual reports and the accounting statements of the company (A. Goyal and M. Goyal, 2009). ii) Creditors: The trade creditors supply goods on the credit basis, in an anticipation that they will receive their full payment before or on the due date. They extend the credit period for a short time and are very keen to know whether the enterprise has the ability to pay the financial commitments or not. The accounting statements are thus helpful to them for determining the short term solvency status and the liquidity position of the company. Thus, they review the financial position of the company for making any decision regarding supplying the goods (Gazely, 2006). Example: The creditors of McDonald always check the solvency and the liquidity status of the company, so that they are assured of the payment. iii) Government agencies: The government agencies comprise of the taxation authorities and the regulatory bodies, who ensure that the companies are obeying the rules pertaining to the presentation, preparation and disclosures of the information (Warren, 2009). Example: Income tax department are interested in ensuring proper assessment of the tax-liability of the companies, while the regulatory agencies concentrate on protecting and safeguarding the investor’s interest and also, the public (Maher, 2012). However, the government needs accounting information for formulating policies which are of great importance to the society and thus, rightly direct towards the goals and priorities of the company (Lucy, 2003). iv) Customers: The public who can be the customers are interested in the accounting statements and the annual reports that are provided by the company (Fridson and Alvarez, 2011). It is useful to them in order to evaluate whether the production is controlled and also, to monitor that the distribution expenses are rightly made. The customer protection associations are formulated to protect the concerns of the customers and make the companies aware of their responsibilities. Example: The customers of British airways are interested to know the whereabouts of the company as the price of the airfares are increased and decreased according to the functioning of the airplanes and the technology and gadgets that are used. v) Researchers: The researchers find the financial statements helpful as they study them to know the status of the companies. They also provide with facts and findings which can be used by the government for setting economic policies. They are even helpful to the regulatory bodies for reviewing the policies that are already set by them (White, Sondhi and Fied, 2003). Example: Financial researchers use the data from the annual report as the main source of information for their analysis of the company status. They provide relevant views in the journals regarding the solvency and the liquidity position of the company (Banerjee, 2010). vi) Foreigners: It is quite interesting to notice that the foreigners are willing to know about the financial status of any international company. They require these facts for deciding any foreign collaboration like, joint ventures, mergers and acquisitions, with the multinational companies (Hendrickson and William, 2004). Example: Walmart Plc. and Bharti Enterprises went into joint ventures after evaluating both the company’s financial statements so as to understand the solvency and liquidity position of each other. Conclusion Thus, it can be concluded that the accounting information is very useful to multi-users as it satisfies their needs very easily. The accounting information provides with the relevant data to their respective users who are in need of those data, including both the internal or external users. Reference List Banerjee, B.K., 2010. Financial accounting. New Delhi: PHI Learning Private Limited. Bebbigton, J., 2001. Financial accounting. Singapore: British Library Cataloguing-in- Publication Data. Broadbent, J., 2002. Critical accounting research: A view from England. Critical Perspectives in Accounting, 13, pp 433 – 449. Edwards, J., 2008. Financial accounting. New York: Routledge Elmaleh, M., 2005. Financial accounting. Union Bridge: Eplphany Communication. Francis, J., 2010. Financial accounting. New York: South-Western Cengage Learning. Fridson, M. and Alvarez, F., 2011. Financial statement analysis. New Jersey: John Wiley & Sons. Gazely, A., 2006. Management accounting. California: Sage Publications Ltd. Goyal, A. and Goyal, M., 2009. Accounting for managers. New Delhi: V.K. Enterprises. Harrison, W., 2008. Financial accounting. London: Pearson Prentice Hall. Hendrickson, H. and William, P., 2004. Accounting theory. London: Routledge. Ingram, R., 2007. Financial accounting. New York: South-Western Cengage Learning. Kimuda, D., 2008. Financial accounting. Kampala: East African Publishers ltd. Lucy, T., 2003. Management accounting. New York: Continuum. Macintosh, N. B., 2002. Accounting, Accountants and Accountability: Post-structuralist Positions. London: Routledge. Maher, M., 2012. Managerial accounting. Connecticut: Cengage Learning Milad, A., 2009. Financial accounting. Bloomington: AuthorHouse. Narayananswamy, R., 2008. Financial accounting. Delhi: PHI Learning Private Limited. Riahi-Belkaoui, A., 2004. Accounting theory. London: Thomson Learning. Simons, J., 2004. Contemporary critical theory. Edinburgh: Edinburgh Press. Warren, C., 2009. Managerial accounting. Connecticut: Cengage Learning. White, G., Sondhi, A. and Fied, D., 2003. Analysis and use of financial statement. New Delhi: John Wiley & Sons (Asia) Pvt. Ltd. Read More