The process using which the data in an organisation is recorded, summarised, analysed, and interpreted is known as Accounting. Accounting information is thus generated in this process. Its users include business managers, owners, investors, creditors, employees, government, etc. There are different systems of accounting information that process the data with the help of computers. The information technology system is used to record the company's transactions. These systems help generate reports everyone uses, including the different stakeholders interested in the organisation.
Did you know? Luca Pacioli wrote the first book on double book accounting in 1494. In this book, he warned that one “should not go sleep at night until the debits equalled the credits.”
Criteria for Accounting Information
The following criteria are based on the common needs of the users and these criteria are helpful in making financial reporting useful to users of financial reporting.
Relevance
Accounting data must help a user create, confirm, or possibly alter an opinion - normally in the context of making a decision (should I invest, should I lend money to this company?). Is it a good idea for me to work for this company?)
Comparability
Users will compare similar companies in the same industry group and run performance comparisons over time if they are capable. The desire to compare drives developing accounting standards of comparibility. It is done to benefit the decision-making process of creditors and investors.
Consistency
In brief, consistency is highly valued by users, until a need arises to improve practices, policies, and procedures. Consistency over accounting periods enhances the utility of financial statements to users. It enables analysis and understanding of comparative accounting data.
Understandability
It entails expressing accounting data clearly and intelligibly for users - who are normally presumed to have a reasonable understanding of business and economic activity.
Also read: Know the Basics of Managerial Accounting
Objectivity
It means that accounting data is created and provided objectively. To put it another way, it is not discriminatory towards a specific user group or vested interest.
Reliability
It means that the accounting data supplied is true, accurate, full (nothing important is missing), and verifiable.
Who are the parties interested in Accounting Information?
The information is disseminated to a wide range of interested parties. Managers, owners, creditors, governmental bodies, financial experts, and even employees are the users of accounting information.
Business managers require accounting information to make smart leadership decisions. Owners and investors expect earnings that will result in business distributions (e.g., "dividends"). Creditors are constantly anxious about the entity's ability to pay its debts. Government agencies require accounting information to tax and regulate. Analysts draw insights based on accounting data before making investment recommendations. Employees aspire to work for successful organisations to advance their careers, and they frequently receive incentives or options based on the company's performance. Accounting information regarding specific entities is useful in meeting the demands of all of these stakeholders.
Principles of Accounting Information
Accounting principles are the rules and guidelines that companies must follow when reporting financial data.
-
Accrual Principle
This assumption recognises income when it is earned regardless of the actual receipt in money or not. Similarly, the expenses are recognised when incurred, even if the payment is due or outstanding.
-
Matching Principle
Accounting accurately records all financial transactions and determines the overall income or profit and loss from operations. Thus, accounting for all revenue and expenses related to the same accounting period is preferable. If revenue has been recorded, all expenses for the period and the cost of products sold related to revenue must be documented as well.
-
Principle of Objectivity
Accounting's main purpose is to record transactions to present a true and fair image. As a result, the accuracy of the data becomes extremely important. Furthermore, no personal bias or viewpoints should affect the recording process.
-
Full Disclosure Principle
The financial reports and statements should provide accurate information. To put it another way, it should not misrepresent facts, delay disclosing key facts, or include false information. It increases the company's credibility among investors, creditors, shareholders, and lenders.
Assumptions of Accounting Information
Accounting assumptions define the mechanism for the reporting of financial transactions in the financial statements.
-
Assumption of Reliability
Accounting data should be trustworthy and verifiable, and it should allow for authentication of data and records and independent audits. It should be comprehensive and provide a realistic and fair picture of its financial position and statistics.
-
Going Concern Assumption
Accounting data is still predicated on the assumption that the company has an endless lifespan, and the company's operations will continue for the foreseeable future. This assumption supports asset assessment using the historical cost technique, i.e., at the time of purchase or installation. It enables the corporation to charge depreciation regularly, avoiding the impact of asset value changes on financial performance.
If the going concern concept is not followed, assets will be valued at their present market worth, presuming the company can cease operations at any time. It doesn't reflect the assets' true worth.
Also read: What is an Accounting Voucher? Know Meaning and Types of Accounting Vouchers.
-
Consistency and Comparability
Accounting data should be based on the same accounting approach throughout all accounting periods. In other words, there should be no frequent and year-to-year modifications in the accounting system. Instead, firms should follow a standardised process. And there should be a good justification for any significant shift. That information should be included in the final reports and statements.
Comparing accounting data between the two companies should be possible. Over time, reports should have a consistent format. For reports to be consistent, the information flow must be proper and timely.
Each country has given particular requirements to ensure consistency and uniformity of reporting and information among companies. The globally recognised principles include the US GAAP and the IFRS.
-
Balancing Equation or Double Entry System
Commercial enterprises worldwide employ a double-entry accounting system to record all financial transactions. They may be required use of a receipt maker to create and manage receipts. Every transaction in this system has two sides, credit, and debit. Furthermore, the sum of both sides of each entry or record must match, remain the same, or it would be considered an error.
What are the uses of Accounting Information?
As noted in the introduction, accounting information is critical and the only means to communicate an entity's financial status to the rest of the world. As a result, it has many applications: financial accounting, managerial accounting, and cost accounting. Furthermore, it is useful to the company, managers, investors, shareholders, lenders, creditors, and others at the user level.
-
Managerial Accounting
Managerial accounting reports are useful to the company's internal operations, and management and staff are the most common users of such comments. Accounting data is used to create reports that are both flexible in nature and structure. Because they're used in-house, they are also exempt from various accounting standards, such as GAAP.
Accounting data that is accurate, timely, and complete is critical. Because businesses must prepare these reports regularly when required. Business managers must plan, monitor, and select whether reports must be modified or specialised. They may be required to undertake a cost-benefit analysis, review costs and expenses, determine the proper pricing and break-even point for a product or regularly assess various cost centres' financial performance.
-
Financial Accounting
The primary goal of financial accounting is to provide financial information to stakeholders and users outside the organisation. Companies that are publicly traded must file financial statements and reports with the country's monetary and regulatory authorities regularly. These reports are available to the general public for analysis and other purposes. The reports preparation is done using frameworks such as IFRS, Generally Accepted Accounting Principles, or other frameworks.
Generally, financial statements are prepared in the following manner:
-
Balance Sheet
It shows the position and standing of an organisation to determine how strong it is. The total of both the asset and liabilities side matches always. It is based upon the double-entry system.
Liabilities are shown on the left side of this statement. Outside liabilities include long-term loans, short-term loans, various creditors, and other liabilities, as well as shareholder cash, including reserves and surplus. The information of the entity's assets is still listed on the right side. All of this could include fixed assets, investments, inventory, cash and cash equivalents, various debtors, and so on. The net profit or loss is added to or deducted from the equity during the preparation of this statement.
-
Income and Expenditure Account
The income and expenditure account is called the Profit and Loss Account, as it shows the actual results. In recording expenses and income, the matching principle and the accrual assumption of accounting are held. Income is recognised on the right side of the Profit and Loss Account, and expenses are recognised on the left side. Profit is calculated by deducting expenses from income. However, if expenses are more, then a loss will be shown.
-
Cash Flow
Cash flow is a statement that shows cash movement in any organisation, i.e. inflow and outflow of cash. There are three types of activities in the cash flow statement- Operating Activities, Investing Activities, and Financing Activities, and cash flow from each activity is calculated separately.
Limitations of Accounting Information
Accounting information is neither absolute nor concrete. A significant amount of judgment and estimation is required to produce the specific accounting metrics reported within a given month, quarter, or year.
- For example, what profit is made when a car is sold with a 3-year warranty? The final expenses of the warranty agreement will not be known for three years. One strategy would be to wait three years before disclosing the transaction's profit or loss. However, by the time the information is reliably conveyed, it would be so old that it would be useless. As a result, realistic estimates are routinely incorporated in the normal preparation of periodic financial reports to deliver information on time.
- Furthermore, accounting has not progressed to the point where it can value a company. As a result, the historical cost concept reports various transactions and events (in contrast to fair value). Land, for example, is normally recorded and carried in accounting records at a price paid for it. The historical cost principle assumes that certain financial statement parts should be reported at amounts linked to the objective and verifiable prior transactions.
- Alternatively, accounts can be valued (and revalued) based on subjective estimates of current worth. Such improvements are difficult to make and have sparked a lot of debate. Nonetheless, the present trend in worldwide standard-setting is toward a greater acceptance of the conditions under which fair value accounting is judged acceptable for some financial statement parts.
Also read: Know What Is Closing Stock?
Conclusion
Every financial transaction must be recorded using a well-thought-out and reliable accounting system. It won't be easy to operate smoothly and correctly without it. These particulars are required at every level and in dealings with the outside world. Furthermore, timeliness, dependability, transparency, and consistency are essential for a sound accounting system. Based on these data and details, an entity makes a decision every time. As a result, if the data is reliable and complete, the decision's effectiveness improves, and vice versa.
Accounting information is the foundation of any organisation. Apart from the aforementioned uses, accurate data is also required for additional objectives. We hope the article has given you the relevant information about accounting information, users of accounting information, and uses of accounting information.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting
