Introduction To Accounting

Accounting is about quantitative information that is usually financial in nature. It should provide useful information for making decisions concerning the allocation of scarce resources and opportunity costs. Management accounting is primarily directed towards internal use and decision making, and is unregulated. Financial accounting for external review and evaluation and is regulated. Management accounting is used for stewardship, planning, control and decision making. Financial accounting provides external reviewers an annual report which includes an income statement, a balance sheet, a statement of changes in equity, a cash flow statement, plus any information required by law and willingly expressed by the company. As an entity grows owners and shareholders become more reliant on financial accounts rather than managerial accounts. Other external users include lenders, suppliers, customers, employees, government and the general public.

Financial accounting information is limited because it relate to information in the past, whereas decision that need to be taken relate to the future. Accuracy of information is often questionable e.g., under what category does a half-finished building belong to? Accounting has to estimate the monetary value of assets which may not be realised. Finally, although accounting information is expressed in monetary terms, the value of money is not stable.

Accounting is a business function with subtle but pervasive effects, whose knowledge can be misapplied. An entity will use different accounting systems depending on the size of the organisation, the type of business, the simplicity or complexity of the activity, technology, the structure of the organisation, whether it is for- or not-for-profit and, of course, the regulatory environment. A business can fail even if it has an excellent accounting system - although such a systems should be able to give warning signs. However a business is unlikely to succeed without an excellent accounting system.

Accounting information has economic consequences, meant here as the results influencing accounting policies. Managers and firms and firms will choose policies based on the impact, via compensation, debt contracts and political costs. Compensation and debt contracts create incentives for managers to favour profit-increasing account, whereas political costs create incentives for managers to select accounting policies that decrease reported profit.

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