1 ACCOUNTING : The Basis for Business Decisions

Lecture - 1
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Accounting : Information for Decision Making

 WHAT IS ACCOUNTING?

Accounting: The systematic and comprehensive

recording of financial transactions pertaining to a
business.

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 WHAT IS ACCOUNTING?

Accounting also refers to the process of

summarizing, analyzing and reporting these
transactions.

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The Language of Business {as it is the means by
which information about an enterprise is
communicated to make economic decisions}
 WHAT IS ACCOUNTING?

Accounting is :The Art of

•Recording

•Classifying

•Summarizing and
5 •Communicating the results
•Of business transactions

•On a certain Date.

A means to an end.
 Concepts Underlying Accounting
Measurement
 Accounting is an information system that measures,
processes, and communicates financial information about
a business or other economic entity.

1. An economic entity is a unit that exists independently, such as a business,

hospital, or governmental body.

2. Bookkeeping is the process of recording financial transactions and keeping

financial records. It is mechanical and repetitive and is usually handled by
computers.
 Concepts Underlying Accounting
Measurement

3. Management information systems (MIS) consist of the interconnected business

subsystems, including accounting, that provide the information needed to run a
business.

4. For accounting purposes, a business organization is a separate entity, distinct

not only from its creditors and customers but also from its owners.
 Business Transactions
1. Business transactions are economic events that
affect a business’s financial position.

2. All business transactions are recorded in terms of

money. This concept is called money measure.

3. In international transactions, exchange rates must be used to

translate from one currency to another. An exchange rate is the
value of one currency in terms of another.
 Forms of Business Organization

 There are three basic forms of business organization

that are recognized as separate entities.

I - Sole proprietorship—a business owned by one person

 The owner takes all the profits or losses of the

business and is liable for all its obligations.
 Forms of Business Organization

II - Partnership—a business that has two or more owners

 The partners share the profits or losses

according to a prearranged formula.
III - Corporation—a business unit chartered by the state and legally separate
from its owners

 The owners are called stockholders because

their ownership is represented by shares of
stock.
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Types of Accounting

Financial Accounting

Providing information about the financial resources,

obligations, and activities of an economic entity that
is intended for use primarily by external decision
makers – investors and creditors.
General Purpose (Profit, loss, assets, obligation
etc)
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Types of Accounting

Management Accounting

Providing information that is intended primarily

for use by internal management in decision
making required to run the business.
Helps in Planning and Control
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Types of Accounting

Tax Accounting

Preparation of income tax returns and

anticipating the tax effects of business
transactions and structuring them in such a
way as to minimize the income tax burden.
Helps in preparation of Income Tax Return etc
 Financial and Managerial Accounting

 Accounting is usually divided into financial

accounting and managerial accounting.
- External decision makers use financial accounting to evaluate how well
a business has achieved its goals.

 These reports, called financial statements, are

a central feature of accounting. They report on a
business’s financial performance.
Financial and Managerial Accounting

 Accounting is usually divided into financial

accounting and managerial accounting.

- Internal decision makers use information provided by managerial accounting

about operating, investing, and financing activities.

 It provides managers and employees with

information about how they have done in the past
and what they can expect in the future.
19 Importance of Financial Accounting

The Primary objectives of financial accounting are :

1. to provide information that is useful in making

investment and credit decisions in assessing the
amount, timing, and uncertainty of future cash
flows,

2. It helps in learning about the enterprise’s

economic resources, claims to resources.
20 Importance of Financial Accounting

The Primary objectives of financial accounting

are :

3. Changes in claims to resources.

4. It is means to an end.
5. It is historical to nature
21 Importance of Financial Accounting

The Primary objectives of financial accounting

are :

6. It results from inexact and approximate

measure of business activity, and
7. It is based on a general-purpose
assumption.
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 ACCOUNTING SYSTEM :

The personnel, procedures, devices, and

23 records used by an organization to develop
accounting information and communicate
that information to economic decision
makers.
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 Economic Activities

Human
Activities

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.
Non-Economic Economic
Activities Activities

Profession Business
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Functions of Accounting System

1. In every Accounting System, the economic activities of

the organization are Recorded in the books of accounts.
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Functions of Accounting System

2. Next, the recorded data are Classified in the system to

accumulate sub-total for various types of economic
activities.
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Functions of Accounting System

3. Finally, the information is Summarized in Accounting

Repots i.e. designed to meet the information needs of
the various decision makers.
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Financial Reporting and Financial Statements

 Internal Information:
1. Balance Sheet
2. Income Statement
3. Statement of Cash flows

 Other Information:
• Industry
• Competitors
• Economy-wide
31 Objectives of External Financial Reporting

Balance Sheet

Income Statement
The primary financial
Statement of Cash Flows statements.
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 Decision Makers: The Users of
Accounting Information

 The people who use accounting

information to make decisions fall into
three categories: managers (internal
users), outsiders who have a direct
financial interest in the business, and
outsiders who have an indirect financial
interest.
 Management, Investors, and Creditors
 Management is responsible for ensuring that a company meets its goals of
profitability and liquidity.
 Investors—owners and stockholders—have a direct financial interest in the
success of their companies.
 Creditors—those who lend money or deliver goods or services before
being paid—are interested mainly in whether a company will have the cash
to pay interest charges and to repay the debt on time.
36 External Users of Accounting Information
•Creditors

•Owners

•Labor unions

•Governmental agencies

•Suppliers

•Customers
37 External Users of Accounting Information
•Investors
•Creditors
•Government Agencies
(SECP, SBP, IRS, EPA,
Ministries etc.)
•Researchers

•Trade associations

•General public
38 External Users of Accounting Information
•Labor Unions
•Suppliers
•Customers
•Trade Associations
•General Public
39 Users of Internal Accounting Information

 Board of Directors

 Chief Executive Office - CEO

 Chief Financial Officer – CFO

 Vice Presidents
40 Users of Internal Accounting Information

 Business Unit managers

 Plant managers

 Store Managers

 Line Supervisors
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Objectives of Management Accounting
Information

To
Tohelp
helpachieve
achievegoals
goalsand
and
missions
missions

To
Tohelp
helpevaluate
evaluateand
andreward
reward
decision
decisionmakers
makers
 Integrity of Accounting Information

Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
Securities and Exchange Commission
Internal Control Structure
Audits
Legislation
GAAP and the Independent CPA’s Report

 To ensure that financial statements are understandable to their users,

a set of generally accepted accounting principles (GAAP) has
been developed to provide guidelines for financial accounting.
 Many companies of all sizes have their financial statements audited
by an independent certified public accountant (CPA).
 An audit is an examination of a company’s financial statements and the accounting systems,
controls, and records that produced them. It ascertains that the statements were prepared in
accordance with GAAP.
 Organizations That Issue Accounting
Standards
 Two organizations issue accounting standards that are
used in the United States:
 The Financial Accounting Standards Board (FASB) has been designated by
the Securities and Exchange Commission (SEC) to issue Statements of
Financial Accounting Standards.
 The International Accounting Standards Board (IASB) issues international
financial reporting standards (IFRS). The SEC allows foreign companies to
use these standards in the United States.
Other Organizations That Influence GAAP

 The Governmental Accounting Standards Board (GASB) issues

accounting standards for state and local governments.
 The Internal Revenue Service (IRS) interprets and enforces the tax laws
that specify the rules for determining taxable income.
 The Public Company Accounting Oversight Board (PCAOB) has wide
powers to determine the standards that auditors must follow.
.
Other Organizations That Influence GAAP

 The American Institute of Certified Public Accountants (AICPA) is the

primary professional organization of CPAs.
 The Securities and Exchange Commission (SEC) is a governmental
agency that has the legal power to set and enforce accounting practices for
companies whose securities are offered for sale to the general public.
 Professional Conduct
 The code of professional ethics of the American Institute of Certified
Public Accountants governs the conduct of CPAs. The code requires
CPAs to act with:

 Integrity—be honest and candid and

subordinate personal gain to service and
the public trust.
 Objectivity—be impartial and intellectually
honest.
 Professional Conduct
 Independence—avoid all relationships
that impair or appear to impair objectivity.
 Due care—carry out professional
responsibilities with competence and
diligence.
 The Institute of Management Accountants (IMA), the primary
professional association of managerial accountants, also has a code of
professional conduct.
 Business Goals and Activities

 A business is an economic unit that aims to sell goods and services at prices that
will provide an adequate return to its owners.
 The two major goals of all businesses are:

 Profitability—the ability to earn enough income to

attract and hold investment capital
 Liquidity—the ability to have enough cash to pay
debts when they are due
 Integrity of Accounting Information

Professional Organizations
American Institute of Certified Public
Accountants
Institute of Management Accountants
Institute of Internal Auditors
American Accounting Association
 Integrity of Accounting Information

Competence, Judgment and Ethical Behavior

Certified Public Accountants (CPAs)
Certificate in Management Accounting (CMA)
Certificate in Internal Auditing (CIA)
Code of Professional Conduct

CP
A
 Integrity of Accounting Information

Careers in Accounting
Public Accounting
Management Accounting
Governmental Accounting
Accounting Education
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SUMMARY
 Accounting is the means by which information about an enterprise is
communicated and is called the language of business.

 Many internal and external users have need for accounting information in
order to make important decisions.
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SUMMARY
 Because the primary role of accounting information is to provide useful
information for decision making purposes, it is referred to as a means to an
end.

 With the end being the decision that is helped by the availability of
accounting information.