Section 1: The Role of Accounting Debit Credit Stage 2 Accounting
What is accounting? Accounting is the process of: identifying Measuring Recording Communicating Accounting is the process of: identifying measuring recording and communicating (analysing & interpreting) financial information to interested parties to help them make informed judgements and decisions NB: Interested parties (users of accounting information) are usually the people who have invested money in the business, ie the owners, lenders, bankers, managers, shareholders etc..
Types of data & information Accountants analyse data and information to help make decisions Data is anything that can be measured and give a money value ($) ie. unstructured facts eg. lists of sales figures, bank deposits, receipts of items, number of hours worked by employees. Information is when these raw figures and data are summarised or rearranged in a structured manner eg. table showing names of employees, total hours worked per week and wages received by each employee. Data and information are used to make decisions. Data Information
Types of data & information There are different types of data and information including Quantitative data- information expressed in numerical form and which is measurable. It is referred to as objective information (ie. it can be verified or proven) Qualitative information- all other information such as legal, social, environmental or ethical matters; state of the economy, short term versus long term and business owner’s personal values/opinions. It is referred to as subjective information because it is intuitive or it can be biased.
Types of data & information There are different types of data and information including Financial information- may include budgets, ratios, sales results and current interest rates. Information involving money. Non-financial information- may include benchmarks, staff turnover, and market share, environmental impacts.
Characteristics of qualitative information Qualitative information can not be expressed by a numerical or dollar value, eg. impact of government policies, quality of employees. Such information must therefore be selected based on its relevance, reliability and materiality. Relevance- financial information must have value in terms of assisting users in making and evaluating decisions about the allocation of financial, physical and human resources. It must reflect accountability by the preparers of financial information. Reliability- financial information must be free from bias and undue error. Materiality- information may be relevant in the general operations of an enterprise but might not be of significance when the entity is reporting eg. a small business may round off to the nearest $10 whereas a large firm may round off to the nearest $1000 as this still presents an accurate picture of the business.
Presentation of financial information Comparability- financial information must be presented in a consistent manner (from one period of time to another) to enable an entity (organisation) to be compared with other entities. Notes may be included when changes have been made to the method of valuation of the figures. This reflects the consistency. Understandability - financial information must be presented in a form that assists users in its understanding (ie it has to be easily understood by the users who have limited knowledge of accounting)
Limitations/constraints on qualitative information Timeliness- financial information such income statements, balance sheets, cash flows and budgets must be prepared and represented to interested parties regularly (eg. yearly, quarterly or monthly) so that it is always relevant and up to date. This is important when making business decisions. Cost v Benefits – accountants must weigh the costs and benefits of some information eg. If conducting market research (information) for a business will improve a large amount of profit for the business in the future compared to the amount spent on the research, then it is worth the investment.