Section 1: Functions of Accounting and users of accounting information Debit Credit Stage 2 Accounting

Functions of accounting There are 3 main functions of accounting: 1. Provide information for decision making: Accountants provide information through financial figures produced from the data collected to interested parties. Written reports accompany these figures. Decisions are aided by accurate and timely information that is provided in a form that is easily understood by users outside the profession (non accountants).

Functions of accounting 2. Assist in discharging accountability Accountability means being held responsible for another authority for actions carried out. Accountants have the responsibility to provide information to enable users to make informed judgements about the performance, financial position, investing, and compliance of the reporting entity. 3. Help evaluate performance Accountants produce different reports to help owners and managers with assessing the past, present and future performances of their business.

Accounting reports 1. General purpose reports: These reports provide an evaluation of the overall performance of the business (ie how well or badly the business is doing). They indicate the performance of management in using resources efficiently, earning profits, and achieving financial stability. There are 3 general purpose reports: Income statement Balance sheet Statement of cash flows 2. Special purpose reports These reports show the performance of individual or groups within the organisation to be evaluated by management or interested external users. Evaluation may be achieved through the calculation of ratios and analysis of comparative figures. Results are compared with previous periods’ figures ad with figures form other enterprises in the same industry.

Users of accounting information Those who use accounting information are referred to as the stakeholders. These individuals or groups may come from within the business (internal) or from outside the business (external). Internal users- include all levels of management and other governing bodies of an organisation, eg. owners, managers, executives of clubs and boards of directors. Internal stakeholders make decisions on various aspects of the operation of the organisation, such as financing, personnel, production and marketing. They have direct financial interest in the business

Users of accounting information External users- include present and potential investors and present or potential creditors, the government, trade unions, employees and customers. They make decisions for themselves regarding future investment in a business, the provision of goods or services, or the extension of credit to the business. Investors and creditors have direct financial interest in the business while other parties have indirect financial interest in the business. Government Financial institutions and creditors Trade unions

Users of accounting information Stakeholders Examples of decisions for which information is needed Shareholders to buy, sell or hold shares; to compare prices with returns on shares, and to identify dividend payout trends Lenders/creditors to increase, reduce or keep constant the levels of loans or credit. Employees & Trade Unions To claim salary increases or to change employment. Government To raise taxation, or to examine the organisation’s impact on the environment. Customers To remain loyal to products and services, an to buy products. Managers To determine the level at which to conduct operations; to change pricing policies; to control customers’ accounts; to determine business expansion policies, sales trends of products, dividend payout; to borrow and repay loans. General public To assess the economic and social impact of an organisation, eg the impact of a mining company’s activities on the physical environment.