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Accountancy Theory

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17 views2 pages

Accountancy Theory

Uploaded by

Joy Bhowmick
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Siksha Srijan Academy

What is the meaning of accounting?

Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial
transactions and information of an organization or individual. It helps in tracking financial activities,
ensuring accuracy, and providing insights for decision-making, budgeting, and tax purposes.

The primary objectives of accounting

are:

1. Recording Financial Transactions: Accounting is used to record all financial transactions systematically
and in a standardized format. This helps in keeping a reliable record of al I business activities.

2. Summarizing Financial Information: It involves summarizing these transactions into financial


statements like the income statement, balance sheet, and cash flow statement, which provide a concise
overview of the financial position and performance of a business.

3. Analyzing Financial Data: Accounting allows for the analysis of financial data to assess the financial
health and performance of a business. This analysis can aid in making informed decisions.

4. Financial Reporting: Accounting ensures the preparation and presentation of financial reports to
stakeholders, including shareholders, investors, creditors, and government authorities. These reports
provide transparency and accou ntabi I ity.

5. Compliance: Accounting helps in ensuring compliance with relevant financial regulations and tax laws.
It helps a business follow legal

6. Facilitating Decision-Making: By providing financial information, accounting supports decision-making


processes within a business. Managers and stakeholders can use this data to make informed choices.

7. Budgeting and Planning: Accounting assists in budgeting and planning for the future. It provides
historical financial data that can be used to create forecasts and budgets.

8. Evaluating Efficiency and Performance: Through financial ratios and analysis, accounting allows for the
assessment of a company's efficiency, profitability, and overall performance.

9. Risk Management: Accounting helps in identifying and managing financial risks, such as credit risk,
market risk, and operational risk.

10. Resource Allocation: It aids in determining how resources should be allocated within the business to
achieve its financial goals and objectives.

These objectives collectively contribute to the effective management of a business's financial affairs and
its ability to provide relevant, reliable, and timely

information to stakeholders.

Users of accounting information.

Users of accounting information can


be categorized into two main groups:

internal· users and external users .

. Internal Users:

• Management: Managers use accounting information to make decisions, set goals, and monitor

the financial health of the organization.

• Employees: Employees may use financial statements to

• 1::.mployees: 1::.mployees may use financial statements to understand the company's performance
and stability, especially in terms of job security.

• Shareholders: Shareholders use financial reports to assess the company's performance and financial
stabi I ity, which can influence their investment decisions.

• Board of Directors: The board relies on financial information to oversee the management's actions and
ensure that they align with the company's objectives.

External Users:

• Investors: Potential investors

2. External Users:

• Investors: Potential investors analyze financial statements to assess the company's

profitability, growth potential, ,and risk before investing.

• Creditors: Lenders and suppliers use financial information to evaluate a company's creditworthiness
and determine

credit terms.

• Regulators and Tax Authorities: Government agencies and tax authorities use financial reports to
enforce regulations, collect taxes, and ensure compliance.

• Customers: Customers may analyze a company's financial

• Customers: Customers may analyze a company's financial health to gauge its ability to deliver products
or services consistently.

• Competitors: Competitors can study a company's financial statements for benchmarking and strategic
purposes.

• Analysts and Financial Advisors: Financial analysts and advisors use accounting information to provide
insights and recommendations to clients and investors

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