1.1 Nature and Purpose of Accounts

What is Accounting?
 Accounting is defined as:

“the process of identifying, measuring and
communicating information to permit informed
judgements and decisions by users of the information”
American Accounting Association
Objectives of Financial Statements
 To provide information about an entity’s
 Financial position
 Performance
 Changes in financial position
that is useful to a wide range of users in making

economic decisions.
The Framework for the Preparation and Presentation of Financial Statements 1989
Brief history of Accounting 1
 Earliest accounting records
 Some of the earliest written records known to us
are accounting records.
 Initially written in physical quantities only.
 Helped people keep track of their assets and made it
easier to exercise control over those entrusted with
other peoples’ property – the stewardship
function.
Brief history of Accounting 2
 Double entry
 Double entry bookkeeping developed by Luca
Pacioli in 1494.
 Accounting developed in response to changing
needs of business but profit and loss account was not
considered important.
 Concept of limited liability introduced in late 19th
and early 20th century as firms needed more
resources to expand.
 External investors interested in profitability thus the
profit and loss account became far more significant.
User group Use
Customers Assess the ability of the business to
continue and supply their needs.
Competitors Assess the market threat posed and
provide a performance benchmark.
Employees Assess the ability of the business to
continue and reward employees for
their labour.
Suppliers Assess the ability of the business to
pay for goods/services provided.
Investment analysts Assess the likely risks and returns
associated with the business and advise
clients accordingly.
Lenders Assess the ability of the business to
meet its obligations.
User group Use
Government Assess the amount of tax payable,
whether the business complies with
agreed pricing policies and whether
financial support is required.
Community Assess the ability of the business to
representatives continue to provide employment, to
purchase community resources and to
fund environmental improvements.
Managers Help make decisions and plans for the
business and exercise control so that
plans come to fruition.
Owners Assess how effectively managers are
running the business and make
judgements about likely levels of risk
and return in the future.
Conflicting interests of users
 Managers v owners
 Employees v managers
 Lenders v owners
Qualitative Characteristics of Financial
Statements
 Understandability
 Relevance
 Reliability
 Comparability
Financial and Management Accounting
 Financial accounting seeks to meet the information
needs of all users. Users rely on the information
which management is prepared to provide or is
required to provide under financial reporting
regulations.
 Management accounting seeks to meet the specific
information needs of managers. Managers have a
greater degree of control over the form and content of
the information received.
Financial Management
Type of reports General purpose Specific purpose
Level of detail Broad overview Very detailed
Regulation Usually subject to No external regulation,
accounting designed to meet
regulation. specific need.
Reporting Usually on an Daily, weekly or
interval annual basis. monthly.
Time horizon Past period. Past and future.
Range and Monetary terms Monetary and non-
quality of using objective monetary terms using
information and verifiable less objective &
data. verifiable data.
Accounting Conventions
 Accounting conventions are rules that have
evolved over time in order to deal with the
practical problems encountered in preparing
accounts.
Accounting Regulation
 Accounting Standards Board (ASB)
◦ Issues Financial Reporting Standards (FRSs)
 International Accounting Standards Board (IASB)
◦ Issues International Financial Reporting
Standards.
 Auditing Practices Board (APB)
◦ Issues Auditing Standards.
 Company Law.
 Stock Exchange Rules.
 Relevant legislation in relation to statutory bodies.

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What is Accounting?

 Accounting is defined as:

that is useful to a wide range of users in making

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