What is Accounting Information?
Accounting is the process to record summarizing, summarizing, and interpreting financial information for a business. The company’s stakeholders, including shareholders and creditors, as well as other lenders, regulator agencies, tax authorities, and regulatory agencies, can use the accounting information generated. It is the only language or way the company can communicate with both the internal and the external world.
An accounting information system uses computers to process data and feeds in accounting information. The system records and tracks all accounting activity within the company by using information technology systems and other resources. The system generates reports that can be used internally and externally by other users and stakeholders.
The Main Guiding Principles and Assumptions
Going Concern Basis
Accounting information is still based on the assumption that the company has an indefinite life. Business activities will continue in the foreseeable future. This assumption allows assets to be valued based on their historical cost method. This allows the company to charge amortization on a regular basis and to avoid any impact of changes in assets’ value that could affect financial performance.
If we don’t follow the going concern principle assets valuation will occur at their current market value, assuming that the company is able to close its doors anytime. This may not be the true value of the assets.
Accrual Basis for Accounting
Accounting reports should be prepared on an accrual basis. Revenue is considered earned when a transaction occurs. This applies regardless of whether or not physical cash or money is exchanged. The company also recognizes expenditures when it receives goods and services. This means that expenses are recorded regardless of the date they occur.
Accounting is the process of accurately recording all financial transactions, and determining the income or loss from operations. It is therefore important and preferred to account for all revenue or expenses that are related to the same accounting period, or pertaining directly to income or costs. Once revenue is recorded and recognized, it becomes essential that all expenses related to the revenue period and the cost of goods sold are also recorded.
Assumption Of Reliability
It is important that accounting information be verifiable and reliable. It will allow you to verify the information and perform an independent audit. It should be accurate and provide a fair and complete view of the financial data and the standing of the company.
Financial statements and financial reports should contain complete information. It should not conceal any material facts or misrepresent any facts. It increases the company’s credibility among investors, creditors, shareholders, and lenders.
The Objectivity Principle
Accounting’s sole purpose is to accurately record transactions to provide a fair and accurate picture. It is, therefore, crucial to ensure that the data are accurate. The recording process should not be influenced by any personal opinions or biases. Personal opinions can influence the final result and the objective. To avoid any influence, It is standard practice to keep and preserve all supporting documentation for any transaction. These can take the form of and include receipts, invoices or quotations, approvals, measurement details, etc. This increases the reliability of records to a large extent.
Double Entry System/Balancing Equation
For all financial transactions, most commercial organizations use double-entry accounting. This system allows for two sides to any transaction and at least two accounts will be posted. These two sides are Debit or Credit. Additionally, both sides must match for each entry or record.
Consistent, Comparable Results
Accounting information should be based upon the same accounting method over different accounting periods. Also, accounting information should not change year after year. A consistent method should be used. Any material change should have a reason. This should have been made clear in the final reports.
Comparing accounting information between companies should be possible. Reports should be consistent over time.
It is important that information flows are consistent and accurate so reports can be sent out on a regular basis. Information that is delayed can cause problems for both the company as well as the stakeholders. This could lead to missed opportunities and a loss of profits.
Each country has its own guidelines to ensure consistency and uniformity in reports and information. There are two types of guidance at a global level: US GAAP or IFRS.
How is Accounting Information used?
Para accounting information, as we have already discussed, is crucial and the only way for the world to know about an entity’s financial situation. It is used in many ways, including financial accounting, managerial accounting, and cost accounting. It is also useful at the user level for managers, investors, shareholders, and lenders.
Financial accounting is primarily concerned with providing financial information to users and stakeholders outside of the company. Listings on the stock market must file financial statements and reports periodically with the relevant economic regulatory body. These reports are available to the general public for analysis and other purposes.
Reports are prepared according to the Generally Accepted Accounting Principles ( GAAP), IFR, and any other framework deemed appropriate by the regulatory body.
Three important statements or financial reports are usually prepared to summarize all the transactions for the year.
Income Statement and Expenditure Report
It’s also known as the Profit & Loss Account, which indicates the end result of commercial operations. It indicates whether the entity has made a profit or a loss, and the amount. This statement includes all income and expenses that occurred during the accounting period. This income and expense should be routed to the profit and loss account.
All income is on the right, while all expenses are on left. The total revenue is then reduced by the cost of goods and any expenses for that period. If the revenue is greater, it is called the profit. If the expenses are higher, it is considered a loss for that period.
Cash Flow Statement
As the name implies, this statement shows cash movement in the company over the reporting period. This is the cash the company actually receives and spends. This statement acknowledges that it is a mixture of three types cash flows: cash flow generating from business operations and cash flow generating through investing activities.
The Balance-Sheet shows the mirror image, or picture, of the financial strength and position of an entity at a particular date. Furthermore, both the balance sheets should match due to the double-entry system.
This statement includes details about liabilities. These are the shareholders funds, as well as surplus and reserves, and any outside liabilities. This could include long -term loans, short-term loans, sundry creditors, or other liabilities. The details of assets owned by the entity can be found on the right. All that could include fixed assets investments, inventory, cash or cash equivalents, sundry creditors, and so on. This statement can be adjusted or deducted from the equity to reflect the net profits.
These reports can be used internally within an organization. These statements are used by the management and employees. Reports that are flexible in format and nature can be prepared using accounting information. These are internal. They do not need to follow certain accounting frameworks like the GAAP.
It is crucial to have accurate, complete, and timely accounting information. These reports must be prepared often and as needed. Managers need to manage, plan, and determine which reports they might require. They might need to perform a cost-benefit analysis and check expenses and costs, determine the right pricing for a product, and evaluate the financial performance from different cost centers.
Accounting information is the foundation of every organization. Without accounting information and the related systems, it can be lost or destroyed. Not only is it important for the purposes mentioned above, but also for other purposes.
Coordination between Departments
For a successful closing of a business transaction, it is essential that accounting information flows between departments. The information must flow through the appropriate channels and systems from the moment an order is received to the production of it using the necessary raw materials, to the sale, and finally to the realization of the payment.
These departments can only coordinate when they have uninterrupted information.
What are the Limitations to Accounting Information?
Accounting information can have its limitations. These are few:
Based on Interpretations and Judgments
Accounting information is based on the many judgments, estimates, and interpretations made by managers. It can therefore be vulnerable, biased, and sometimes not accurate. How and when should a manager recognize a profit if a product has a five-year replacement guarantee? The current accounting period may not have allowed for the recording of sales and profits. It may return as a return later. It could be a loss for the business after the profits are recouped.
This information is often based on the historical cost principle, and therefore does not value assets at fair market value. It is impossible to accurately value a business at any given time.
It is vital that every financial transaction is recorded using a well-designed and robust accounting system. It will be difficult to run smoothly and accurately without this. These details are crucial at all stages and when dealing with the outside. A sound system is built on reliability, consistency, transparency, and timeliness. These data and details are the basis for every decision made by an entity. The data should be accurate and correct to increase the effectiveness of the decision and vice versa.