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TOPIC 1: ACCOUNTING AND INFORMATION SYSTEMS
ACCOUNTING CONCEPT
Accounting is an information system that measures business activities, processes information, and communicates financial information. It is useful to anyone who must make judgments and decisions that have economic consequences.
The basic role of accounting is the transformation of objectively relevant information regarding the financial analysis of a firm into understandable statements that transmit the economic performance of a firm and its consequent financial situation.
EVENT ACCOUNTANT’S ANALYSIS AND RECORDING FINANCIAL STATEMENTS USERS
If the event does not affect the equity of the firm, we don’t register it.
USERS OF ACCOUNTING INFORMATION.
Accounting information is useful for many different agents that need to know the financial and economic situation of a firm. These agents can be:
INTERNAL USERS : They’re those that are part of the firm and whose decisions affect the running of the firm: Board of directors, Executive committee, CEO, Management, People who work for the firm. EXTERNAL USERS : External users are agents that are not active participants in the running of the firm, but are affected by the decisions its makes. We can differentiate between:
- The stakeholders of a firm are agents who are interested in the running of the firm because the decisions
they make are directly affected by the success of the firm. Those are:
- Shareholders and potential shareholders (potential investors), Creditors, Employees, Suppliers, Clients, Government (Public authorities), The competition...
- Any other person who is interested in analyzing the accounting information to find out about a firm, such as professors, researchers or undergraduate students.
CLASSIFICATION OF ACCOUNTING.
FINANCIAL VERSUS MANAGEMENT ACCOUNTING
Financial Accounting Management Accounting Users External parties Internal parties Regulations Constrained by laws, rules (e.g. Pla Genera de Comptabilitat)
No constraints (relevant and in time)
Goal The existence of homogeneous, easily understandable and comparable information for all firms.
To analyze the costs of a firm, and how these costs are distributed among its departments in order to carry out an in depth analysis by business line, by product, by geographical area... Publication of statements
Published Not published, just used to help management make internal decisions. Application Compulsory Voluntary Time span At least once a year. Information is punctual.
Flexible, daily, weekly, quarterly, ...
Type of information Financial data Financial and Nonfinancial data
STAGES IN THE ACCOUNTING CYCLE.
- DATA COLLECTION: Identify relevant information about accounting transactions that the firm is
party to. The transaction must be supported by a valid document ( checks, invoices, contracts, certificates, notes... )
- DATA PREPARATION AND PROCESSING: Once we have the information, it must be measured in
monetary units, recorded to journal and ledger and classified and aggregated according to the GAP
- Journal : Transactions of the company
- Ledger : Book of accounts. We go there to know about bank balance or other ones.
- INFORMATION : The firm creates its financial statements ( balance sheet, income
statement, statement of cash-flows, statement of shareholders’ equity and notes ), which will reflect the economic and financial position in a manner that allows it to be easily understood, communicated and analyzed.
- Valuation of assets inventories: FIFO, Average. We value the assets taking into account the costs, not their value on the market.
THE FINANCIAL STATEMENTS.
Balance Sheet : Information on the financial condition of a business at a certain moment. Income Statement : Information on the income (profit or loss) of a business during a certain period. Statement of Cash-Flows: Information on the origin and use of cash in the company. Statement of Shareholders’ Equity: Presents the individual components of Shareholders’ Equity and the changes during the last year. Notes: Information on the criteria, principles and norms used in the balance sheet and income statement. Other data on the company.
LIMITATION OF ACCOUNTING DATA.
■ Qualitative factors are not reflected. For example, it is not possible to measure how “good” a worker is.
■ Sometimes it’s necessary to estimate data when concrete data is not available so final outcome is less
objective.
■ There are different methods to measure the assets, liabilities, revenues and expenses of a firm. This
makes it difficult to accurately compare information.
■ Changes in prices due to inflation also make it more difficult to guarantee accuracy.
■ Accounting information is based in the past , and it attempts to report the current position of a firm.
REQUIREMENTS FOR ACCOUNTING INFORMATION.
■ Relevant : The information must be significant to help in the decision-making process.
■ In time : Information must be available when a decision has to be made.
■ Accurate : Quality of the information. Users must be able to rely on it.
