Lecture 1 Financial Accounting

Types and Users of Accounting
Information
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An organisation’s financial information is recorded, examined, summarised, and
interpreted through the accounting process. Accounting Information is needed by
stakeholders of the firm, including the employees, owners, creditors, banks and other
lenders, regulatory agencies, and tax authorities, among others, so that they can make use
of the accounting information. In order to communicate with both the internal and
exterior worlds, an organisation needs accounting information.
Accounting Information can be of different types and use. Majorly there are 3 types of
Accounting Information:
Types of Accounting Information:
1. Financial Accounting: Financial accounting is historical in character, i.e., it

documents transactions that have already happened. It includes creation, analysis, and
presentation of financial statements. The creation of the Profit and Loss Account and the
Balance Sheet is the final step in financial accounting. It primarily aids in determining the
financial situation as of the specified date as well as the net result for an accounting
period.
2. Management Accounting: Management Accounting is concerned with the process of
accumulating accounting information for internal operational reporting. It consists of
many information regarding the planning, controlling, decision-making, etc., related to
the firm. It includes many methods of information grouping and reports preparation that
managers use to carry out their duties. Cost accounting, which deals with cost
ascertainment and cost control, is a crucial part of management accounting.
3. Cost Accounting: The process of accounting for cost begins with recording income
and expenditure or the bases on which they are calculated and ends with the preparation
of periodical statements and reports for ascertaining and controlling costs. The goal of
cost accounting is to track, evaluate, and promote improvements in internal cost
management and effectiveness. In a nutshell, cost accounting is a system for managing
operational analysis.
Users of Accounting Information and their Needs:
The public, the government and its agencies, management, employees, lenders, suppliers,
and other creditors in the business world are among the users of accounting information.
These users make use of accounting information according to their needs:
1. Public: The public is impacted by businesses in a number of different ways. For
instance, businesses may have a significant positive impact on the community’s economy
through their employment of locals and the use of their suppliers. Financial statements
can help the public by informing them of recent changes and trends that have affected the
enterprise’s success and the scope of its activities.
2. Government and their Agencies: The allocation of resources and, consequently,
business activities are of interest to the government and its agencies. They also need the
information to set tax policy, control business activity and calculate various indicators,
like GDP (gross Domestic product) and National Income.
3. Management: In order to assess the firm’s short-term and long-term solvency,
management needs information regarding the firm’s activity. Management needs
accounting information to make several decisions, like determination of selling price and
other strategies. It is also needed for comparison of performance with similar enterprises
in the industry and to make plans for the future regarding expansion, reduction, etc.
4. Employees: The stability and profitability of the employers are topics that interest both
the workforce and the groups that serve as its representatives. Additionally, they are
looking for facts that will help them judge whether the company can afford to pay
salaries, offer retirement benefits, and create job prospects.
5. Creditors: In order to decide whether to prolong, sustain, or restrict the flow of credit
to a specific firm, short and long term creditors need to know if the amount owed to them
will be paid when due. To ascertain if their principal amounts and interest accrued will be
paid when due and whether to prolong, maintain, or restrict the flow of credit to a firm,
short and long-term creditors need information. Such information helps them to
understand the paying ability of the enterprise.
6. Present Investors: In order to assess the pros and cons of their investment, and decide
whether to buy, hold, or sell the shares, current investors require accounting information.
7. Potential Investors: To evaluate an enterprise’s strengths and decide whether to
purchase shares, prospective investors also require accounting information.
8. Customers: Customers are curious about an organisation’s future, especially if they
depend on it or have a long-standing relationship with it. Accounting information
increases or decreases a firm’s goodwill amongst its customers.
9. Tax Authorities: To determine an enterprise’s tax liabilities, tax authorities need
information. In order to compare the information on tax returns with the supporting
accounting records, tax authorities occasionally audit the returns filed by firms. The
accounting records of suppliers and customers are also cross-checked by tax authorities to
spot suspected tax evasion.
10. Auditor: Auditors examine financial statements and underlying accounting records to
form an audit opinion. Investors and other interested parties rely on external auditors’
independent assessment of the correctness of financial records
BASIC ACCOUNTING TERMINOLOGIES
How often have you ended a call with your accountant feeling more confused
than before it started? If your response is a variation of “pretty much every
time,” have no fear! We’ve compiled this handy list of 42 common accounting
terms, along with their common abbreviations (where appropriate) and
definitions.
Balance Sheet Terms

The Balance Sheet is one of the two most common financial statements
produced by accountants. This section pertains to potentially confusing basic
accounting terms that relate to the balance sheet.
1. Accounts Payable (AP)

Accounts Payable include all of the expenses that a business has incurred but
has not yet paid. This account is recorded as a liability on the Balance Sheet as
it is a debt owed by the company.
2. Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has
provided but has not yet collected payment on. This account is on the Balance
Sheet, recorded as an asset that will likely convert to cash in the short-term.
3. Accrued Expense
An expense that been incurred but hasn’t been paid is described by the term
Accrued Expense.
4. Asset (A)
Anything the company owns that has monetary value. These are listed in order
of liquidity, from cash (the most liquid) to land (least liquid).
5. Balance Sheet (BS)

A financial statement that reports on all of a company’s assets, liabilities, and
equity. As suggested by its name, a balance sheet abides by the equation
<Assets = Liabilities + Equity>.
6. Book Value (BV)

As an asset is depreciated, it loses value. The Book Value shows the original
value of an Asset, less any accumulated Depreciation.
7. Equity (E)
Equity denotes the value left over after liabilities have been removed. Recall
the equation Assets = Liabilities + Equity. If you take your Assets and subtract
your Liabilities, you are left with Equity, which is the portion of the company
that is owned by the investors and owners.
8. Inventory
Inventory is the term used to classify the assets that a company has purchased
to sell to its customers that remain unsold. As these items are sold to
customers, the inventory account will lower.
9. Liability (L)
All debts that a company has yet to pay are referred to as Liabilities. Common
liabilities include Accounts Payable, Payroll, and Loans.
Income Statement Terms

The Income Statement AKA Profit and Loss Statement is the second of the two
common financial statements. These are the most common basic accounting
terms used in reference with this reporting tool.
10. Cost of Goods Sold (COGS)

Cost of Goods Sold are the expenses that directly relate to the creation of a
product or service. Not included in this category are those costs that are
needed to run the business. An example of COGS would be the cost of
Materials, or the Direct Labor to provide a service.
11. Depreciation (Dep)

Depreciation is the term that accounts for the loss of value in an asset over
time. Generally, an asset has to have substantial value in order to warrant
depreciating it. Common assets to be depreciated are automobiles and
equipment. Depreciation appears on the Income Statement as an expense and
is often categorized as a “Non-Cash Expense” since it doesn’t have a direct
impact on a company’s cash position.
12. Expense (Cost)

An Expense is any cost incurred by the business.
Learn more about personal vs. business expenses here.
13. Gross Margin (GM)

Gross Margin is a percentage calculated by taking Gross Profit and dividing by
Revenue for the same period. It represents the profitability of a company after
deducting the Cost of Goods Sold.
>>Supporting Post: How to Calculate Gross Profit Margin
14. Gross Profit (GP)

Gross Profit indicates the profitability of a company in dollars, without taking
overhead expenses into account. It is calculated by subtracting the Cost of
Goods Sold from Revenue for the same period
What Are the Basic Accounting Principles?

Some of the most fundamental accounting principles include the following:
 Accrual principle
 Conservatism principle
 Consistency principle
 Cost principle
 Economic entity principle
 Full disclosure principle
 Going concern principle
 Matching principle
 Materiality principle
 Monetary unit principle
 Reliability principle
 Revenue recognition principle
 Time period principle

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Types and Users of Accounting

Types of Accounting Information:

1. Financial Accounting: Financial accounting is historical in character, i.e., it

BASIC ACCOUNTING TERMINOLOGIES

Balance Sheet Terms

1. Accounts Payable (AP)

2. Accounts Receivable (AR)

5. Balance Sheet (BS)

6. Book Value (BV)

Income Statement Terms

10. Cost of Goods Sold (COGS)

11. Depreciation (Dep)

12. Expense (Cost)

Learn more about personal vs. business expenses here.

13. Gross Margin (GM)

>>Supporting Post: How to Calculate Gross Profit Margin

14. Gross Profit (GP)

What Are the Basic Accounting Principles?

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