Importance of Accounting
Accounting is important in view of the following
uses.
1. Accounting information can be used for
decision-making.
2. It provides permanent records for all
transactions.
3. It helps to determine the profitability of a
business concern.
4. Accounting records are used for tax assessment.
5. It helps to prevent fraudulent practices.
6. The records provide a means by which the
finances of a business are controlled.
7. The records show the income and expenditure.
8. Accounting records show assets and liabilities.
9. Accounting records aid planning.
10. Accounting records provide a proof of the
financial position of an enterprise.
Characteristics of Useful Accounting Information
No information is
useless; however, the degree of usefulness of information varies. Financial statements and reports could be said
to contain valuable/useful information if,
and only if, they possess the following
characteristics:
1.
Relevance:
The information provided
should be that which is required to
satisfy the needs of information users. In the case of company accounts, clearly a wide range
of information will be needed to
satisfy the numerous interest groups.
2.
Comprehensibility:
Information may be difficult to understand because it is skimpy or incomplete, but
too much detail is also a defect,
which can cause difficulties of understanding. Useful information should be relatively easy to
understand and
comprehend.
3.
Reliability:
This will be enhanced if
information is
independently verified.
The law requires that an auditor, who must
be a person independent of the company and the holder of an approved qualification, should verify
the accounts published
by limited companies.
by limited companies.
4. Completeness:
A company’s accounts should present a rounded picture or contained a snapshot of its
entire economic activities.
5.
Accurate:
Accurate financial information is error free.
In some cases, inaccurate information is
generated because inaccurate data
was fed into the transformation process.
6.
Economical:
Economic information should be relatively economical to produce; management must
balance the value of every
accounting report with the cost of producing it.
7.
Simplicity:
Accounting information
should be simple and not complex.
Sophisticated and Technical information may be unnecessary and uncommunicative.
8.
Verifiable:
Accounting information has to be verifiable.
This means that users of accounting
information may wish to confirm/check
it to make sure it is correct.
9.
Accessible:
Information should be easily
accessible to authorized users. It
must be obtained in the right format, in the right time and in the right place to meet their needs.
10.
Flexibility:
Financial information is expected to be
flexible to meet the diverse needs of users. It
should serve a variety of purposes.
Again, methods of presenting information should be free from too much rigidity and follow
the “times”.
Users of accounting information and they needs
One of the
features of accounting definition is the provision of accounting information to
all users. This is necessary because decision makers (users) need to judge the economic performance and progress
of an entity and then take decisions.
Accounting
information is usually in the form of reports and statements, and for any report or statement to be
regarded as information generally, it
must possess the qualities of useful or valuable information, otherwise it ceases to be information.
1.
Owners
who are also managers
a.
Assessment
of past performance
b.
Whether
to cease business, continue as before, expand etc
c.
As a
basis for detailed future planning
d.
To show
to potential buyers the performance of the business
2.
Owners
who are not managers e.g. shareholders in a companies
a.
To assess
the performance of management
b.
Whether
to support or change management
c.
Whether
to remain as owners, dispose of the investment or still invest more into the
enterprise etc
3.
Management
who are also owners e.g. company directors
a.
To assess
their own performance
b.
In case
of company, to decide on what dividend to recommend
c.
As a
basis for detailed future planning
4.
Inspector
of taxes
a.
To assess
the taxation which is due
b.
To determined
if all incomes have apparently been included
5.
Banks
and other lenders
a.
To assess
management performance so as to decide whether lending should be abandoned,
reduced, continued or increased
b.
To determine
the terms and condition of any lending (e.g. if security should be offered, if
guarantees should be sought from owners, repayment time etc)
6.
Potential
buyer of business
a.
Whether
the business should be bought or not
b.
The price
that is reasonable to pay
c.
What
detailed action will need to be taken if the business is bought (e.g. plants and
other assets, paying off workers)
7.
Actual
and potential suppliers
a.
How long
the business takes to pay its supplier
b.
Whether
it is likely to stay in business long enough to pay
c.
What
credit limit is reasonable
8.
Actual
and potential customers
a.
An appreciation
of the size of order to be placed
compared with whole turnover of the business
b.
Appraisal
of the long and short term ability of the business to fulfill orders placed etc
9.
Employees
and trade unions
a.
Ability
of the business to pay higher wages and salaries
b.
Ability
of the business to survive in the long term
Advantages of accounting
the following are the
advantages of accounting to a business:
a.
It
helps in having complete record of business transactions.
b.
It
gives information about the profit or loss made by the business at the close of a
year and its financial conditions. The basic function of accounting is
to supply meaningful information about the financial activities of
the business to the owners and the managers.
c.
It provides useful information for making
economic decisions,
d.
It facilitates comparative study of current
year’s profit, sales, expenses etc., with those of the previous years.
e.
It
supplies information useful in judging the management’s ability to utilize enterprise
resources effectively in achieving primary enterprise goals.
f.
It
provides users with factual and interpretive information about transactions
and other events which are useful for predicting, comparing and
evaluation the enterprise’s earning power.
g.
It
helps in complying with certain legal formalities like filing of income tax and
sales-tax returns. If the accounts are properly maintained, the assessment of
taxes is greatly facilitated.
Disadvantages of Accounting
a.
Accounting
is historical in nature: It does not reflect the current financial position or
worth of a business.
b.
Transactions
of non-monetary mature do not find place in accounting. Accounting is
limited to monetary transactions only. It excludes qualitative
elements like management, reputation, employee morale, labour strike
etc.
c.
Facts
recorded in financial statements are greatly influenced by accounting conventions
and personal judgments’ of the Accountant or Management. Valuation of inventory,
provision for doubtful debts and assumption about useful life of an asset
may, therefore, differ from one business house to another.
d.
Accounting
principles are not static or unchanging-alternative accounting procedures are
often equally acceptable. Therefore, accounting statements do not always
present comparable data
e.
Cost concept is found in accounting. Price
changes are not considered. Money value is bound to change often from
time to time. This is a strong limitation of accounting.
f.
Accounting
statements do not show the impact of inflation.
g. The
accounting statements do not reflect those increase in net asset values that
are not considered realized.