Stream- Commerce

Session- (2021-2022)
Class- XI
SUBJECT:- Accountancy

Assignment-2 Introduction to Accounting

Accounting information
Meaning of accounting information
Accounting Information refers to the financial statements generated through the process of book-keeping,
use of which helps the users to arrive at decisions.
As an information system accounting collects financial data, records it in the books of account, classifies
and summarises it to produce financial information that is communicated to its users. Accounting begins
with the identification of transactions of financial nature and ends with the preparation of financial
statements i.e., income statement and balance sheet.

Qualitative characteristics of accounting information

1. Reliability:
Accounting information must be reliable. Reliability of information means it is verifiable, free from bias and
material error i.e., all information provided must be traceable and verifiable with proper source documents.

2. Relevance
Accounting Information must be relevant to the user. Information is relevant if it meets the need of the
users in decision making.
Example of relevance: a firm is expected to provide the total amount owed by the debtors in the balance
sheet where as a total number of debtors is not important.

3. Understandability:
It means that the information provided through the financial statements must be presented in a manner that
the users are able to understand easily and clear about the information provided to them.

4. Comparability:
Comparability means that the user should be able to compare the accounting information of an enterprise
of the period either with that of other periods, known as intra-firm comparison or with the accounting
information of other enterprises, known as inter-firm comparison.
 Users of Accounting Information
1. Internal users
2. External users

1. Internal users
Internal Users are those individuals or groups who are within the organisation like owners, management,
employees and trade unions.

a. Owners: Owners contribute capital in the businessand wants to know the profitability and financial
soundness of business.They also want to know whether the profits are increasing or decreasing? What
are the reasons for the increase or decrease in profits? What is the value of the assets of the business? All
such information is provided by accounting.

b. Management: Management needs accounting information for the efficient conduct of the business
such as increase or decrease in the sales, production etc. All such information helps the management in
planning, controlling and to take prompt decisions to manage the business efficiently.

c. Employees and trade unions: Employees and Trade Unions need accounting information to form
judgement about the earning capacity of the business since their remuneration and bonus depend on
it.

2. External users
External Users are those individuals or groups who are outside the organisation like creditors, investors,
banks and other financial institutions, present and potential investors, government tax authorities,
regulatory agencies and researchers, customer, public.

a. Creditors and Suppliers: They want information about the creditworthiness of the business
enterprise. They want to know whether the amount owing to them will be repaid when due and
whether they should extend, maintain or restrict the credit to the enterprise.

b. Bank and Financial Institutions: Before providing a credit to a business, banks and financial
institutions want to know the profit earning capacity and the financial position of the business.
Hence, accounting informations are very useful and important for them.

c. (I) Present Investors: Potential Investors needs accounting information to know the position,
progress and prosperity of the business in order to ensure the safety of their investment.
 (ii) Potential Investors: They need accounting information of the business to decide whether to
Invest in the business or not.

d. Government and Tax Authorities: The Government is interested in the financial statements of
a business for the framing of policies, rules and regulations, allocation of resources and
amendments in different acts related to busines. Tax Authorities needs accounting information of
the business to know the earnings in order to assess the tax liabilities of the business.

e. Regulatory Agencies : Regulatory Agencies needs accounting information of the business to

evaluate the business operation under the regulatory legislations.

f. Researchers: The main purpose of the researchers is to analysis and interpret the financial
statements. Therefore, accounting statements prepared on the basis of accounting principles
provide ground for ascertaining the trends in the development of business.

g. Consumers: Consumers need accounting information to judge effectiveness of the cost

control system in the organisation. Cost control keeps the prices under control.

h. Competitors: Competitors of the business need accounting information regarding relative

strengths and weakness of the organisation for making strategies for their business.

i. Public: The business enterprises affect the public in variety of ways. For example, public might be
interested in knowing the trend of employment opportunities provided by the enterprise and the
measure adopted by the enterprise to check the pollution. Such information is available from the
annual reports of the enterprise.

Advantages of Accounting
1. Replacement of memory:
Human memory has a limited capacity to store every business transactions in mind. Therefore,
accounting helps in keeping a systematic and permanent record of business, which may be referred
from time to time.

2. Business valuation:
If a running business is to be sold or purchased, it is essential to ascertain the value of business.
Accounting helps in the calculation of this amount.

3. Facilitates Raising loans:

Accounting makes available the information with respect to performance of the business. Banks and
financial institutions grant loans on the basis of this information.

4. Evidence in legal matters:

Properly maintained accounts, supported by authenticated documents are accepted by the courts
as a firm evidence. In other words, The proper accounting is a good proof in the court regarding the
transactions of the businessman with others.

5. Enables comparative study:

A systematic recording of business transactions enables a business man to compare current year's
results with those of past years. It also helps him to compare the performance of his business with
that of other business.

6. Financial information about the business:

Accounting provides the financial information about the business to people, inside and outside the
 business so that they can take prompt decisions about the efficient running of the business.

Limitations of accounting
1. Historical in nature:
Accounting is historical in nature and reflects the past position of business organisation. The assets
remain undervalued in many cases particularly land and building. Thus, accounting does not depict the
actual financial position of the business.
2. Qualitative information is ignored:
Financial Accounting takes into account only the quantitative information which is expressed in monetary
terms but a number of qualitative factors such as reputation, honesty and loyalty of the management,
efficiency of workers etc. which cannot be expressed in monetary terms are not considered by financial
accounting.
3. Affected by window dressing:
Window dressing refers to the practice of manuplating the accounts to present the better position of
the business than actual it is and when an accountant resorts to window dressing in the balance sheet the
balance sheet cannot exhibit the true and fair view of the state of affairs of the business.
4. Influenced by personal judgement:
Accounting statements are influenced by the personal judgement of the accountant. He may select any
method of depreciation, valuation of stock ; judgement is based on integrity and competence of the
accountant and will affect the preparation of accounting statements.
5. Incomplete information:
Accounting statement provides only the incomplete information because the actual profit or loss of a
business can be known only when the business is closed down.
6. Unsuitable for forecasting:
Financial Accounts are only a record of past events. Continuous changes takes place in the demand of the
product, policies adopted by the firm, the position of competition etc. As such, the financial analysis based
on past events may not be of much use for forecasting.

ASSIGNMENT- 2
Q1. State whether the following statements are true or false:
(a) Accounting information should be comparable.
(b) Accounting may be affected by window dressing.
(c) Accounting is not accepted as evidence in legal matters.
(d) Accounting makes a record of qualitative aspects of business.
(e) Creditors are internal users of accounting information.
Q2. What are the informational needs of management?
Q3. Who are the internal users of accounting information?
Q4. "Accounting information should be comparable,". Do you agree with this statement? give one reason.
Q5. Which qualitative feature of accounting is reflected in the following cases:
(a) free from personal bias
(b) information is clearly presented
(c) information about departments
(d) consistent use of accounting policies and conventions
Q6. Arrange the steps of accounting process-
(a) Recording
(b) Summarising
(c) Identifying the financial transactions
(d) Classifying
(e) Communicating
Q7. Name any two limitations of accounting information?
Q8. What is meant by window dressing in accounting?
Q9. who would most likely use an entities financial report to determine whether or not the business entity is
eligible for a loan?
(a). Creditors and financial institutions. (b) Debtors
(c). Government (d) Customer
Q10. use of common unit of measurement and common format of reporting promotes
(a) comparability. (b) understandability
(c) relevance. (d) reliability
Q11. What do you mean by qualitative information?
Q12. Who are the external users of information?
Q13. Confidence and trust that the reported information is reasonable representation of the actual items
and events, that have occurred indicates which qualitative characteristic of accounting information?
Q14. Enumerate information needs of potential and present investors?
Q15. List any five users who have indirect interest in accounting?
Q16. Why is accounting as an information system?
Q17. Explain the qualitative characteristics of accounting information?
Q18. Internal users of accounting information are
(a) potential investors. (b) Creditors
(c) Employees. (d) Management
Q19. which of the following is a most relevant accounting information for taxation?
(a) Cash balance of the firm
(b) Book value of the fixed assets
(c) Credit sales of the Year
(d) Profit generated during the year
Q20.which of the following limitations of accounting states that accounts may be manipulated to conceal
vital effects:
(a) accounting is not fully exact
(b) accounting may lead to window dressing
(c) accounting ignores price level changes
(d) accounting ignores qualitative elements
Q21. Explain any four advantages of accounting?
Q22. Why is Accounting as an Information System?