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ACCOUNTING : The Basis for Business
Decisions
Lecture - 1

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Accounting : Information for Decision Making

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 WHAT IS ACCOUNTING?

Accounting: The systematic and comprehensive

recording of financial transactions pertaining to a
business.

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 WHAT IS ACCOUNTING?

Accounting also refers to the process of

summarizing, analyzing and reporting these
transactions.

The Language of Business {as it is the means by

which information about an enterprise is
communicated to make economic decisions}
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 WHAT IS ACCOUNTING?

Accounting is :The Art of

•Recording
•Classifying
•Summarizing and
•Communicating the results
•Of business transactions
•On a certain Date.

A means to an end.
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 Concepts Underlying Accounting
Measurement
 Accounting is an information system that measures,
processes, and communicates financial information about
a business or other economic entity.

1. An economic entity is a unit that exists

independently, such as a business, hospital, or
governmental body.

2. Bookkeeping is the process of recording financial

transactions and keeping financial records. It is
mechanical and repetitive and is usually handled by
computers.
 Concepts Underlying Accounting
Measurement

3. Management information systems (MIS) consist of

the interconnected business subsystems, including
accounting, that provide the information needed to run
a business.

4. For accounting purposes, a business organization is a

separate entity, distinct not only from its creditors
and customers but also from its owners.
 Business Transactions
1. Business transactions are economic events that
affect a business’s financial position.

2. All business transactions are recorded in terms of

money. This concept is called money measure.

3. In international transactions, exchange rates

must be used to translate from one currency to
another. An exchange rate is the value of one
currency in terms of another.
 Forms of Business Organization

 There are three basic forms of business organization

that are recognized as separate entities.

I - Sole proprietorship—a business owned by one

person
 The owner takes all the profits or losses of the

business and is liable for all its obligations.

 Forms of Business Organization

II - Partnership—a business that has two or more

owners
 The partners share the profits or losses

according to a prearranged formula.

III - Corporation—a business unit chartered by the
state and legally separate from its owners
 The owners are called stockholders because

their ownership is represented by shares of

stock.
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 Types of Accounting

Financial Accounting

Providing information about the financial resources,

obligations, and activities of an economic entity that
is intended for use primarily by external decision
makers – investors and creditors.
General Purpose (Profit, loss, assets, obligation
etc)

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 Types of Accounting

Management Accounting

Providing information that is intended primarily

for use by internal management in decision
making required to run the business.
Helps in Planning and Control

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 Types of Accounting

Tax Accounting

Preparation of income tax returns and

anticipating the tax effects of business
transactions and structuring them in such a
way as to minimize the income tax burden.
Helps in preparation of Income Tax Return etc

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 Financial and Managerial Accounting

 Accounting is usually divided into financial

accounting and managerial accounting.

- External decision makers use financial

accounting to evaluate how well a business has
achieved its goals.

 These reports, called financial statements, are

a central feature of accounting. They report on a
business’s financial performance.
Financial and Managerial Accounting

 Accounting is usually divided into financial

accounting and managerial accounting.

- Internal decision makers use information provided by

managerial accounting about operating, investing, and
financing activities.

 It provides managers and employees with information

about how they have done in the past and what they can
expect in the future.
 Importance of Financial Accounting

The Primary objectives of financial accounting are :

1. to provide information that is useful in making

investment and credit decisions in assessing the
amount, timing, and uncertainty of future cash
flows,

2. It helps in learning about the enterprise’s

economic resources, claims to resources.

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Importance of Financial Accounting

The Primary objectives of financial accounting

are :

3. Changes in claims to resources.

4. It is means to an end.
5. It is historical to nature

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Importance of Financial Accounting

The Primary objectives of financial accounting

are :

6. It results from inexact and approximate

measure of business activity, and
7. It is based on a general-purpose
assumption.

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Importance of Management Accounting
The Primary objectives of Management Accounting
information are :

1. It is useful to the enterprise in achieving its

goals, objects and missions

2. Assessing pas performance and

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Importance of Management Accounting
The Primary objectives of Management Accounting
information are :

3. Assessing future decisions; and

4. Evaluating and rewarding decision making

performance.

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Importance of Management Accounting
The Primary objectives of Management Accounting
information are :

5. Some of the important characteristics of

management accounting information are its
timeliness

6. Its relationship to decision-making authority,

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Importance of Management Accounting
The Primary objectives of Management Accounting
information are :

7. Its future orientation

8. Its relationship to measurement efficiency and

effectiveness, and

9. The fact that it is a means to an end.

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ACCOUNTING SYSTEM :

The personnel, procedures, devices, and

records used by an organization to
develop accounting information and
communicate that information to
economic decision makers.

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 Economic Activities

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 Functions of Accounting System

1. In every Accounting System, the economic activities of

the organization are Recoded in the books of accounts.

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 Functions of Accounting System

2. Next, the recorded data are Classified in the system to

accumulate sub-total for various types of economic
activities.

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 Functions of Accounting System

3. Finally, the information is Summarized in Accounting

Repots i.e. designed to meet the information needs of
the various decision makers.

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Financial Reporting and Financial Statements
Internal Information:
1.Balanced Sheet
2. Income Statement
3. Statement of Cash flows
Other Information:
• Industry
• Competitors
• Economy-wide

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Objectives of External Financial Reporting

Balance Sheet

Income Statement

Statement of Cash Flows The primary

financial
statements.

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 Decision Makers: The Users of
Accounting Information

 The people who use accounting

information to make decisions fall into
three categories: managers (internal
users), outsiders who have a direct
financial interest in the business, and
outsiders who have an indirect financial
interest.
 Management, Investors, and Creditors
 Management is responsible for ensuring that a
company meets its goals of profitability and
liquidity.
 Investors—owners and stockholders—have a
direct financial interest in the success of their
companies.
 Creditors—those who lend money or deliver
goods or services before being paid—are
interested mainly in whether a company will have
the cash to pay interest charges and to repay the
debt on time.
External Users of Accounting Information
•Creditors

•Owners

•Labor unions

•Governmental agencies

•Suppliers

•Customers

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External Users of Accounting Information
•Investors
•Creditors
•Government Agencies
(SECP, SBP, IRS, EPA,
Ministries etc.)
•Researchers

•Trade associations

•General public

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External Users of Accounting Information
•Labor Unions
•Suppliers
•Customers
•Trade Associations
•General Public

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Users of Internal Accounting Information

Board of Directors

Chief Executive Office - CEO

Chief Financial Officer – CFO

Vice Presidents

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Users of Internal Accounting Information

Business Unit managers

Plant managers

Store Managers

Line Supervisors

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 Objectives of Management Accounting
Information

To
Tohelp
helpachieve
achievegoals
goalsand
and
missions
missions

To
Tohelp
helpevaluate
evaluateand
andreward
reward
decision
decisionmakers
makers
 Integrity of Accounting Information

Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
Securities and Exchange Commission
Internal Control Structure
Audits
Legislation
GAAP and the Independent CPA’s Report

 To ensure that financial statements are understandable

to their users, a set of generally accepted
accounting principles (GAAP) has been developed
to provide guidelines for financial accounting.
 Many companies of all sizes have their financial
statements audited by an independent certified
public accountant (CPA).
An audit is an examination of a company’s financial
statements and the accounting systems, controls,
and records that produced them. It ascertains that
the statements were prepared in accordance with
GAAP.
 Organizations That Issue Accounting
Standards
 Two organizations issue accounting standards that are
used in the United States:
The Financial Accounting Standards Board (FASB)
has been designated by the Securities and Exchange
Commission (SEC) to issue Statements of Financial
Accounting Standards.
The International Accounting Standards Board
(IASB) issues international financial reporting
standards (IFRS). The SEC allows foreign companies
to use these standards in the United States.
Other Organizations That Influence
GAAP
 The Governmental Accounting Standards
Board (GASB) issues accounting standards for
state and local governments.
 The Internal Revenue Service (IRS) interprets
and enforces the tax laws that specify the rules for
determining taxable income.
 The Public Company Accounting Oversight
Board (PCAOB) has wide powers to determine
the standards that auditors must follow.
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Other Organizations That Influence
GAAP
 The American Institute of Certified Public
Accountants (AICPA) is the primary professional
organization of CPAs.
 The Securities and Exchange Commission
(SEC) is a governmental agency that has the legal
power to set and enforce accounting practices for
companies whose securities are offered for sale to
the general public.
 Professional Conduct
 The code of professional ethics of the
American Institute of Certified Public
Accountants governs the conduct of CPAs.
The code requires CPAs to act with:
Integrity—be honest and candid and
subordinate personal gain to service and
the public trust.
Objectivity—be impartial and intellectually
honest.
 Professional Conduct
Independence—avoid all relationships
that impair or appear to impair objectivity.
Due care—carry out professional
responsibilities with competence and
diligence.
 The Institute of Management Accountants
(IMA), the primary professional association of
managerial accountants, also has a code of
professional conduct.
 Business Goals and Activities

 A business is an economic unit that aims to sell

goods and services at prices that will provide an
adequate return to its owners.
 The two major goals of all businesses are:
Profitability—the ability to earn enough
income to attract and hold investment capital
Liquidity—the ability to have enough cash to
pay debts when they are due
 Integrity of Accounting Information

Professional Organizations
American Institute of Certified Public
Accountants
Institute of Management Accountants
Institute of Internal Auditors
American Accounting Association
 Integrity of Accounting Information

Competence, Judgment and Ethical Behavior

Certified Public Accountants (CPAs)
Certificate in Management Accounting (CMA)
Certificate in Internal Auditing (CIA)
Code of Professional Conduct

CP
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 Integrity of Accounting Information

Careers in Accounting
Public Accounting
Management Accounting
Governmental Accounting
Accounting Education
 SUMMARY
Accounting is the means by which information

about an enterprise is communicated and is

called the language of business.
Many internal and external users have need for

accounting information in order to make

important decisions.

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 SUMMARY
Because the primary role of accounting
information is to provide useful information for
decision making purposes, it is referred to as a
means to an end.
With the end being the decision that is helped by

the availability of accounting information.

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