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There is no generally accepted definition of accounting. Accounting is the recording, measurement, and interpretation of financial information used in business decisions.
Accounting is often seen as a language used to communicate financial and other information to people, organizations and the government. Accounting is also a profession, a social force, and also a human activity. It is a form of communication. There are many theories of financial accounting and the theories of accounting are judgements and acceptance of one theory, in preference to others, will in part be tied to one's own value judgements. 'A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of forming the general framework of reference for a field of inquiry' (Hendriksen 1970, p. 1) Theories of accounting consider: people's behavior with respect to accounting information, people's needs for accounting information, and why people within organizations elect to supply particular information.
Accountants draw on different images of the accounting process to elaborate different theories of accounting. "Four principal images have shaped the development of financial accounting. They are those which treat accounting as a historical record, as a descriptor of current economic reality, as an information system, and as a commodity." (Davis, Menon, Morgan, 1982) These will be explained in the following parts.
To begin with, it is necessary to define the 'things' that make up accounting. For example, bookkeeping, tax, financial statements, cash flow forecast, payroll, cost accounting, and so on.
Firstly, bookkeeping is a recording of financial transactions which include sales, purchases, income, receipts and payments by individuals and organizations. There are two common methods of bookkeeping, one is the single-entry bookkeeping system and the other one is the double-entry bookkeeping system.
Secondly, tax is not a donation, but an enforced contribution, and government exacts it according to legislative authority and any contribution. Taxes are often levied as a percentage, called the tax rate. "pecuniary burden laid upon individuals or property owners to support the government [...] a payment exacted by legislative authority." (Black's Law Dictionary, p.1307)
Thirdly, the end results of the accounting process (recording and posting information) are a series of financial statements. They typically include statements of financial position (balance sheet), statements of comprehensive income (income statement), statements of changes in equity, and cash flow statements. About the current economic reality, accounting should be concerned with depicting current economic reality. It means that current and future prices affect enterprise behavior, and advocate the development of accounting statements, such as the balance sheet and the income statement, which reflect these prices rather than the historical prices. The statement of financial position shows the financial position or wealth of the firm by using the economic values of assets and liabilities at the balance sheet date. The statement of comprehensive income reports on a company's income, expenses, and profits over a period of time. The statement of changes in equity explains the changes in an entity's equity throughout the reporting period. Cash flow statement reports on cash flow activities of a company, particularly operating, investing and financing activities.
Next, cash flow forecast is planning future cash requirements of a company to avoid a crisis of liquidity. E.g. If a business runs out of cash and is not able to obtain new finance, it will bankrupt. It is no excuse for management to claim that they didn't see a cash flow crisis coming. So in business, "cash is king".
And then, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. The amount of payroll paid to employees for services according to they provided during a certain period of time.
Then lastly, cost accounting is designed for managers and is useful for them to make decisions. Cost accounting is regarded as the process of collecting, analyzing, summarizing and evaluating various alternative courses of action based on the cost efficiency and capability of the management.
Furthermore, accounting has a number of categories; the main two are financial accounting and management accounting. The information of accounting relates to the activities of an individual or a business enterprise, its users generally fall into two categories: internal users and external users.
Management accounting is used by the company in planning and directing the course of the organization cash flow, budgets, operations, costing, so the users of it are internal users. The major internal user is the senior management of an enterprise. The directors and managers have to make decisions about how the resources within their control are to be used day-to-day, and it is generally based on information provided through both the financial and management accounting systems. The form of report will also change; it depends on the purpose of the report. So about the historical record, accounting is generally providing the history and recording transations of a company in external environment. This is important for owners running their organizations. For example, management controls what is going on, he needs a report of the past transactions and performance of the company. The historical cost accounting system tends to be seen as the only acceptable form of financial accounting. For planning purposes, however, a forecast of what is likely to happen in the future will be more important. Therefore, we need to categorize needs of managers. The first one is stewardship. It refers to the relationship between the managers and the owners. Then for external reporting is on showing that investments have been made in productive assets in an attempt to make profits within the objectives. It needs a balance sheet and profit and loss account, and then owners can trace aggregate financial movements during the period concerned. And the second one is Decision-making. "The need to make specific decisions (should we make the component ourselves or buy it in? How much will it cost to make a particular product? How much money will we need in order to run the enterprise? etc.)." (Berry, 1999, p.6) However, in my opinion, most of the literature on decision usefulness relates only to the needs of shareholders and creditors. The function of financial and other statements with respect to wider user groups is discussed under the heading of accountability.
In addition, the other two internal users are investors (shareholders) and employees. Shareholders' needs will be met by the management accounting information and reports. "Investors need to assess the financial performance of the organization they have invested in to consider the risk inherent in, and return provided by, their investments." (Black, 2005, p.3) known as a dividend. They need to know from management accounting: whether the enterprise has done as well as it should have; whether the managers have looked after and make good use of the resources of the enterprise; whether the inherent risk in the investment has changed; how the enterprise is going to fare in the future. And employees are interested in profitability of their employers, and the ability of employers to pay wages and pensions. They also want to assess the ability of the entity to continue to provide remuneration, retirement benefits and employment opportunities. They are interested in financial statements of a company and generally they get the information from the profit and loss account.
Financial accounting is used by the company to report financial performance to any group outside the business, so the users are external users. The external users adapted from The Corporate Report and the Statement of Principles for Financial Reporting, they are: lenders, suppliers, customers, the government, and the public. And the next image is the information system, accounting conceived in its simplest form as a process linking an accountant, a channel of communication and external users. This image pays attention to the importance of "usefulness", accounting exists because of the needs of users who need useful information.
Firstly, Lenders (such as banks) need to realize the ability of the organization to repay loans and interest. They usually get the information from the balance sheet. For example, research (Berry et al., 1987 and 1993) had shown that UK bankers used a mixture of different approaches to arrive at the lending decision. The approach is related to the size of the enterprise. For smaller enterprises, the 'gone concern' or security based approach, which emphasizes the availability of assets for repayment in business failing, the emphasis is clearly on the balance sheet. However, with very large business, the 'going concern' approach where the emphasis is more clearly focused on the present and future profitability of the enterprise. The importance of published accounting information to this group cannot be over-emphasized; nearly 100% of respondents to a recent survey (Berry et al., 1987) said that these reports were 'very important' and 'always used' in making a lending decision.
The last image is a commodity, accounting information is seen as an economic commodity, and it produced because of the appearance of demand and supply. Therefore, the second external users are suppliers (creditors) are interested in the ability of the organization to access funds quickly. Suppliers are likely to be interested in an entity over a shorter period than lenders, unless they depend upon the entity as a major continuing customer. Therefore, they need information concerning the financial position of a company.
Thirdly, Customers need information about the continuance of an entity, especially when they have a long-term involvement with the entity. For example, if you are a traveler and then you need to be sure that the travel agency that will not cheat you and bring you to go shopping frequently.
And the next one is the governments. "Governments and their agencies need information in order to regulate the activities of entities and to collect taxation, and as the basis for national income and similar statistics." (David et al., 2010, p.5) This information is provided in the profit and loss account and it will help government properly formulate strategic plan.
And finally, is the public. Entities affect members of the public in a variety of ways. For example, entities pollute the atmosphere or despoil the countryside. Financial statements may give the public information about the trends and recent developments of the entity and the range of its activities. It may be included in the annual report. There also are major non-finance people. Accountants satisfy this kind of people with clear communication in the business without financial jargons.
To conclude, according to the analysis of this paper, it is obviously that the view is one-side, accounting not only has one role to satisfy user needs. In current period, it is hard to satisfy different users' requirements if accounting just has one role. Hence, accounting has different roles to satisfy needs of different users in different conditions. Therefore, in my opinion, these points for accountants to satisfy the user needs from above: 1, Clear communication. 2, Listening to user needs to determine their precise requirements. 3, Avoid beating about the bush. 4, Tools & techniques they employ to satisfy needs such as management accounts, general management information, investment appraisals, budgetary control, internal controls & risk analysis, forecasting, financial modeling etc. 5, Avoid temptations to window dress or cook the books.