CHAPTER ONE

Accounting:
Information for Decision-
Making

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 Contents

Definition of Accounting

Accounting Information

Users of Accounting Information

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 What is Accounting?

 Accounting is the process of identifying, measuring,

recording, and communicating an organization’s
economic activities to users.

 Users need information for decision making.

 Accounting is often called the Language of Business

because it uses a unique vocabulary to communicate
information to decision makers.

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 What is Accounting?
 The area of accounting known as managerial
accounting serves the decision-making needs
of Internal Users.

 External users do not work for the organization

and include investors, creditors, labour unions,
and customers. Financial accounting is the
area of accounting that presents financial
information of interest to External Users.
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 What is Accounting?
The systematic recording, reporting, and analysis of financial
transactions of a business.
 Which type of organisation need accounting?
 Sole trader. This means one person who runs a business on his/her
own, or perhaps with a few employees. The main aim is to
make a profit.
 Partnership. This is two or more people who carry on a business in
common, intending to make a profit.
 Share company. A limited company is a legal organisation set up
under the Companies. The owners are called the shareholders,
and it is run by directors, who are appointed by the
shareholders.
 Public sector bodies. Traditionally, these bodies have not existed to
make a profit, but to provide a service.
 Clubs and societies. Again the intention club is not to make a profit,
but to provide services for members.
 All of these organisations require some form of accounting
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 What are the reasons that Accounting is
undertaken by organisations?
 To record what money has come into the organisation
and what has gone out.
 To tell other people about the activities and
consequent profit or loss of the organisation during the
past year, or other period.
 To tell other people about the present financial state of
the organisation.
 To provide a basis for taxation.
 To provide a basis for planning future activities .
 To help managers make decisions about how to run
the organisation.

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 The
accounting
process

Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities  and
with the results of
their decisions.

Actions
(decisions) Decision
makers
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 Accounting Information :

What is information?

 It is a stimuli that has meaning in some context for its

user.
 When it is entered into and stored in a computer, it is
generally referred to as data.
 The output data can again be perceived as
information.
Thus, the first objective of accounting is to provide
information that is useful for decision making
purpose.

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 Con,t........

 To make Economic Decision based on

accounting information, decision makers
need to understand;
A. The nature of economic activities that
accounting information describes.

B. The assumptions and measurement

techniques involved in developing
accounting information.

C. The information that is most relevant for

making various type of decisions. 1-9
 Con,t
 Broadly speaking Accounting Information can be
placed into one of three categories;

 Financial Accounting Information that is primarily used

by External Parties.

 Managerial Accounting Information is used by persons

within the organization to help manage and control
business processes.

 Tax information is used to help organizations complete

obligations to report to the Tax authorities and other
regulatory agencies. 1-10
 Accounting Information
System
 AIS is methods, procedures, and standards
followed in accumulating, classifying,
recording, and reporting business events and
transactions.
 It is a system of collection, storage and
processing of financial and accounting data
that is used by decision makers.
 Accounting system includes the formal
records and original source data.
 The information should meet the needs of
users of information.
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 Basic Functions of an
Accounting System
 Interpret  Classify
and record similar
business transactions
transactions. into useful  Summarize
reports. and
communicate
information to
decision
makers.

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 The Three Basic Functions
Performed by an AIS
1 To collect and store data about the
organization’s business activities and
transactions efficiently and effectively: (Record &
interpret the effect of business transactions)
 Capture transaction data on source documents.
 Record transaction data in journals, which present
a chronological record of what occurred.
 Post data from journals to ledgers, which sort data
by account type.

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2. Classify the effects of similar transactions in a
manner that permits determination of the
various totals and subtotals useful to
management and used in accounting reports

3. Summarize and communicate the information

contained in the system to decision makers
 In manual systems, this information is provided in
the form of reports that fall into two main
categories:
– financial statements
– managerial reports

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The Accounting information system

1) Income
Inputs Process Outputs 2)
Statement
Balance Sheet
3) Cash Flow

1. Accounts
2. Journal
3. General
Ledger
4. Trial Balance

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 The Process of Providing
Information
STAKEHOLDERS
Owners, Customers,
Identify
creditors,
1
managers,
stake-
employees government
holders.

Assess
stakeholders’
2 informational
needs.

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 The Process of Providing
Information

Design the
Record accounting
Accountin
economic
4 data about
business
g
Informatio 3 information
system to
n System meet
activities stakeholders
and events. ’ needs.

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 The Process of
Providing Information
STAKEHOLDERS
Owners, Customers,
managers, creditors,
employees government

Prepare

5 accounting
reports for
stakeholders.
Accounting
Information
System
 Financial Accounting
Information
 Financial accounting provides information
about the Financial Resources, Obligations
and Activities of an enterprises that is
intended for use primarily by external
decision makers.
 Mainly for External users

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 External Users of Accounting Information
 External users of accounting information are individuals and other
enterprises that have a financial interest in the reporting
enterprises, but they are not involved in the day to day operations
of that enterprise.
 External users of financial accounting information include the
following users with a direct & indirect Financial Interest
 Investors
They have direct interest
 Creditors
 Labor union
 Governmental Agencies.
They have indirect interest
 Suppliers
 Customers.
 General public, etc

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 Objectives of External Financial Reporting

 The accounting profession has identified certain

objectives of external reporting to guide its efforts to
refine and improve the reporting of information to
external decision makers.
 These general objectives are;
 to provide information that is useful in making
investment & credit decision.
 to provide information that is useful in assessing the
amount, timing & uncertainty of future cash flow.
 to provide information about the enterprise’s resources,
claims to those resources and how both the resources
and claims to resources change over time.

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The Primary Financial Statements

Balance Sheet
These statements are used
Income Statement to meet the objectives of
external financial reporting
Statement of Cash Flows

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These Financial
Statements are Lens to
View Business

Financial
Statements

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 Characteristics of Externally
Reported Information
Usefulness
Broader than
Enhanced
Financial
via
Statements
Explanation

Based on Historical in
General Purpose Nature
Assumption

Results from Inexact and

Approximate Measures

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 Management Accounting
Information
 Management accounting is the preparation
& use of accounting information to achieve
the organization's objectives by supporting
decision makers inside the organization.

 Internal decision makers are employed by

the organization

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Internal Users of Accounting Information
 Every internal employee of the organization
uses accounting information.
 Example of internal users of accounting
information system are
 Board of directors
 Chief executive officer (CEO)
 Chief finance officer (CFO)
 Business unit managers
 Plant managers
 Store managers
 Line supervisors etc

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 Objectives of Management Accounting
Information

 It helps the organization to achieve its mission

and goals
 It helps to assess both the past performance
and the future directions of the enterprise and
 It helps the decision making authority to
make decision; and to evaluate & make
reward for better performance

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Characteristics of Management
Accounting Information

Timeliness
Identify
Decision
Maker

Measures of
Efficiency and Oriented
Effectiveness Toward
Future

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 INTEGRITY OF ACCOUNTING INFORMATION

 In order for individuals to rely on the financial

information for making important financial decisions, the
information itself must have integrity:
 it must be complete, factual and without bias.

 Accounting information integrity - integrity refers to the

following qualities: Complete, unbroken, unimpaired,
honest, and sincere

 It enables investors and creditors to rely on

financial accounting information without fear
 Helps the management to be sure that
internally generated information is free from
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 Integrity of Accounting information
is enhanced in three primary ways
 First certain Institutional Features add significantly to
the integrity of accounting information.
 These features like -Standards for the preparation of
accounting information, an Internal Control Structure and
Audits of Financial Statements
GAAP, IFRS
Financial Accounting Standards Board
Securities and Exchange Commission
Internal Control Structure
Audits

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 Second, several Professional Accounting
Organizations play unique roles in adding to
the integrity of accounting information.
Association/ Institute of Certified Public
Accountants

Association/ Institute of Management

Accountants

Association/ Institute of Internal Auditors

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 Finally, and perhaps most important, is the
personnel competence, judgment and ethical
behavior of professional accountants.
 Competence, Judgment and Ethical Behavior
 Certified Public Accountants (CPAs)
 Certificate in Management Accounting (CMA)
 Certificate in Internal Auditing (CIA)
 Code of Professional Conduct

 These three elements of the accounting

profession come together to ensure that users
of accounting information can rely on the
information to be fair representation of what it
asserts to represent.
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END OF THE CHAPTER

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