Summary Notes 1.1 - Framework Of Accounting File

Purpose of Accounting Financial accounting is a system that involves recording, analysis and communication of financial information. The purpose of accounting is to provide financial information about the current operations and financial condition of a business to individuals, agencies and organizations. In other words, accounting is a system that is used by businesses to monitor their activities and report their performance. The overall objective of accounting is to provide information that can be used in making economic decisions. Users of Financial Information Persons outside of the business who have interest in the business, but are not involved in its day-to-day operation (external users), as well as, persons inside the organization who are involved in its day-to-day operations (internal users), use financial information. Some of the main users of financial information are: 1. Investors Investors (both existing and potential) need information concerning the safety and profitability of their investment and to decide whether a change of ownership interest is warranted. 2. Trade and Loan Creditors Both present and potential creditors of the business use financial information to help them in deciding whether or not it is safe to extend credit to the business. They need information about the profitability and stability of the enterprise. In other words, they are interested in the solvency of the business i.e. Can the business pay its debts when they fall due? 3. Statutory Agencies They need this information to assist them in evaluating tax returns for assessment purposes and to see whether there is compliance with government rules and regulations e.g. Income Tax Department and Registrar of Companies. 4. Employees and Trade Unions They use financial information to assist in the making of employment decisions and in negotiating contracts and benefits. 5. Financial Analysts Use financial information to evaluate the soundness of businesses for their clients who may wish to make investment decisions and for Stock Exchange purposes.