Accounting is one of the most fundamental disciplines of human life. It is the blend of science and art involving systematic mathematical skills along with the ability to present the facts easily. Information is the structural, descriptive, numerical and pictorial data presented in an easily understandable format for any reference. As the data has grown into a science, the bulk of data all the information that we see on the accounting books today is not completely valid and reliable. To put things in a useful way, an accountant (one who takes care of accounts), needs to judge all the entries by comparing them with a lot of facts and figures. This section deals with what is accounting information and how it's useful for different users and the qualities of accounting information.
Uses of Accounting Information
A valid accounting information can be used for decision-making, writing goals, forecasting loss and profit, taxation, etc. The accounting data helps many users like business owners, top-level management, potential investors, creditors, lenders, public, employees, government, etc. Different users may require different accounting information and it is important to understand the qualitative characteristics of accounting information as explained below.
Qualitative Characteristics of Accounting Information
Reliability :According to this principle, accounting information has to provide trustworthy data so that the uses must be able to use it with certainty and confidence. Reliable information is the one that should be genuine, error-free, and should describe what it is supposed to be.
Relevance : The given information is said to be relevant when it is very straight, accurate and pinpoint the problems in the system with ease. Reliable information must help its users in prediction and feedback of the given issue. One should feel that, by looking at the data, he or she can rely upon the information being written.
Understandability: It means when the decision-makers are able to interpret the accounting information in the same sense as it is prepared and conveyed to them. In other words, the document must present clear, legible, and straight forward facts. A message is said to be effectively communicated when it is interpreted by the receiver of the message in the same sense in which the sender has sent. In general, understandability of a data represent the fact that different people mean it in the same way.
Comparability : Which means when the users of the reports are able to compare various aspects of the data against different time periods or to the different organizations by taking similar documents of that enterprise. The available document must be representative, readable, measurable, precise and has a definite format so that users will not have confusions.
Timeliness: Any accounting information must be handy, easy and quick to store, retrieve and process. Accounting information should be made available as and when necessary without delay.
6. Economy of use or cost-benefit: Economy refers to those methods that saves time, energy, money and other material resources pertaining to the making, storing, transferring and disseminating the accounting information. A special emphasis must be placed to achieve more profit with the least consumption of resources for record-keeping.
7. Verifiability: Every transaction should have a valid evidence in the form of written communication through bills, journals, books, receipts, invoices etc. In addition, the persons other than the accountants themselves shall also be able to check or validate the accuracy of records.
8. Neutrality: Accounting information is balanced ; in the sense, it should not favour one group over another nor it over-emphasize the personal accounting assumptions that result in conflicts within the system.
9. Completeness: There should be provision of more valid evide3nces Completeness means that all material facts that are necessary to creditors or other users for assessing the financial position and operating results of the organization has been disclosed in the financial statements.
Various Users Of Accounting
Accounting information is the language of business necessitating information for both the internal and external players.
Internal users are Chief Executive officers, Financial Officers, Board of presidents like Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, etc.
External users include investors, and shareholders, Creditors (Banks and other Financial Institutions, Debenture holders and other Lenders), Tax Authorities, Regulatory Agencies (Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India, Labour Unions, Trade Associations, Stock Exchange and Customers, etc.
Accounting Information System (AIS)
An accounting information system is the aggregate of various actions in an accounting firm. It involves the collection, storage, organization, and processing of financial and accounting data for its users. It helps in reporting the valid information to various investors, auditors, management, creditors, tax authorities and to the government if necessary. An AIS is usually of a combination of traditional accounting practices, such as the use of Generally Accepted Accounting Principles (GAAP), along with the modern information technology resources such as computerized accounting systems.
- Describe the basic characteristics of a good accounting information.
- What do you mean by the users of accounting? Explain the uses of accounting information for different users.
- What are external and internal users of accounting?