Introduction to Accounting
The nature and purpose of accounting
1. The purpose of accounting is to provide economic information which permits users of that information to make informed judgments and decisions. Users of economic information require this knowledge to help them decide how best to allocate available resources. As a rule, resources are generally scarce in relation to needs, and so users rely on accounting reports to ensure the efficient and effective allocation of suppliers.
You can see that, essentially, accounting is a form of service. By measuring economic events and presenting this information to users, accounting acts as a valuable aid to economic decision- making.
For accounting to serve its intended purpose, it is necessary to establish clearly who the major users of financial information are and what their needs are.
As is known, in the world of business it is possible to classify users of accounting information into major groups. Users within each group are considered to have very similar, or the same, information needs.
Some of the major users of accounting information are: 1) owners of business, 2) lenders of money, such as banks, 3)suppliers of goods and services, 4) managers of businesses, 5) customers of a business, 6) employees, 7) governments, 8) the public, 9) competitors.
2. Owners.Owners normally invest in business in order to increase their wealth. The major decision confronting owners and potential owners is whether or not to invest or retain an investment in a business. In order to make an investment decision of his nature owners need to assess the likely future returns from their investment. In addition, possible future risks must be considered. Owners and potential owners should be satisfied that the potential returns are adequate given the potential risks involved the business.
3. Lenders.Lenders can be conveniently divided into two groups: 1) shot-term lenders, and 2) long-term lenders.
Short-term lenders (i.e. those who lend money for up to 12-month period) will normally be concerned with the ‘liquidity’ of the business. The term ‘liquidity’ refers to the availability of cash , or near-cash items such as short-term investments. Shot-term lenders will normally view liquidity as an important indicator of the ability of the business to pay short-term obligations when they fall due.
Like owners, long-term lenders are concerned with the longer term prospects of the business. They are interested in likely future risks and rewards, and in the efficiency of management.
4. Suppliers of goods and services.Suppliers of goods and services need to ensure that a business is able to pay for the goods and services provided. They will, therefore, be concerned with the liquidity of a business. It is quite common to find that some suppliers provide a business with a substantial and continuous flow of
goods and services. For suppliers in this position, the long-term prospects of the business may be of great interest.
5. Management.Managers exercise a day-to-day control of the business. In carrying out their duties they must make different kinds of economic decisions and will, therefore, require different kinds of accounting information.
6. Customers.Where customers regard a business as an important supplier of goods or services they will require information to satisfy themselves that business can be relied upon as a continuing source of supply. The current financial condition of the business and likely future performance and prospects will, therefore, be of interest.
7. Employees.Employees will rely on business for their livelihood and will often have a long-standing relationship with the business. Their concerns will be for security and prospects of employment and its financial rewards. Employees will require information concerning possible changes in employment levels, the condition of service and the ability of the business to meet pay demands. Information relating to the performance and prospects of individual units of the business will be useful in addition to information concerning the progress of the business overall.
8. Governments.Governments may require information concerning a business for different reasons. Governments use information on profits made in order to assess liability for taxation. In addition, information concerning financial condition of profits may be useful in assessing the effects of government policies or for deciding on the level of grants or subsidies to be provided.
Governments sometimes wish to regulate the activities of certain businesses. For example, there may be a policy to prevent the growth of monopolies in business and to encourage the spread of competition. Such a policy may be seen as being in the best interests of the consumer. Where anti-monopoly policies are being pursued, governments may take a keen interest in the sales and profits achieved by large businesses.
9. The public.Businesses operate within a community. The workforce will often be drawn from the community, and the businesses may use community-owned resources such as the roads. Members of the public may, therefore, wish to assess whether or not the business is a ‘good citizen’. To help make such an assessment it may be useful to receive information on such matters as: 1) employment policies, 2) environmental policies, 3) donations to community programmers.
10. Competitors.Competitors may take a keen interest in the financial condition and performance of a business for various reasons.
Firstly, a competitor may consider taking over the business. In this case, it will have a particular interest in such information as the sales and profits achieved and the value of resources held by the business. Secondly, a competitor may require information concerning performance of the business in order to make comparisons of relative efficiency. Finally, a competitor may seek information concerning a business in order to predict future strategies. For example, the building up of large cash balances by a business may indicate the possible threat of a take-over bid in the future.
VOCABULARY STUDY
1. purpose-цель
2. to provide-предоставлять, снабжать, обеспечивать
3. to permit –позволять, разрешать
4. judgment –оценка, суждение, решение;to make informed judgments and decisions – выносить информативно обоснованные суждения и решения
5. to require – требовать, приказывать; нуждаться (в чем-либо)
6. to allocate- распределять, относить (о затратах); allocation-распределение, отнесение (о затратах)
7. at(smth) disposal – (в чем-либо) распоряжении
8. scarce- скудный, недостаточный, редкий; scarcity-недостаток, нехватка
9. in relation(to smth) – в отношении (чего-либо к чему-либо)
10. accounting reports – бухгалтерские отчеты
11. to ensure -обеспечивать
12. essential -непременный, обязательный, необходимый; essentially- существенно, по существу
13. retain – сохранять, удерживать
14. lender -кредитор, ссудодатель;short-term lenders -краткосрочные кредиторы;long- term lenders –долгосрочные кредиторы
15. supplier -поставщик
16. obligation -обязательство
17. to fall due –наступать (о сроке платежа)
18. to exercise control –осуществлять контроль
19. performance –1)выполнение, исполнение; 2) работа, функционирование; 3) результат, показатель действий
20. relevance –значимость;relevant - значимый
21. verifiability -проверяемость
22. bias -отклонение, систематическая ошибка. погрешность
23. timeliness- своевременность
24. retrieval -поиск;information retrieval– поиск информации
25. filing system –система регистрации (подшивки) документов
26. ledger –бухгалтерский регистр, бухгалтерская книга
27. impartiality-беспристрастность.
Practice 1 Re-read the text to answer the following questions:
1. What kind of information permits users to make informed judgments and decisions?
2. Why do so many users are in need of accounting information?
3. Why does accounting act as a valuable aid to economic decision-making?
4. Why is it necessary for accounting to establish clearly the major users of its information?
5. How many major users of accounting information have been mentioned in the text?
6. What do the owners need accounting information for?
7. What are lenders’ information requirements?
8. What kind of accounting information do managers require?
9. In many ways long-term lenders have needs similar to those of the owners of a business. In what ways do you think their needs are similar?
10. Do you think that the information requirements of certain users should be given priority?
11. All the users of accounting information have one thing in common. What is it?
Practice 2 Which of users need accounting information:
1) to make investment decision?
2) to assess liability for taxation?
3) to make sure that a business is an important suppliers of goods and services?
4) to establish that the business is able to pay?
5) to control business activity?
6) to decide whether it makes sense to provide finance to a business?
7) to find out prospects of employment?