Page 12 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes various levels of management. Management information and reporting system is instituted
to give adequate feedback in terms of the delegated responsibility. Under this system,
units of an organization, under a specified authority in a person, are developed as
responsibility center and evaluated individually for their performance.

Accounting as Science or an Art

Accounting is both the science and art. Study of science is based on some principles and it is
systemized. It is a science because the business transactions are recorded on the basis of some
principles and journal of transaction, ledger posting, trial balance and preparation of final
statements are done in a sequence. Art is the creation of practical applications and rules for the
completion of any work. On the basis of it, accounting is an art as we do not only study principles
of accounting but also we learn to apply these principles in practice to record the business
transaction. Thus accounting is both science and art.

1.1.5 Users of Accounting Information

There are two types of persons interested in financial statements: (1) Internal users, and
(2) External users.
1. Internal Users: These are: (a) Shareholders, (b) Management, and (c) Trade unions
employees, etc.

(a) Shareholders are interested to know the welfare of the business. They can know the
operational results through such financial statements and the financial position of
the business.
(b) Management is interested to take important decisions relating to fixing up the selling
prices and making future policies.
(c) Trade unions and employees are interested to know the operational results because
their bonus etc. is dependent on the profit earned by the business. Financial statements
also help in their negotiations for wages/salaries.
2. External Users: The following are most important external users of financial statements:
(a) Investors: They are interested to know the earning capacity of business which can be
known through financial statements. They can also know the financial soundness of
the business through financial statements.
(b) Creditors, Lenders of Money etc.: The creditors and lenders of money etc. can also
know the financial soundness through financial statement. They have to see two
things (i) Regularity of income and (ii) solvency of the business so that their
investment is risk free.
(c) Government: Government is interested to formulate laws to regulate business
activities and also law relating to taxation etc. Financial statements help while
computing National Income statistics etc.
(d) Taxation authorities: Financial statements provide information relating to operational
results as well as financial position of the business. Tax authorities decide the amount
of tax as per financial statement. It is very useful to other taxation authorities such as
sales tax etc.
(e) Stock Exchanges are meant for dealing in share/securities. Purchase and sale of such
shares and securities are possible through stock exchanges which provide financial
information about each company which is listed with them.

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