Page 61 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
Did u know? 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.

4.2 Preparation of Final Accounts

The profit and loss account and the balance sheet are, together popularly known as the final
accounts. The profit and loss account is prepared to show the financial results of a business and
the balance sheet is prepared to show the financial position. To calculate the accurate amount of
profit or loss, it is a must that there should be a recognisation of the revenues and expenditures.
If there is a wrong recognisation of expenses or revenues, results of the business will also be
wrong. Thus, the distinction between the capital and revenue items is very important.
There are two types of expenses and two types of incomes which are classified as:
1. Revenue expenditure/Revenue receipts
2. Capital expenditure/Capital receipts

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