Accounting Principle

ACCOUNTING IN ACTION

Definition of Accounting:

“Accounting is a services activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is to be useful in making economic decisions, in making reasoned choices among alternative courses of action.” ---- AICPA (1970).

Accounting is defined as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” --- AAA (1966).

Objectives of Accounting:

1. Making decisions concerning the use of limited resources, including the identification of crucial decision areas and determination of objectives and goals.

2. Effectively directing and controlling an organization’s human and material resources.

3. Maintaining and reporting on the custodianship of resources.

4. Facilitating social functions and controls (with respect to taxation, detection and protection of frauds, government control on public utility services, government incentives for encouraging trade and commerce, statistics on economic activities, et.).

Scope of Accounting:

1. Data Creation and Collection: Historic and Predictive

2. Data Recording using Accounting Methods (GAAP) and Data Processing (Manual, Mechanical and Electronic)

3. Data Evaluation that includes:

(a) Budgetary Control including Standard Costing and Variance Analysis

(b) Performance Analysis

(c) Cash Flow Analysis

(d) Analysis and Interpretation of Accounting Information (for external and internal decision makers)

(e) Auditing

4. Data Reporting to internal management (according to their demand) and external stakeholders (financial statements and notes accompanying those statements)

5. Accounting Theory in the heart of the above.

Information Needs of the Users of Financial Statements

According to paragraph 9 of the Framework for the Preparation and Presentation of Financial Statements of the IASB (International Accounting Standards Board), the users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs of information. These needs include the following:

(a) Investors: The providers of risk capital and their advisers are concerned with the risk inherent