Introduction to accounting
n this opening chapter we begin by considering the role of accounting. We shall see that it can be a valuable tool for decision-making. We shall identify the main users of accounting and financial information and discuss the ways in which this information can improve the quality of decisions that those users make. We shall then go on to consider the particular role of financial accounting and the differences between financial and management accounting. Since this book is concerned with accounting and financial decision making for private-sector businesses, we shall also examine the main forms of business enterprise and consider what are likely to be the key objectives of a business.
When you have completed this chapter, you should be able to: ●
explain the nature and roles of accounting;
identify the main users of financial information and discuss their needs;
distinguish between financial and management accounting;
explain the purpose of a business and describe how businesses are organised and structured.
INTRODUCTION TO ACCOUNTING
What is accounting?
Accounting is concerned with collecting, analysing and communicating ﬁnancial information. The purpose is to help people who use this information to make more informed decisions. If the ﬁnancial information that is communicated is not capable of improving the quality of decisions made, there would be no point in producing it. Sometimes the impression is given that the purpose of accounting is simply to prepare ﬁnancial reports on a regular basis. While it is true that accountants undertake this kind of work, it does not represent an end in itself. The ultimate purpose of the accountant’s work is to give people better ﬁnancial information on which to base their decisions. This decision-making perspective of accounting ﬁts in with the theme of this book and shapes the way in which we deal with each topic.
Who are the users of accounting information?
For accounting information to be useful, the accountant must be clear for whom the information is being prepared and for what purpose the information will be used. There are likely to be various groups of people (known as ‘user groups’) with an interest in a particular organisation, in the sense of needing to make decisions about it. For the typical private-sector business, the more important of these groups are shown in Figure 1.1. Take a look at this ﬁgure and then try Activity 1.1.
Main users of financial information relating to a business
Several user groups have an interest in accounting information relating to a business. The majority of these are outside the business but, nevertheless, have a stake in it. This is not meant to be an exhaustive list of potential users; however, the groups identified are normally the most important.
W HO ARE THE USERS OF ACCOUNTING INFORMATION?
Ptarmigan Insurance plc (PI) is a large motor insurance business. Taking the user groups identified in Figure 1.1, suggest, for each group, the sorts of decisions likely to be made about PI and the factors to be taken into account when making these decisions. Your answer may be along the following lines:
Whether to take further motor policies with PI. This might involve an assessment of PI’s ability to continue in business and to meet their needs, particularly in respect of any insurance claims made. Competitors
How best to compete against PI or, perhaps, whether to leave the market on the grounds that it is not possible to compete profitably with PI. This might involve competitors using PI’s performance in various aspects as a ‘benchmark’ when evaluating their own performance. They might also try to assess PI’s financial strength and to identify significant changes that may signal PI’s future actions (for example, raising funds as a prelude...