Introduction to Financial Accounting

CHAPTER 1: INTRODUCTION TO FINANCIAL ACCOUNTING 1.1 USE, PREPARATION AND CONCEPTS * Use: The information derived from financial accounting is used by managers, investors, bankers, financial analysts and accountants, helping them to learn how to use information effectively and to do their jobs better. This information is essential to accountants for the services they provide. * Preparation: to be effective users of accounting information, people need to know something about how and why the information is prepared. Accountants’ expertise is about the how and why. * Concepts: Users, accountants and accounting form a connected system. The demand for useful information shapes how financial accounting information is prepared. Tying it all together are the whys: the reasons it is used and prepared, the principles that lie behind it. The hows (preparation procedures and techniques), whys (concepts and principles) and uses (analysis and decisions) of financial accounting are all tied together.

1.2 FINANCIAL ACCOUNTING * Accounting: a process of identifying, measuring, and communicating economic information to allow the users of that information to make informed decisions. * Accounting systems are usually described as either financial accounting systems (periodic financial statements are provided to external decision makers e.g. investors, creditors, customers), or management accounting systems (information for planning and performance reports to internal decision makers e.g. manager of an organisation). * Financial accounting measures an enterprise’s performance over time, and its position at a point in time, in whatever currency is relevant to the enterprise; from small to large businesses, and other enterprises including local or national governmental bodies, charities, churches etc. * Financial statements (financial accounting’s reports) summarises measurements of financial performance and position in standards thought to be