Question

QUESTION FIVE

(a)      Explain any four characteristics of accounting.             [8 marks]

(b)      Discuss the users of accounting information.                [12 marks]

Answer 1

a) Characteristics of Accounting

There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria:

Understandability

This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities

Relevance

This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)

Consistency

This implies consistent treatment of similar items and application of accounting policies

Comparability

This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

Objectivity

This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest.

b) Users of accounting information

Users of accounting information are internal and external

External users are those individuals who take interest in the account information of an organization but they are not part of the organization’s administrative process.

External users have a direct or indirect interest in accounting information.

External users are creditors, investors, government, trading partners, regulatory agencies, international standardization agencies, journalists and internal users are owners, directors, managers, employees of the company.

Creditors

Creditors or lenders use the accounting information to find out the ability of the borrower to repay the loan, the number of assets and liabilities of the borrower, evidence of income, economic position, etc. before he or she lend the money to the economic entity.

Investors

Investors are the capital providers of a business.

Before investing, an investor sees the financial report for figuring out the possibilities of the business in the future. Financial information is important for an investor for making sure that the investment is secure.

Trading partners

Business needs business to do business, it is the truth.

Associate trading companies look at the financial information and decide to trade with the particular economic entity.

Government Regulatory Agencies

The financial information is vital for government regulatory agencies as it allows them to monitor the economy and market.

Internal users are that individual who runs, manages and operates the daily activities of the inside area of an organization.

1. Owners and Stockholders.
2. Directors,
3. Managers,
4. Officers.
5. Internal Departments.
6. Employees
7. Internal Auditor.

Managerial accounting identifies, measures, analyzes and communicates the financial information needed by management to plan, control, and evaluates a company’s operations for the internal users.