Study Accountancy

There are a number of different types of users of financial information:

• Shareholders: Shareholders want to know how effectively the directors are performing their stewardship function, and will use financial information as the basis of decsions to buy or sell shares.
• The loan-creditor group (existing and potential debenture and loan stock holders, and providers of short-term funds): The loan-creditor group want to ensure that interest payments will be made promptly and that capital repayments will be made as agreed. Debentute and loan stock holders will want to know how easily they may dispose of their debenture or loan stocks should they so wish.
• Employee groups (existing, past and potential employees of the organisation, along with trade unions whose employees are members of the organisation): Past employees will primarily be concerned with the security of their pensions. Present employees will be concerned with whether the company can keep operating, continue to pay acceptable wages and maintain pensions. They may also want to ensure they are getting fair compensation for profits accruing as a result of their efforts. Potential employees may be trying to decide if the company is worth working for. Trade unions may use financial statements in wage and pension negatiations.
• Bankers: If a bank has not given a loan or overdraft to an organisation then it will have no great need to see the financial statements. If money is owed to a bank then that bank will want to ensure payments of interest will be made when due and that loans/overdraft will be repaid at the correct time.
• The business-contact group (trade creditors, suppliers, customers, business rivals, potential takeover bidders, and those interested in a merger): Trade creditors and suppliers will want to know if they will continue to be paid, and/or the prospects for future profitable association with the organisation. Customers want to know if a company is a secure source of supply. Business rivals will want to assess the comparative position. Potential takeover bidders and those interested in a merger would want to assess the desirability of such a move.
• The analyst/advisor group: This group will need information for their client or readers. Financial journalists need information for readers. Stockbrokers need information to advise investors. Credit agencies want information so they can advise present and possible suppliers to the company of its creditworthiness.
• Inland Revenue: Need financial statements to assess the tax payable.
• Other official agencies: Organisations concerned with supervision of industry and commerce may need the information for their purposes.
• Management: Vitally concerned with published (as opposed to internal) financial statements and the effects they may have.
• The public: Various groups with varying needs e.g. ratepayers, taxpayers, political parties, pressure groups and consumers.

In the UK, the Accounting Standards Board has prepared a Statement of Principles that sets out what information is considered useful for making financial decisions. This information can be categorised as follows:

• Primary Statements: statements of financial performance; statement of financial position; cash flow statement.
• Notes to financial statements: accounting policies; analysis of figures in primary statements; information about any uncertainties affecting the financial position.
• Additional information: operating and financial review statement; chairman’s statement; directors’ report; historical summaries; non-accounting / non-financial information.
• Other methods of reporting: letters to shareholders; press releases; internet or other media activities.
• Miscellaneous: analysts’ reports; economic statistics; news articles.

Only the first two items in the list are relevant to Financial Accounting.

A simple definition of an accountant might be a person in a role responsible for the accounting function of an organisation. There is no clear line to indicate when someone ceases to be a clerk or bookkeeper and should instead be referred to as an accountant.

Some examples of the type of work done by accountants are:

• Control over cash or bank balances.
• Ensuring that sufficient funds are available to pay bills as they fall due.
• Maintenance of financial transaction records.
• Preparation of periodic financial statements.

The above items are covered within the Financial Accounting section of this site. The following will be covered elsewhere:

• Preparation of budgets and comparisons of budgets against actual figures.
• Calculating the expected cost to produce an item.
• Calculating whether investments are financially justified.
• Minimising taxation liabilities.

Accounting records have been kept by societies going back thousands of years. The earliest known reference to double entry bookkeeping date from 1494 and remain in use today. More modern accounting techniques were developed during the Industrial Revolution, when larger concentrations of production began to emerge, especially within the textile and engineering industries.

The greater concentrations of capital required to run these larger organisations led to changes in the way companies were organised. The concept of limited liability was introduced in the 1840s, and was achieved by the establishment in company law of limited liability companies. Prior to this, a Royal Charter was required to set up a company. Examples include the East India Company.

Limited liability allowed investors to invest in a business with the guarantee that they could lost only the amount of money they had invested, rather than all of their assets. This allowed companies to raise capital from investors who were not interested in running the business on a day-to-day basis. Instead, the investors delegated their responsibility to a board of directors who were required to demonstrate their stewardship of the investors’ assets by preparing annual statements.

We use the term stakeholder to describe those interested parties who have a stake in the success or failure of a business. There are a wide variety of stakeholders and the information produced by the financial accounting function must be sufficient for all their varied purposes.

There are basically three functions of accounting: to record, analyse and summarise financial data. These basic functions are achieved through double entry bookkeeping, which is usually done using computerised systems. However, effectively communicating this information to stakeholders usually requires the services of a qualified accountant.