What is accounting information? Who are the users of accounting information? Explain. (b) Define source of…

(a)

Accounting information is the financial information produced by the accounting process, which identifies, measures, records, classifies, summarizes and interprets business transactions. It is presented through financial statements such as the income statement, balance sheet and cash flow statement. It is designed to meet the common needs of decision makers, such as deciding whether to buy, hold or sell shares, whether to lend money, or how much tax to charge. This is why accounting is called the language of business. Users of accounting information fall into two groups.

Internal users are the various levels of management, who need the information for planning, control and decision making:

1. Board of Directors (BOD): elected at the AGM, the BOD needs accounting information to formulate short-run and long-run plans and policies.
2. Managers: managers implement the BOD’s policies and need reliable information to use resources effectively and judge profitability and growth.
3. Accountants and others: accountants record and process transactions, while consultants and legal advisors use the information in their work.

External users are parties outside the organization with a direct or indirect interest in it:

1. Investors and shareholders: they want to know the return and risk of their investment, to decide whether to buy, hold or sell shares and whether regular dividends can be paid.
2. Lenders: banks, financial institutions and debenture holders judge whether the loan and interest can be repaid on time, what security to ask for and what interest rate to charge.
3. Suppliers and trade creditors: they decide whether to give goods on credit, for how long, and how great the risk of bad debts is.
4. Employees and trade unions: they look at stability and profitability to bargain for wages, bonuses and job security.
5. Customers, government, tax authorities and the public:
   • customers check whether the company will continue in business and honour its warranties;
   • the government and regulators, such as NRB, SEBON and NEPSE, check compliance and proper disclosure;
   • tax authorities, such as the Inland Revenue Department, assess income tax and VAT;
   • the public checks the company’s social responsibility, product safety and pollution control.

Thus, accounting information serves both internal and external users in making sound economic decisions.

(b)

Source documents are the written evidence of business transactions. They provide the evidence an accounting system needs to record transactions, and they also serve as proof of the terms and conditions agreed between the business and the other party. Examples include invoices, cheques, debit and credit notes, cash receipts, bank deposit slips and salary sheets.

The objectives of source documents are:

1. Basis for recording: they serve as the basis for recording transactions in the journal and books of account.
2. Validation: they confirm that a transaction actually took place.
3. Legal evidence: they serve as evidence in a court of law in case of a dispute.
4. Basis for taxation: tax authorities use them to assess tax liability, such as VAT bills.
5. Product or service information: they give details of the goods or services involved, such as quantity, price and discount.
6. Basis for adjustment: they act as the basis for adjusting transactions, for example a credit note for returned goods.
7. Future reference: they are kept as proof of recording and for future reference and audit.