Nature Of Accounting Information

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Nature of Accounting Information

Accounting information, (also called financial information) is the end result of accounting cycle which begins with the recording of business transactions and concludes with the production of summarized financial statements, namely, the balance sheet, the profit and loss account and statement of cash flows. The accounting cycle is of great help in analyzing the numerous business transactions by recording, classifying and summarizing them and preparing the financial transactions by recording, classifying and summarizing them and preparing the financial reports that present the summary results. These financial statements – the balance sheet income statement and statement of cash flows – become the basis of the accounting information. The nature of the accounting information is therefore related to the nature of the financial statements.
The balance sheet is essentially a list of assets and liabilities of an enterprise. The balance sheet provides accounting information about the financial position of and enterprise. The profit and loss account (or income statement) is a very important statement as it enables us to ascertain whether the business is profitable or not. Profit and loss account provides some of the basic accounting information for a rational decision to be made. An all-purpose income statement would provide financial information in respect of non-operating activities. The statement of cash flows which provides accounting in respect of cash flowing into the business and the cash flowing out of the business.

The nature and quantum of accounting information to be provided by the financial statements would largely depend on the type of business organization, the environmental influence and the strategic context.

(i)    Type of business organization:

 As is well known that the business may be operated in the form of a sole trader, a partnership firm or a joint stock company. The accounting information contained in these annual accounts has to be in the form of prescribed balance sheet and the rules relating to the preparation of the profit and loss account. The rules prescribe the maximum disclosure of accounting information to protect the interest of the investors, creditors and others who have some interest in the affairs of the company. The extent of accounting information also depends on the size of the organization. A small business organization may provide accounting information in respect of individual assets and liabilities in the balance sheet itself whereas in a larger and more complex organization, the assets and liabilities may be summarized under broad headings; otherwise the user will find it extremely difficult to get an overall picture.

(ii)    The environmental influence:

At the environmental level, the form and contents of the financial statements are influenced by the Government through various legislative enactments. There are different rules about the presentation of the accounting information depending on whether the organization is a trust. There are other rules laid by professional accounting bodies which are known as Accounting Standards.

(iii)    The strategic consideration:

It means that the activity in which the organization is engaged may have considerable effect on the nature of the accounting information. There is always a temptation to try to enhance the value of the asset by revaluing the land and building before applying for a loan. The income figure may be manipulated to attract inflow of funds.

(iv)    Users of accounts:

The nature of accounting information is also influenced by the requirements of the different users of information who may be placed into two broad categories: (a) those inside the enterprise i.e., mangers or owners and (b) those outside the enterprise i.e., investors, creditors, banks, the government, labor unions, etc. The mangers or owners need information for planning, control, and decision-making. This will ensure the regular flow of cash. The preparation of frequent reports for the internal users is related to area of accounting called management accounting which focuses on the accounting information needed for planning, implementation the plans and controlling information. It may be concluded that the nature of the accounting information is basically related to the nature of the financial statements. But the needs of the users always have an impact on the type of information to be provided.

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