2857 accounting for governmental and non profit organizations 203203 chapter 3

 Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements  Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies  The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements  Accounting systems are designed to meet the needs of the decisions makers who use the financial information  Every business has some sort of accounting system ◦ These accounting systems may be very complex or very simple, but the real value of any accounting system lies in the information that the system provides  Accounting information is useful to anyone who makes decisions that have economic results • Managers want to know if a new product will be profitable • Owners want to know which employees are productive • Investors want to know if a company is a good investment • Creditors want to know if they should extend credit, how much to extend, and for how long • Government regulators want to know if financial statements conform to requirements  Fundamental relationships in the decisionmaking process: Event Accountant’s analysis & recording Financial Statements Users  The major distinction between financial and management accounting is the users of the information ◦ Financial accounting serves external users ◦ Management accounting serves internal users, such as top executives, management, and administrators within organizations The primary questions about an organization’s success that decision makers want to know are: What is the financial picture of the organization on a given day? How well did the organization during a given period? Accountants answer these primary questions with three major financial statements  Balance Sheet - financial picture on a given day  Income Statement - performance over a given period  Statement of Cash Flows - performance over a given period  Annual report - a document prepared by management and distributed to current and potential investors to inform them about the company’s past performance and future prospects ◦ The annual report is one of the most common sources of financial information used by investors and managers  The annual report usually includes: ◦ a letter from corporate management ◦ a discussion and analysis of recent economic events by management ◦ footnotes that explain many elements of the financial statements in more detail ◦ the report of the independent auditors ◦ a statement of management’s responsibility for preparation of the financial statements ◦ other corporate information In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another The comparison of one accounting period with that of another is possible only when the convention of consistency is followed This principle implies that accounts must be honestly prepared and all material information must be disclosed therein The contents of Balance Sheet and Profit and Loss Account are prescribed by law These are designed to make disclosure of all material facts compulsory Financial statements are always drawn up on rather a conservative basis That is, showing a position better than what it is, not permitted It is also not proper to show a position worse than what it is In other words, secret reserves are not permitted • Keeping systematic records • Protecting properties of the business • Communicating the results • Meeting legal requirements The first function of accounting is to keep a systematic record of financial transactions, to post them to the ledger accounts and ultimately prepare final statements The second important function is to protect the property of the business The system accounting is designed in such a way that it protects its assets from an unjustified and unwarranted use The fourth accounting and is the to last meet function the of legal requirements under the Companies Act, Income Tax Act, Sales Tax Act and so on Recording transactions in subsidiary books Classifying data by posting from subsidiary books to the accounts Closing the books and preparation of final accounts • Accounts in the names of persons are known as “Personal Accounts” • Accounts in the names of assets are known as “Real Accounts” • Accounts in respect of expenses and incomes are known as “Nominal Accounts” ACCOUNTS PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS REAL ACCOUNTS NOMINAL ACCOUNTS Accounts in the name of persons are known as personal accounts Eg: Babu A/C, Babu & Co A/C, Outstanding Salaries A/C, etc These are accounts of assets or properties Assets may be tangible or intangible Real accounts are impersonal which are tangible or intangible in nature Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature These accounts are impersonal, but invisible and intangible Nominal accounts are related to those things which we can feel, but can not see and touch All “expenses and losses” and all “incomes and gains” fall in this category Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc Each accounts have two sides – the left side and the right side In accounting, the left side of an account is called the “Debit Side” and the right side of an account is called the “Credit Side” The entries made on the left side of an account is called a “Debit Entry” and the entries made on the right side of an account is called a “Credit Entry”  By: Munawar Hameed ... financial and management accounting is the users of the information ◦ Financial accounting serves external users ◦ Management accounting serves internal users, such as top executives, management, and. .. organizations, which state the financial position and performance and give the auditor’s report, director’s report and other information Investors and creditors are the external users having direct... liability side Accounting principles can be subdivided into two categories: • Accounting Concepts; and • Accounting Conventions Accounting principles can be subdivided into two categories: • Accounting