The Need for Accounting
BE100 – Lecture 1
Lecture Outline
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•
•
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Types of business entities
The need for accounting
Definition of accounting
Differences between financial and
management accounting
• Why do we need financial statements?
• Users of financial information
2
Types of Business Entities
• Sole traders where one person owns a business
• Partnerships where two or more people form a
business
• Companies (legal entities separate from their
members or owners)
• Not-For-Profit Organisations (public sector,
charities, clubs, social enterprises)
3
Companies Limited by Shares
• Public limited companies (PLC)
– minimum authorised share capital £ 50,000
– shares are offered for sale to the general
public
– most, but not all, are listed
• Private companies (Ltd)
– not allowed to offer their shares for sale to the
general public
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The Need for Accounting
• To provide information about the performance and
position of organisations
• To communicate that information to people inside
and outside the organisation
• People outside the organisation do not have direct
access to information – this is the Agency problem
5
Agency Theory
• Relationship between the owner (principal)
and the manager (agent).
• There is an inherent conflict between the
interests of owners and managers. This
conflict is partly resolved by the managers
being required to provide information on a
regular basis to the owners so their decisions
and behaviour can be monitored and
assessed.
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Definition of Accounting
“The process of identifying,
measuring and communicating
economic information to permit
informed judgements and
decisions by users of the
information.”
American Accounting Association
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Two Branches of Accounting
Financial Accounting
provides information
to shareholders,
creditors and others
who are outside
the organisation
Management Accounting
provides information
for managers of an
organisation who
direct and control
its operations
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Differences Between Financial and
Management Accounting
Financial
Accounting
Management
Accounting
Main users
External users
Managers
Time focus
Historical perspective
Future emphasis
Verifiability
versus
relevance
Emphasis on
verifiability
Emphasis on
relevance for planning
and control
Precision versus Emphasis on precision Emphasis on
timeliness
timeliness
Subject
Focus is on
organisation as a
whole
Focus is on segments
or divisions of an
organisation
Requirements
Must follow
accounting standards
and other regulatory
No accounting
standards or
regulatory
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Financial Accounting
 In this module we are concerned with
financial accounting
 The product of financial accounting
are financial statements
10
Why do We Need Financial
Statements?
• To provide information about
the financial position, financial
performance and cash flows of
an entity that is useful to a wide
range of users in making
economic decisions
(International Accounting
Standards IAS1).
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Financial Statements
• IAS1 Presentation of Financial
Statements
– Statement of financial
position/Balance sheet
– Comprehensive income
statement/Income statement
– Statement of changes in equity
– Cash flow statement
– Notes to the accounts
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Users of financial information
Owners
Manager
s
Customers
Competito
rs
Employees
and their
representatives
Business
Lenders
Governme
nt
Community
Investme
Suppliers
representatives
nt
analysts
Figure 1.1 Main users of financial
information relating to a
business (Atrill & McLaney, 2013, p. 2)
General purpose or specific purpose
financial statements?
• Each user group has its specific information
needs.
• But there is a view that a general purpose
financial statement can be designed which is
useful to more than one user group.
• Owners and long-term lenders regarded as
primary users but all potential users are
interested in financial performance and financial
position of the reporting entity.
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Reading

Atrill & McLaney:

Chapter 1

Chapter 4 from page 112 to page
122
15
Next week’s class
• Multiple choice questions – will be made
available on Moodle.
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