Accounting Environment Essay Example for Free

score Environment Essay learning Outcomes At the end of this chapter the students should be able to ?Explain the meaning and purpose of news report ?Describe the parting of bill as a schooling system ? Describe why account statement is considered as the verbiage of trade ? Assess the impact of external milieual factors on business relationship Introduction Accounting has evolved and emerged as most other fields of human activity in response to the social and frugal take of society.Today be is moving away from its traditional procedural base, encompassing come in keeping and relate activities towards the adoption of a role which emphasizes its social importance. In this context, this introductory chapter of the course manual deals with the definition of score, drop of report as an information system and the dustup of business, use uprs of score information and the impact of external environment on invoice. Definition of Accounting The question what is mea nt by accounting has not been answered precisely. Instead on that point be many definitions on accounting.Some of these definitions be considered in this section to identify the purpose and tends of accounting. The Committee on Terminology of the American Institute of Certified habitual Accountants (AICPA) formulated the compriseers definition on accounting in 1941. Accounting is the art of recording, classifying and summarizing in a significant manner and in shapes of money, minutes and events which argon, in part at least, of a fiscal character, and interpreting the results thereof. This definition of AICPA, USA has been quoted for many years. However, it defines accounting only from the point of view of what it does.Hence, it does not clearly establish the purpose of accounting. On the other hand, the following definition provided by the American Accounting Association (AAA) in 1961 emphasizes the broader perspective of accounting. This definition focuses on accounting as an aid to decision-making. Accounting is the process of identifying, measuring and communicating economic information to permit intercommunicate judgements and decisions by users of the information. In 1970, AICPA of USA provided the following definition on accounting with reference to the concept of information.The depot decimal information used in this definition is wider in scope than financial or economic information used in previous definitions. Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic activities that is intended to be recyclable in making economic decisions. Both definitions of AAA and AICPA say that accounting is considered not merely with record keeping. Instead it involves with a whole range of activities. These dickens definitions emphasize on using accounting information for decision making purposes.Both internal parties of an placement (e. g. managers) and extracurricular parties (e. g. owners, creditors, government) use accounting information in making decisions that affect the organization. Although these definitions have looked at accounting from different perspectives, they have been able to set the term of accounting. They have established the nature of accounting and the purpose for which it is used. Hence, based on these definitions, it can be give tongue to that accounting is primarily pertain with the provision of information to unlike stakeholders of an organization to be used in decision making.Accounting as an Information System AAA definition on accounting implies two phases (1) identifying and measuring economic information and (2) communicating economic information to users (stakeholders of an organisation) for decision making purposes. These two phases show that accounting acts as an information system in an organisation. The accounting process involves recoding and processing of proceedings and events of an entity that had occu rred during a specific period of time, and communicating the information relevant to processed transactions and events to aid decision-making of various users of accounting information.As an information system, accounting links an information source or transmitter (prepargonr/s of information), a channel of communication (financial and other statements/reports) and a set of receivers (users of information/stakeholders of an organization). The Figure 1 shows how accounting functions as an information system in business and economic decisions. In the accounting system, transactions and events be the input and the statements of reports given to decision-makers ar the output. Figure 1 Accounting as an Information System in Business and Economic DecisionsData Source Lal, J. (2005), Corporate Financial Reporting conjecture and Practice, second edition, Taxmann allied go (Pvt) Ltd, New Delhi. Accounting as the Language of Business Accounting is often called the language of business be cause it is considered as the main mean of communicating information about a business. This reference to accounting as the language of business is observed by Ijiri (1975) as follows As the language of business, accounting has many things in common with other languages.The various business activities of a firm are reported in accounting statements using accounting language, just as reported news events are reported in newspapers, in the English Language. To express an event in accounting or in English we must follow certain rules. Without following certain rules diligently, not only does one run the risk of being misunderstand but also risks a penalty for misinterpretation, lying or perjury. Comparability of statements is essential to the effective surgical procedure of a language whether it is in English or in Accounting.At the same time, language has to be flexible to adapt to a changing environment. A language broadly has two components symbols and rules. In accounting too, the se two components are available. In accounting, numerals and words, and debits and credits are accepted symbols and they are unique to the accounting discipline. The rules in accounting refer to the general set of procedures followed in creating financial information for an entity. Anthony and Reece (1991) draw a collimate betwixt accounting and language as follows. Accounting resembles a language in that some of its rules are definite whereas others are not.Accountants differ as to how a given event should be reported, just as grammarians differ as to many matters of sentence structure, punctuation and choice of words. Nevertheless, just as many practices are clearly poor English (language), many practices are definitely poor accounting. Languages evolve and change in response to the changing needs of society, and so does accounting. Users of Accounting Information There is an array of users (or stakeholders) who make use of accounting information for decision making. These user groups include present and otential investors, managers, employees, lenders, suppliers, customers, analysts, media, government, and the general public. However, with the broadening of the accountability of organizations, they are accountable to a large group of stakeholders, some of them not clearly known or place by the organizations. These users can be broadly categorized as internal and external users of accounting information. The term internal users refers to parties in spite of appearance an organization that make decisions directly affecting its internal operations and this category usually includes managers and employees of an entity.All other users can be grouped under the term external users, which refer to parties outside the organization that make decisions concerning their relationship to the organization. These two major classifications of users have led to a distinction between two main areas of accounting financial accounting and management accounting. The primar y quill concern of financial accounting is to provide information to external user groups. On the other hand, the management accounting is primarily concerned with the provision of information to internal user groups. These users have diverse information needs.However, among these diverse needs too, there are common information needs. The financial statements of an entity that provide information about its financial performance, financial position, and changes in financial position address these information needs common to all users. As these financial statements are prepared to meet the information needs of a cross-section of users, they are known as common-purpose (general-purpose) financial statements. However, these financial statements do not provide all the information that users need to make decisions since they largely give the financial effects of past transactions and events.The responsibility to prepare and present financial statements lies with the management of an enti ty. As general-purpose financial statements meet the information needs of users who are unable to command the preparation of financial reports of an entity, the government has imposed regulations to govern these financial statements. These regulations are intended to protect the public interest. External environmental Factors influencing Accounting The pace and change in external environmental factors have a profound watch on business organizations and the way in which they are managed.These factors could be social, economic, political, legal or technological. Accounting, as the language of business and its information system is also affected by these changes. The changing conditions in the external environment have confronted accounting with a number of challenges that should be recognized, accepted and addressed to ensure its relevance and usefulness. This has make accounting to change and grow over the years to meet social requirements and to guide business and labor requireme nts. Thus, understanding accounting requires understanding the environment within which accounting operates and which it is intended to reflect.The society has been subjected to political, social, economic and technological change. These changes have resulted in globalization, the rise of informed and selective customers, the development of information technology and etc. These changes in the external environment factors are reflected in business organizations through the shift in business types and be profiles, increase in strategic decision making and greater emphasis on survival. The changing conditions within business organizations lead accounting to change in order to meet the new requirements resulted from these changes.The areas requiring changes in accounting include selection of data, information processing, dissemination of information, role of accounting standards, assumptions and perspectives of accounting, and uses and impact of accounting information. Thus, todays rap idly changing environment is forcing accounting to reassess its role and function both within the organization and society. Although challenges imposed by different environmental factors on accounting could be discussed separately, they should be viewed from a holistic perspective.This is because the power of potential improvement lies in the cohesion of the changes rather than in individual items. The changing conditions in the business environment will shape the future for accounting. The environment within which business and accounting function operate has become increasing complex. One of its characteristic features is that many social, economic, political, legal and technological influences that create unbroken change in that environment and these in turn impact on accounting and its product, accounting information.However, it is sometimes criticized that accounting has not been able to keep pace with this changing conditions in the external environment. Summary This chapter p rovides an overview of accounting based on its nature and purpose, users of accounting information and impact of external environment on accounting. The primary objective of accounting is to provide information that can be used by the stakeholders of an organization (users of accounting information) in making their decisions. These decisions could have a bearing on the resource allocation process in the country and thereby on the economic growth and development of the country.However, the role and functions of accounting cannot be considered in isolation from the social-political-economic context within which it is operating. The rapidly changing external environment is posing many challenges to accounting and it needs to adapt to these changing conditions. This requires a continual process of renewal and improvement in accounting. References American Accounting Association (1966), A Statement of Basic Accounting Theory, AAA. American Institute of Certified Public Accountants (AICPA ) (1941), Review and Resume, Accounting Terminology Bulletin, No. . American Institute of Certified Public Accountants (AICPA) (1970), Basic Concepts and Accounting Principles underlying Financial Statements of Business Enterprises, Accounting Principles Board Statement No. 4, Anthony, R. N. and Reece, J. S. (1991), Accounting Principles, Richard D Irwin. Ijiri, Y. (1975), Theory of Accounting Measurement, Research Report, No. 10, AAA. Lal, J. (2005), Corporate Financial Reporting Theory and Practice, second edition, Taxmann Allied Services (Pvt) Ltd, New Delhi.