1. Chapter Introduction

2. Purposes of Accounting Information

3. Uses of Earnings Information

4. Balance Sheet

5. Uses of balance Sheet

1. Chapter Introduction:

Accounting was developed as a system for reporting information to the owners including shareholders and other investors of the business. In the process of its evolution, accounting has branched off into two distinct directions- financial accounting & the second as managerial accounting. The financial accounting deals with information processing for external uses and managerial accounting deals with information processing for internal uses.

Accounting information generally encompass information processing for both internal & external uses.

2. Purposes of Accounting Information:

• Score Keeping: The score-keeping function is one the primary purposes of accounting information. It basically deals with the financial health of the enterprise. In other words, it answers: How are we doing? Good, bad or indifferent? Though it appears to be a simple question, a moment’s reflection will show that it is not that simple. It involves answering questions such as: What is doing good? What is doing bad? Is profit earned good? If so, how much? Is it that profit alone is not sufficient? Thus we can go on increasing the string of questions intending to further clarify the basic question. Thus, score keeping has two aspects, one is that of keeping record of actual data on performance – a constant process of measurement and valuation. The other aspect is concerned with putting the data in relation to predetermined standards. In order to answer the question whether the performance is good, bad or indifferent we have to have a constant process of comparison against some norms, standard or benchmarks. This is achieved by preparing a series or reports based on comparison of actual data with the planned data.
• Attention Directing Attention directing is nothing but the process of giving a signal to the user of accounting information about the need to take a decision. As such the accounting information supplied arouses the user’s attention to take decision. For example, a report from an accountant comparing the actual performance data against budget data is a score keeping record. In the hands of a decision-maker it is an attention directing information. This would enable him to immediately focus his attention on the deviations or variances from the budgets or the plants. A whole series of actions will be triggered by this, namely, evaluation or reasons for the deviations, remedial actions to be taken, modifications in the feedback for future and so on.
• Problem Solving: The problem solving function of accounting information involves provisions of such information, which enables the manager to find solutions to the problems. There are many problems, which accounting information could highlight and provide for their possible solutions, such as ‘make or buy decisions’ with respect to components, parts or products, ‘continue or drop decisions’ with respect to product lines, ‘leasing or acquisition decisions’ with respect to asserts etc. problem solving is therefore an important purpose of accounting information system.

3. Uses of Earnings Information

1. Accomplishments: Profit is an important indicator of the accomplishment of business. Other things remaining same, higher the profits greater are the accomplishments.
2. Appropriation Decision: An important question with which owners of a business are often confronted is How much money can be withdrawn without impairing its current level of operations? This question in fact is concerned with appropriation decision. A prudent management would not only like to maintain the capital or the present capability of the enterprise intact but would also plan for future growth. The maximum amount that the owners can withdraw from business for their personal expenses should be limited to the amount of earnings, which remain after making good all the resources that have been used in the process of generating those earnings.
3. Problem Identification Using Earning Data: From the earnings data several problem areas can be identified. This is best done by computing ratios i.e., by examining the relationship of one item of earnings statement with another item. This will be taken up in detail in a subsequent unit. At this stage it may only be stated that the lower earnings my be on account of excessive cost of inputs, excessive expenditure on overheads or low margin of profit on sales of excessive pilling of inventories or other unanticipated losses.
4. Determining the Market Value of a Firm: The economic value of the firm is determined by the size and reliability of the stream of earnings (cash flow) produced by the business.

4. Balance Sheet

After ascertaining the profit or loss of the business, the businessman wants to know the financial position of his business. For this purpose he prepares a statement of Assets and Liabilities, which is called Balance Sheet. It is prepared on a specified date because the figure shown in the Balance Sheet is true on that date only. The totals of the Assets and Liabilities should be equal. If it is not so, it means that there is some error.

The Committee on Terminology of American Institute of Certified Public Accountants has defined the balance sheet as, "a list of balances in the assets and liability accounts. This list depicts the position of assets and liabilities of a specific business at a specific point of time."

Objective of Balance Sheet:

The following are the objectives of preparing a balance sheet:

1. Principal Objective: The main purpose of preparing balance sheet is to know the financial position of the business at a particular date.
2. Subsidiary Objectives: Though the main aim is to know the exact financial position of the firm at a particular date, yet it serves other purpose as well.
   1. It gives information about the actual and real owner’s equity. Though the capital of the owner indicates owner’s equity, yet some other liabilities are to be accounted for against it also.
   2. It helps the firm to make provisions against possible future losses. A provision is made in the form of the Reserves.

The Balance Sheet as distinct from other financial statements has the following characteristics:

1. It is a statement and not an account. Although balance sheet is a part of the final accounts and prepared with the help of accounts, yet it is not an account but a statement.
2. It is always prepared on a particular date, and thus shows the position at that date and not for a period.
3. It has no debit side and credit side. Nor the words ‘To’ and ‘By’ are used before the names of the accounts shown therein. The headings are Liabilities and Assets.
4. It shows the financial position of the business concern.
5. It shows what the firm owes to others and also what others owe to the firm.
6. The totals of Liabilities and Assets always are equal.

5. Uses of balance Sheet

The balance sheet reflects the financial position of the enterprise. It provides useful information to various users. The balance sheet is described as a snapshot of the financial position of a business entity. The various groups interested in the company can draw useful inferences from an analysis of the information contained in the balance sheet. The balance sheet is also called the position statement.

1. It shows the financial position of the business concern.
2. It shows what the firm owes to others and also what others owe to the firm.
3. It shows the nature and value of the assets.
4. It also reflects the liquidity of a firm.