Introduction

The study of accounting

From the outside, accounting can appear to be a purely practical subject. It

would be very easy to focus on just the applications of techniques and

procedures. But accounting is more than just a set of calculations; unless

we can understand and interpret the figures we produce, the calculations

are pointless!

Accounting provides information for a wide variety of different users and

purposes, and its practices can only be properly understood and assessed in

relation to the economic and social environment in which they are applied.

Therefore there are four aspects to this subject:

1. Techniques for recording, calculation, classification and reporting of

accounting information.

2. The legal and institutional background associated with accounting

information.

3. The economic and administrative problems which the information

is required to solve.

4. The interpretation of reports prepared using 1 in the light of 2 and 3.

The accounting information referred to in 1 need not be financial, although

for our purposes in this unit it will almost always be.

The problems referred to in 3 are largely concerned with the planning of,

and control over, the use of economic resources. They are also concerned

with the measurement of income and of various kinds of value changes.

In order to properly interpret accounting information as in 4, and apply it

to the problems in 3, we need to understand the theory and principles

which underlie the techniques in 1.

The study of accounting is traditionally divided into two parts according to

the types of users of the accounting information. Financial accounting is

primarily concerned with the needs of users outside the business (or other

organisation). Therefore it relates to the external control and management

of resources (for example, by shareholders of the company in which they

have invested their funds, or by banks making loans). A key part of

financial accounting is reporting the performance and position of the

business to these external users, via the financial statements. The form

and content of financial statements is usually highly regulated. In contrast,

management accounting is concerned with the needs of users inside the

business. Therefore it relates to the internal control and management of

resources (for example, by the directors, management or employees of a

company). Management accounting statements may be more detailed than

those prepared for external users, and do not normally need to meet any

legal requirements.