Chapter 1:
Introduction to accounting and finance
What are accounting and finance?
Accounting is concerned with collecting, analysing and communicating financial information. The
ultimate aim is to help using this information to make more informed decisions.
Finance (or financial management), like accounting, exists to help decision makers. It is concerned with
the ways in which funds for a business are raised and invested. In essence, a business exists to raise
funds from investors (owners and lenders) and then to use those funds to make investments in order
to create wealth.
Both accounting and finance are concerned with the financial aspects of decision making and there
are many overlaps and interconnections between the two areas.
Who are the users of accounting information?
The accountant must be clear for whom the information is being prepared and for what purpose it will
be used. These are the most important user groups:
Owners
Managers
Lenders
Suppliers
Investment analysts
Customers
Competitors
Employees and their representatives
Governments
Community representatives
Providing a service
Accounting can be seen as a service: the user groups are the clients and the accounting information
produced is the service. The value of this service can be judged according to whether the information
meets their needs.
Information must possess two fundamental qualities:
Relevance. Accounting information should make a difference, be capable of influencing user
decisions. It must help to predict future events or help to confirm past events, or both.
Accounting information must cross a threshold of materiality. An item of information should
be considered material, or significant, if its omission or misstatement could alter the decisions
that users make.
Faithful representation. It should represent what it is supposed to represent. The information
should be complete: it should reflect all of the information needed to understand what is being
portrayed. It should also be neutral, it should be presented and selected without bias. And it
should be free from error (≠ perfectly accurate).
Introduction to accounting and finance
What are accounting and finance?
Accounting is concerned with collecting, analysing and communicating financial information. The
ultimate aim is to help using this information to make more informed decisions.
Finance (or financial management), like accounting, exists to help decision makers. It is concerned with
the ways in which funds for a business are raised and invested. In essence, a business exists to raise
funds from investors (owners and lenders) and then to use those funds to make investments in order
to create wealth.
Both accounting and finance are concerned with the financial aspects of decision making and there
are many overlaps and interconnections between the two areas.
Who are the users of accounting information?
The accountant must be clear for whom the information is being prepared and for what purpose it will
be used. These are the most important user groups:
Owners
Managers
Lenders
Suppliers
Investment analysts
Customers
Competitors
Employees and their representatives
Governments
Community representatives
Providing a service
Accounting can be seen as a service: the user groups are the clients and the accounting information
produced is the service. The value of this service can be judged according to whether the information
meets their needs.
Information must possess two fundamental qualities:
Relevance. Accounting information should make a difference, be capable of influencing user
decisions. It must help to predict future events or help to confirm past events, or both.
Accounting information must cross a threshold of materiality. An item of information should
be considered material, or significant, if its omission or misstatement could alter the decisions
that users make.
Faithful representation. It should represent what it is supposed to represent. The information
should be complete: it should reflect all of the information needed to understand what is being
portrayed. It should also be neutral, it should be presented and selected without bias. And it
should be free from error (≠ perfectly accurate).
