Page 15 - CA_ELG_Volume I_ELG-Sample

Paper 1 Principles and Practices of Accounting Theoretical Framework 1.5

ƒ Classifying: Recorded data are being systematically analysed with a view to group
transactions and events of one nature in one place to make the information into usable
form. The book which contains classified information is known as “ledger”.

ƒ Summarising: The classified data is prepared and presented in such a way that it is
useful for internal as well as the external users of financial statements.

ƒ Analysing: It means methodical classification of the data given in the financial
statements. The financial statement should be in simplified form.

ƒ Interpreting: Interpreting the financial data is the final function of accounting.
The data is analysed and interpreted in a manner that will enable the users of
financial statement to make a meaningful judgement about the financial condition and
profitability of the business operations. The financial statement should explain three
fundamental questions:

a) What had happened?
b) Why it had happened?

c) What is likely to happen under specified conditions?

ƒ Communicating: It is concerned with dissemination of summarised, analysed and inter-
preted information to the users of financial statement so as to make rational decisions.
It is achieved through preparation and distribution of accounting reports, which also
includes additional information in the form of accounting ratios, graphs, diagrams, fund
flow statements, etc. apart from the usual profit and loss account and the balance sheet.

1.3.2 Using the Financial Information

ƒ Accounting is not only for proprietor, owner or management but also for investors,
lenders, employees, suppliers, customers, government and other agencies and the
public at large.
ƒ Accounting data should focus on economic substance rather than technical form.

ƒ Information should be relevant and material to a user’s decision.

ƒ Information should be unbiased.
ƒ Users of financial statement should be able to understand financial results vis-à-vis
should be able to assess its reliability and compare it with the past trend and for
finding alternative opportunities.

ƒ Internal users (owners or management) use accounting information to take valuable
decisions.

ƒ Financial statement presented to external users should contain key information
regarding assets, liabilities and capital which are summarised in a logical manner help-
ing them in decision-making.

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