- It means determining what transactions to record, i.e., to identity events which are to be recorded.
- It involves observing activities and selecting those events that are of considered financial character and relate to the organisation.
- The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account.
- For example, the value of human resources, changes in managerial policies or appointment of personnel are important but none of these are recorded in books of account.
- However, when a company makes a sale or purchase, whether on cash or credit, or pays salary it is recorded in the books of account.
- It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. rupees and paise as a measuring unit.
- If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts.
- That is why important items like the appointment of a new managing director, signing of
contracts or changes in personnel are not shown in the books of accounts.
- Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order.
- Recording is done in a manner that the necessary financial information is summarised as per well established practice and is made available as and when required.
- The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users.
- The information is regularly communicated through accounting reports.
- These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary decisions from time to time.
- The accounting information system should be designed in such a way that the right information is communicated to the right person at the right time.
- Reports can be daily, weekly, monthly, or quarterly, depending upon the needs of the users.
- An important element in the communication process is the accountant’s ability and efficiency in presenting the relevant information.
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