Understanding Principles of Accounting: A High School Student’S Companion.

By Dr. Cryford Mumba

Discover the Easy Way to Understand Principles of Accounting

Accounting is occupying center stage in commerce at the moment mainly due to heightened focus on the need to keep accounting records. This interactive text provides you with knowledge, skills, and applied techniques required for passing principles of accounting exam with flying colors. The text is written by a professionally-qualified specialist who knows from personal experience the importance of top quality materials for exam success. The text is both user-friendly and prepared in accordance with current accounting syllabus.

Key Features:

Clear presentation and explanation in straightforward English language
Key points covered in the chapter summarized
Variety of worked examples
Thought provoking progress tests after each chapter intended to help students assess their own progress
Suggested solutions to all progress clinics
Authors Note to highlight an important knowledge area.

• Language: English
• Publisher: Trafford Publishing
• Release date: Aug 21, 2015
• ISBN: 9781490762944

Dr. Cryford Mumba

Dr. Cryford Mumba read Economics at The University of Zambia and graduated with a Bachelor of Arts Degree. He complemented his Economics degree with the Advanced Diploma in Project Management (Institute of Commercial Management, UK), Diploma in Banking and Financial Services( Zambia Institute of Banking and Financial Services, Zambia), Diploma in Marketing(ICM, UK). He then expanded his knowledge of business through the accountancy program (ACCA, UK) for which he is a finalist. He holds an MBA (MANCOSA, South Africa) with a thesis “Limited Access to Credit among Women Market Traders.” Finally, he holds a PhD in Economics (Cambell State University, USA) with a thesis “Understanding Money Intelligence.” Dr. Mumba is the Proprietor and Chief Executive Officer of Premier college of Banking and Finance, a firm specializing in financial training and consulting. His specialist teaching areas include Financial Mathematics, Statistical Analysis, Corporate Finance, Financial Reporting and Economics. He has written extensively on banking and financial services course. He is the author of Understanding Money Intelligence, Understanding Statistical Analysis, Understanding Accounting and Finance, Understanding Financial Mathematics, Understanding Commerce, and a host of other Banking and Financial Services training manuals. He is also the Editor of The Student Banker Magazine and a columnist on financial matters for Business analysis Newspaper.

Book preview

UNDERSTANDING

PRINCIPLES

OF ACCOUNTING

A High School Student’s Companion

Dr. Cryford Mumba. PhD (econ), MBA, B.A.(econ), Adv.Dip. Proj. Mgt., Dip. Banking, Dip.Mkt., ACCA Finalist)

(Approved by Ministry of Education (Zambia) for use in schools)

Most Trafford titles are also available at major online book retailers.

©

Copyright 2015 Dr. Cryford Mumba.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written prior permission of the author.

ISBN

: 978-1-4907-6295-1 (sc)

ISBN

: 978-1-4907-6294-4 (e)

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

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CONTENTS

Preface

Acknowledgements

Dedication

GRADE 10 PRINCIPLES of ACCOUNTING

CHAPTER 1   INTRODUCTION of PRINCIPLES of ACCOUNTS

• What is Accounting?

• Purpose/Importance of Accounting

• Job Opportunities In Accounting

• Users of Financial Accounts And Their Key Needs

• Desirable Qualities of Useful Accounting Information

• Progress Test 1

CHAPTER 2   ACCOUNTING CONCEPTS AND PRINCIPLES

• Basic Accounting Concepts

• Concepts Concerning The Measurement Process In Accounting

• Conventions Concerned With The Presentation of Information

• Sources of Authority In Accounting

• Standard Setting Process And The Structure of International Accounting Standards Board

• The Annual Report

• Progress Test 2

CHAPTER 3   BUSINESS TRANSACTIONS AND SOURCE DOUCUMENTS

• What is A Business Transaction?

• Types of Business Transactions

• Source Documents

• Progress Test 3

CHAPTER 4   BOOKS of PRIME ENTRY OR ORIGINAL ENTRY OR SUBSIDIARY BOOKS

• Books of Prime Entry – Credit Transactions

• Anaytical Sales Returns Day Book

• Purchases Day Book

• Purchases Returns Day Book

• Recording Cash Transactions – The Cashbook

• Progress Test 4

CHAPTER 5   THE PETTY CASH BOOK

• Definition of Analytical Petty Cash Book

• The Purpose of Petty Cash

• What are Petty Cash Items?

• Personnel, Security And Control of Petty Cash

• Petty Cash Expenditure (Petty Cash Voucher)

• Receipts

• The Imprest System

• Ious And Petty Cash. (I Owe You)

• Recording The Analytical Petty Cash Book

• Division of The Petty Cash Book.

• Progress Test 5

CHAPTER 6 THE LEDGER ACCOUNT AND DOUBLE ENTRY

• Classes of Accounts

• The Ledger Or T Account

• The Different Types of Ledgers

• The Trial Balance

• Progress Test 6

CHAPTER 7 FINAL ACCOUNTS / STATEMENTS

• The Trading Account

• The Income Statement

• The Statement of Financial Position (Balance Sheet)

• The Accounting Or Balance Sheet Equation

• Progress Test 7

GRADE 11: PRINCIPLES of ACCOUNTS

CHAPTER 8   ADJUSTMENTSTO THE FINAL ACCOUNTS – DEPRECIATION

• Non-Current Asset (Nca)

• Definition of Depreciation

• Purpose of Depreciation

• Recording Depreciation In Financial Statements

• Methods For Calculating Depreciation

• Which Method of Depreciate?

• Disposal of Non-Current Assets

• Revaluation of Non-Current Assets

• Progress Test 8

CHAPTER 9   ADJUSTMENTS of FINAL ACCOUNTS – ACCRUALS AND PREPAYMENT

• Prepaid Expenses(Prepayments)

• Prepaid Revenue

• Accruals (Accrued Expenses)

• Accrued Revenue

• Closing Stock

• Drawings

• Summary of Types of Adjustments

• Progress Test 9

CHAPTER 10   ADJUSTMENTS of FINAL ACCOUNTS – IRRECOVERABLE DEBTS, PROVISIONS AND DISCOUNT ALLOWED

• Types of Adjustments

• Provision For Irrecoverable Debts/Bad Debts

• Recording Provisions For Bad Debts In Financial Statements

• Transfer of Bad Debts of Provision For Irrecoverable Debts

• The Recovery of Bad Debts

• Provision For Debtor’s Discounts

• Progress Test 10

CHAPTER 11   LIMITATIONS of THE TRIAL BALANCE

• Errors Not Revealed By The Trial Balance

• Errors Which are Revealed By A Trial Balance

• Tracing/Detecting Errors In The Trial Balance

• Correcting The Errors Not Disclosed By The Trial Balance Through The Journal

• Suspense Account

• Progress Test 11

CHAPTER 12 THE BANK RECONCILIATION STATEMENT

• Why Businesses Prepare Regular Bank Reconciliations

• The Bank Statement

• Bank Reconciliation

• Bank Overdraft

• Cheques

• Progress Test 12

CHAPTER 13   CONTROL ACCOUNTS AND STOCK VALUATION

• What are Control Accounts?

• Purpose of Control Accounts

• Terms Used With Control Accounts

• Forms of Control Accounts

• Sources of Information For Control Accounts

• Stock Valuation

• Progress Test 13

CHAPTER 14   PREPARING ACCOUNTS FOR NON-PROFIT MAKING ORGANISATIONS

• Not-For-Profit Making Organisations

• Receipts And Payments Account

• Income And Expenditure Account

• Terms Used In Comparison With Trading Organisations

• Trading Activities Within The Not-For- Profit Organisation

• Accumulated Fund

• Subscriptions

• Life Membership

• Donations And Entrance Fees

• Accounting For The Sale of Investments And Non-Current Assets

• Progress Test 14

CHAPTER 15   CAPITAL AND REVENUE EXPENDITURE

• Capital Expenditure

• Revenue Expenditure

• Capital And Revenue Expenditure And Financial Statements

• Distinction Between Capital And Revenue Income

• Progress Test 15

GRADE 12 PRINCIPLES of ACCOUNTS

CHAPTER 16   ACCOUNTING FOR INCOMPLETE RECORDS OR SINGLE ENTRY

• Single Entry Bookkeeping

• Incomplete Records

• Procedure Used of Piece Accounts Together

• Progress Test 16

CHAPTER 17   PREPARING FINAL ACCOUNTS FOR SOLE TRADERS

• The Sole Trader: The Main Features of The One-Man Business

• Progress Test 17

CHAPTER 18   PREPARING FINANCIAL STATEMENTS: PARTNERSHIP ACCOUNTS

• Definition of A Partnership Business

• Advantages of Partnership Business

• Disadvantages of Partnership Business

• Formation of Partnerships - Partnership Agreement Or Deed

• Accounting Distinctions Between Partnerships And Sole Traders

• Ledger Accounts And Balance Sheet Presentation

• Division of Profit

• Interest On Drawings

• Goodwill

• Progress Test 18

CHAPTER 19   PREPARING FINAL ACCOUNTS of LIMITED LIABILITY COMPANIES

• Company Formation And Documentation

• Documentation

• The Capital of Limited Companies

• Ordinary Shares, Preference Shares And Debentures

• Preparation of Limited Company Financial Statements

• Classification of Overhead Expenses

• Presentation of Company Financial Statements

• Progress Test 19

CHAPTER 20   PREPARING MANUFACTURING ACCOUNTS

• Manufacturing Account

• Types of Manufacturing Costs

• Types of Stocks

• The Manufacturing Account: A Basic Example

• Preparing Trading, Profit And Loss Accoung And Balance Sheet

• Calculating Manufacturing Profit

• Mark-Up And Margins of Profit

• Relationship Between Mark-Up And Margin

• Progress Test 20

CHAPTER 21 ETHICS IN ACCOUNTING

• What are Ethics?

• Accountancy Ethics Code

• Types of Issues In Ethics In Accountancy

• Effects of Non-Adhrerence of Ethics

• Consequnces of Non-Adherence of Ethics

• Progress Test 21

CHAPTER 22   INTERPRETATION of FINANCIAL STATEMENTS: RATIO ANALYSIS

• Classfication of Ratios

• Limitations of Ratio Analysis

• Progress Test 22

ABOUT THE AUTHOR

Dr. Cryford Mumba read Economics at The University of Zambia and graduated with a Bachelor of Arts Degree. He complemented his Economics degree with the Advanced Diploma in Project Management (Institute of Commercial Management, UK), Diploma in Banking and Financial Services(Zambia Institute of Banking and Financial Services, Zambia), Diploma in Marketing(ICM, UK). He then expanded his knowledge of business through the accountancy program (ACCA, UK) for which he is a finalist. He holds an MBA (MANCOSA, South Africa) with a thesis ‘Limited Access to Credit Among Women Market Traders". Finally, he holds a PhD in Economics (Cambell State University, USA) with a thesis "Understanding Money Intelligence".

Dr. Mumba is the Proprietor and Chief Executive Officer of Premier college of Banking and Finance, a firm specializing in financial training and consulting. His specialist teaching areas include Financial Mathematics, Statistical Analysis, Corporate Finance, Financial Reporting and Economics. He has written extensively on banking and financial services course. He is the author of Understanding Money Intelligence, Understanding Statistical Analysis, Understanding Accounting and Finance, Understanding Financial Mathematics, Understanding Commerce, and a host of other Banking and Financial Services training manuals. He is also the Editor of The Student Banker Magazine and a columnist on financial matters for Business analysis Newspaper.

He resides in Lusaka, married and is a supporter of Arsenal Football Club. His hobbies include reading and writing.

PREFACE

If you have bought or are thinking of buying this book you will want to know what you can expect it to do for you and how you ought best to use it. The book has been developed from practical teaching of accounting and finance. It covers all the accounting principles required for first and intermediate examination and other courses requiring accounting and finance.

The guiding principles for this book are that it is user-friendly with numerous worked examples and related to the current accounting and finance practice. To this end a variety of real life examples from economics and business have been used. One difficulty encountered in the production of this book is that some students have little or no practical experience of the subject. Therefore, a step-by-step explanation has been adopted which has made me guilty of one offence: over simplification. The book can be used with confidence because it is designed to be user-friendly, interesting to read and to stimulate learning by the use of clear examples with detailed solutions. The book seeks to set the subject of accounting as enjoyable as any other subject.

At this juncture I should sound some caution. The book provides you with the knowledge and the skills in applying it which you need to pass. However, if you aspire to excel, perhaps even to win a place or a prize, you cannot expect to rely on one book alone! The highest marks are given to those candidates who display evidence of the widest reading absorbed by critical mind, a combination, that is, of extensive information and of a highly intellectual appraisal of it. No single book can provide either of these things. What it can do, however, is to provide an adequate amount of information and acceptable competence in handling it. No doubt the PRINCIPLES OF ACCOUNTS course will include matters which I have omitted, and some teachers may not consider all the items I have covered as appropriate. I do hope, however, that a large proportion of the text will be helpful to students of principles of accounting.

It should be stressed that this book is written to teach you and not merely to tell you. The more work and effort you put into all your studies, the greater the chance of success. Be determined, have a positive attitude and all the very best in your future courses and exams.

Dr. Cryford Mumba

28th April 2015

ACKNOWLEDGEMENTS

I am emotionally attuned and profoundly indebted to my Great Company-PREMIER COLLEGE, for the opportunity of exposure and experience enabling me to venture into this humble project. This text grew out of the accounting and finance subjects I have been teaching at Premier College of Banking and Finance during the past few years. I was very fortunate to have had many excellent and dull students, who with their questions and comments contributed much to the clarity of exposition of this text. Particularly, I realized that many of our students did not have a good beginning in accounting from secondary school. This compendium is aimed at bridging that gap so that as students proceed to professional courses they are well grounded in accounting. This will make my job and other lecturers of the subject simpler.

Finally, I would like to express my gratitude to myself for my efficiency and cheerful disposition in typing the manuscript.

I shall greatly appreciate guidance/suggestions for further enrichment of the compendium in course of time, both from the teachers and students of the subject.

DEDICATION

To Cryford Mumba (Jnr)

QUOTATIONS

"I am a beau in nothing but my books". Adam Smith (1723- 1790)

A man who kills another man destroys a living creature, but a man who kills a good book kills reason itself. unknown.

"If people do not believe that Mathematics is simple, it is only because they do not realize how complicated life is." John Louis von Neumann (1903-1957)

GRADE 10 PRINCIPLES OF ACCOUNTING

GENERAL OUTCOMES:

• Acquire knowledge, skills and values of principles of Accounts

• Acquire knowledge, skills and values on recording business transactions

• Develop an understanding of business transactions from source documents into books of original entry

• Acquire knowledge, skills and values on the importance of double entry and the ledger in Accounting

• Acquire knowledge, skills and value on a Trial Balance

• Develop an understanding of final accounts

KEY COMPETENCES

• Demonstrate ability to record transactions in the books of prime entries

• Show ability to prepare the Trial Balance

• Show ability to prepare final accounts

CHAPTER 1

INTRODUCTION TO PRINCIPLES OF ACCOUNTS

So you have decided to study accounting. Good decision. A solid foundation in accounting concepts and techniques will be helpful. This is true whether you take a professional position in accounting or in business, or simply want to better understand your personal finances and dealings with businesses. While studying principles of accounting, you also learn a lot about business. Knowledge of how accounting works will help you evaluate the financial health of businesses and organisations. It will also give you a solid approach to dealing with financial and business transactions in your personal life. How do you plan to use the accounting skills developed in this subject?

After studying this chapter you should be able to:

• Define accounting

• Explain the importance of accounting

• Identify the job opportunities for accountants

• Identify the user groups of accounting information

• Explain the qualities of good accounting information

• Identify career prospects in accounting.

1.1 WHAT IS ACCOUNTING?

A definition of accounting issued by the American Accounting Association in 1966 suggested that accounting consists of identifying, measuring and communicating business information to facilitate judgement and decision making. This definition placed its emphasis firmly on the provision of data for users and played down the more traditional roles of the accountant in recording, classifying and summarizing financial data. It is of course, necessary to record and summarize transactions before financial information can be measured and used by decision-makers. Of great importance to accountants, however, is the need to communicate the information derived from their records, and if necessary to interpret that information to improve its comprehension by the users, who may after all have borne the cost of the information systems. Thus, accounting is seen not as an end in itself but as a costly activity with a purpose whose benefits must exceed the cost.

Accounting is, therefore, concerned with:

1. Identification and recording of economic transactions. A transaction is an economic event which will affect the financial situation of the entity, such as the sale of a product, payment of salaries, purchase of machinery, and so on. The system must be organized so that all transactions are recognized when they occur and are then recorded by being entered into the accounting system. This is part of the bookkeeping aspect of accounting and concerns the maintenance of accurate records of what has taken place.

2. Classification and measurement of transactions once they are recorded. Economic events may create assets (items which the business owns), or liabilities (what is owed), or revenues (income from sales), or expenses (amounts incurred to make products or operate the business), so classification is important. Once transactions are classified into appropriate headings, measurement must be undertaken to ensure that each classified transaction is processed in the accounting system at a proper value. It is at this point that bookkeeping gives way to accounting, and judgement is required to measure each transaction properly, e.g. how much of the costs concerns this year’s accounts, and how much should be carried forward to next year. Two accountants may exercise judgement in different ways over the same item such as the valuation of a doubtful debt, so what is considered to be correct may depend on estimate and opinion.

3. Summarizing of what has been recorded, to assess the performance of the entity during a period (a month or a year) and its financial position at the beginning and end of the period. Financial statements such as the income statement and the balance sheet are summaries of economic events, and the cash flow statement gives yet another view of how transactions have affected the cash and liquid funds held by the entity.

4. Communicating, analysis and interpretation. Financial statements report to a wide range of users and must therefore be drafted with care to enable the recipient to understand the message which they contain. If necessary the accountant will analyse and interpret that message to enhance the value of the information provided.

1.2 PURPOSE/IMPORTANCE OF ACCOUNTING

It is important for businesses to maintain accurate financial records for the following reasons:

1. Stewardship. A traditional purpose of accounting has been that of ‘stewardship’, which implies that a financial statement is made to report events, performance, and position. Thus when the board of directors of a company issue their ’corporate report’, the annual accounts of the company, they are reporting on their stewardship of the business to the shareholders, who are the legal owners. Such a report gives a measure of control to owners, who can dismiss management if they do not approve of its activities. The right of shareholders to receive such information is enshrined in company law. The company law sets out in detail the statutory minimum of information which must be disclosed and the form which such disclosures must take. Stewardship also discloses the profit which has been made and the amount which can, therefore, be paid to the owners as a dividend. Further, it should be appreciated that there are, of course, many other stakeholders who have a claim to be informed of past performance and present position, so the stewardship relationship is not confined to directors and shareholders. It can extend to management committees, etc. in ‘not for profit’ organizations such as charities. Accountability is a term implying the duty to report to interested parties.

2. Decision usefulness. A further purpose of accounting concerns the decision usefulness function of financial statements. This idea holds that a purpose of accounting is to provide information which will enable those who use it to make decisions about their future interest in the entity. A shareholder wishes to know whether to sell shares, hold them or increase the investment; just as a donor needs information when deciding whether to give more to a charity or to donate elsewhere. The difficulty in achieving this purpose is that, whilst stewardship reports on past transactions, decision making requires information about the future which the cautious accountant is loath to make public because of the uncertainty associated with forecasting future events.

3. Management accounting. The purpose explained above have dealt with reporting to interested parties outside the business, but management accounting concerns the ways in which accounting skills can be used to help managers within the business. The tasks of managers can be analysed as planning, deciding, communicating, organizing, and controlling, so financial information will be of great assistance in successful management. The management accounting sees the functional relationship of accounting as covering;

a) Financial accounting; the recording and classification of transactions;

b) Cost accounting; the analysis and classification of costs to products and cost centres;

c) Budgeting; the planning and co-ordination of future activities in financial terms, to fit them into the corporate plan or strategy of the organization;

d) Control; comparison of actual performance with that set out in the budget or plan to formulate action to remedy and departures from the plan;

e) Treasurership; the funding of the organizations and the provision of adequate finance to support managerial operations;

f) Audit; the attest function to protect and prove the effectiveness of the recording /reporting system.

From the above, we can now see that the task of the accountant is to look back at the past, to record, analyse, and report as a steward, and also to look into the future and assist management with decision making and control. Both aspects of this task require figures to be assembled in statements that are easily assimilated, interpreted and used in the evaluation of performance by both accountant and non-accountants. Businesses need to determine easily how much profit or loss has been made, identify the assets and liabilities that the business has at any one time, determine which customers owe the business money, and how much and also to determine who the business owes money to, and how much. The information is also used by various third parties, such as government departments and investors, who rely on the figures shown in the financial statements. It cannot, therefore, be overemphasized that any successful business must prepare and maintain accurate financial records.

1.3 JOB OPPORTUNITIES IN ACCOUNTING

The work of an accountant is often varied and interesting, as well as far reaching. Many people think they have a boring job to do, recording figures all day long and checking the work of others. Accountants do this of course as part of their work but, more importantly, they are managers of finance whether they work in private practice or in an organization where accounting is one of a number of departments like sales, marketing, production and human resources. Not only are they concerned with recording financial information, they are also interested in planning and forecasting results. They are financial consultants helping other managers to decide the way ahead, playing a critical part in evaluating business problems and being part of a team which plans, controls and takes decisions in an organization. Accountants, when qualified and chartered, may take on different roles. This requires taking and passing professional examinations like Zambia Institute of Chartered Accountants (ZICA), Association of Certified Chartered Accountants (ACCA), Chartered Institute of Management Accountants (CIMA), and others.

Accounting is about money and each and every organization receives and spends money. This simply means that an accountant (or whatever the title) must be employed by every organization that receives and spends money. This is different from some jobs. For example, a lab technician can only work in an organization that has labs.

Accounting books, to compute, charge, balance accounts, to maintain records of money, etc. is the job of an accountant. Every business needs to maintain accurate accounting records to help it manage and control its finances more efficiently. Records must be kept by all businesses so that they can be run properly. Without day to day records, it would be very difficult to know if a business was making a profit or a loss or indeed, whether it was worth keeping the business going. That is, if it were making losses, then it might as well pack up and cease trading.

Thus, careers in accounting includes accounts clerks, bookkeepers, finance assistants, finance managers, accountants, auditor, and even finance minister (provided one decides to be a politician).

1.4 USERS OF FINANCIAL ACCOUNTS AND THEIR KEY NEEDS

The purpose of accounting is to provide information to users of the financial statements. In this perspective accountants take a stakeholder view of the organization, i.e. an organization does not only exist for shareholders but for stakeholders who are rightfully interested in financial information, and accountants have a responsibility to provide meaningful information for such groups. If business uses resources of society, in terms of wealth, people and the environment, then appropriate reporting should ensue. A proper management of resources will benefit members of society and not only the legal owners of the business. Different users have different needs. The various users and their needs are noted below.

1. Management. Management is perhaps the most important users of accounting information. An analysis of past and expected future revenue and expenses will provide information which is useful when plans are formulated and decisions made. Once the budget for a business is complete, the accountant can produce figures for what actually happens, as the budget unfolds, so that they can be compared with the budget to measure achievement. Management will need to know, in great detail and soon after the event, the cost consequences of a particular course of action, so that steps can be taken to control the situation if things go wrong. Speed and ability to communicate and interpret are needed here. Managers have access to confidential information which the business may not wish to publicize, since it may prove useful to competitors. Managers are vitally interested in the progress of the company since their own career prospects may depend upon its success but they will rarely use published accounts to gain such information because internal management accounts are more frequent, more detailed and forward looking, and therefore show much useful information. Some managers may not have access to summarized financial information within the business, and will therefore use the published accounts for an overview.

2. Shareholders and potential shareholders. These are another important group of user of accounting information. This group includes the investing public at large and the shareholders, financial analysts and commentators who advise them. The shareholders should be informed of the manner in which management has used their funds which have been invested in the business. They are interested in the profitability and safety of their investment, which helps them to appraise the efficiency of management. This is simply a matter of reporting on past events. However, both shareholders and potential shareholders are also interested in the future performance of the business, and use past figures as a guide to the future if they have to vote on proposals or decide whether to disinvest. Financial analysts advising institutional investors such as insurance companies, pension fund, unit trusts and investment trusts are among the most sophisticated users of accounting information.

A specialist group of potential shareholders are takeover bidders. This group comprises of the managers of other rival companies who plan to buy the shares of a company in order to control its operations and add it to their group. These users are more sophisticated in their appreciation of financial statements than the normal shareholder, and are interested in the detailed notes which accompany the financial statement. However, this class of users would also expect to obtain market information about the company which they propose to take over, from sources other than the published accounts.

The accountant has an obligation to all those in this category to provide information on which they can depend when making their economic decisions, but the fact that some members of the group are more financially sophisticated than others causes difficulties, since the volume of information required by the financial analyst may confuse the ordinary shareholder.

3. Employees and their trade union representatives. These also use accounting information to assess the potential of the business. This information is relevant to the employee, who wishes to discover whether the company can offer safe employment and promotion through growth over a period of years, and to the trade unionist, who uses past profits and potential profits in the calculation of claims for higher wages or better conditions. The viability of different divisions of a company are of interest to this group. Employees have invested in their careers and efforts in the business, and thus have a right to accounting information. Good industrial relations are fostered if there is disclosure of such information, so that employees can participate in decisions, and negotiate profit-sharing arrangements. This fact is recognized by many companies which produce an ‘employee report’ based on the accounts, but highlighting certain items such as training expenditure and statistics (sales per employee, profit per employee) of interest to employees.