Nature and scope of financial accounting
Accounting identifies, records and communicates financial information about a business so that users can make decisions.
What accounting does
Accounting is the process of identifying business events that can be measured in money, recording them in a systematic way, and communicating the results to the people who need them. Bookkeeping is only the recording part. Accounting goes further: it summarises, analyses and explains the numbers. Because every business decision uses it, accounting is called the language of business.
Branches of accounting
This course unit is about financial accounting: recording transactions and preparing financial statements.
Users (stakeholders) and what they want to know
| User | Main question | Sri Lankan example |
|---|---|---|
| Owners and shareholders | Is the business profitable? Is my investment safe? | A shareholder reading the John Keells Holdings annual report |
| Managers | Which product or branch earns most? Where can costs be cut? | A supermarket manager comparing outlet sales |
| Lenders (banks) | Can the business repay the loan and interest on time? | A bank checking a garment exporter before a loan |
| Suppliers | Will we be paid on time? | A wholesaler in Pettah selling on credit to a village shop |
| Employees | Is my job secure? Can the firm pay bonuses? | Workers of a plantation company |
| Customers | Will the business keep supplying and honour warranties? | A hotel that buys vegetables from one supplier |
| Government | How much tax is due? Are the laws followed? | The Inland Revenue Department checking tax returns |
| Investors and the public | Is this company a good investment? Is it responsible? | Investors comparing companies on the Colombo Stock Exchange |
Ethics: five fundamental principles for accountants
- Integrity: be straightforward and honest in all work.
- Objectivity: do not let bias, conflicts of interest or pressure from others override your judgement.
- Professional competence and due care: keep your knowledge up to date and work carefully.
- Confidentiality: do not disclose business information without proper authority.
- Professional behaviour: obey laws and avoid actions that bring the profession into disrepute.
An ethical dilemma
Suppose the owner asks the accountant to record next year's sales in this year so that the bank sees a higher profit. This breaks integrity and gives a misleading picture to the bank, a stakeholder that relies on the figures. The ethical response is to refuse, explain the rule, and record each sale in the period in which it is earned. Ethics matters because users cannot check the books themselves; they must trust them.
Before a Sri Lankan bank lends to a small business, it asks for financial statements. Listed companies such as John Keells Holdings PLC and Dialog Axiata PLC publish annual reports for their shareholders, prepared under the Sri Lanka Accounting Standards issued by CA Sri Lanka.
Short answer: “Define accounting.” Accounting is the process of identifying, recording and communicating financial information about a business to users so that they can make decisions.
Structured question: “Who are the users of accounting information? State what each needs.” List six or seven users (owners, managers, lenders, suppliers, employees, customers, government) with one information need and one Sri Lankan example each.
Essay: “Explain the nature and scope of financial accounting, its users and the role of ethics.” Define accounting, separate financial from management accounting, explain users' needs, list the five ethical principles with an example, and close on why trust matters.
Ethical principles are I-O-P-C-P: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour.