This report should be read in conjunction with Accounting in Banks which gives its reader an overview of how accounting is used within the banking environment.
- Accounting as a service function
- Financial and management accounting
Accounting as a service function
One way of viewing accounting is as a form of service. Accountants provide economic information to their ‘clients’ who are the various users identified in Fig 1.1 . The quality of the service provided will be determined by the extent to which the information needs of the user groups have been met. It can be argued that, to be useful, accounting information should possess certain key ‘qualitative’ characteristics:
- Accounting information must have the ability to influence decisions. This information may be relevant to the prediction of future events or relevant in helping confirm past events.
- Accounting information should be free from any material error or bias. It should be capable of being relied on by users to represent what is true and fair.
- Items which are basically the same should be treated in the same manner for measurement and presentation purposes.
- Accounting reports should be expressed as clearly as possible and should be understood by those for whom the information is aimed.
- Accounting information should be available at reasonably frequent intervals and the time which elapses between the end of the financial period and the production of the accounting reports should not be too long.
The first two characteristics – relevance and reliability – are really what makes accounting information useful. The last three characteristics – comparability, understandability and timeliness – will limit the usefulness of accounting information to the extent that they are missing. For example, information which is relevant to a particular decision may cease to be relevant if the information is not produced in a timely manner.
Financial, Customer and Management Accounting
Accounting in Banks is usually seen as having three distinct strands:
- Management Accounting; which seeks to meet the needs of managers.
- Customer Accounting; which seeks to meet the needs of customers
- Financial Accounting; which seeks to meet the accounting needs of the other users identified previously (fig 1.1).
This review concentrates on Financial Accounting and its main characteristics are outlined below:
- Financial accounting reports tend to be general purpose reports. That is, they contain financial information which will be useful for a broad range of users and decisions.
- Financial accounting reports provide users with a broad overview of the position and performance of the business for a period. As a result, the information is aggregated and the detail is often lost.
- Financial reports, for many banks, are subject to accounting regulations which try to ensure that they are produced according to a standardised format. These regulations are imposed by law and the accounting profession.
- For banks, financial accounting reports are produced on an annual basis. However, they will often produce semi-annual reports and a few produce quarterly reports.
- Financial accounting reports reflect the performance and position of the bank for the past period. In essence, they are backward-looking. However, occasionally, banks will release forecast information to other users in order to raise capital or to fight off unwanted takeover bids.
- Financial accounting reports concentrate on information which can be quantified in monetary terms. Financial accounting places great emphasis on the use of objective, verifiable evidence when preparing reports.