Professional Documents
Culture Documents
FINANCIAL ACCOUNTING
INTRODUCTION TO ACCOUNTING
Introduction to Accounting
Information
Objectives:
1. Understand accounting and its roles
2. Identify uses and users of accounting information
3. Describe the way in which accounting helps managers
in making decisions
Contents
1. Definition of accounting
2. Purpose of accounting information
3. Users of accounting information
4. Limitation of accounting information
1-2
Introduction to Accounting
Information
Two Key Questions:
1. Why is accounting complex and interesting?
Diversity of businesses and events (economic events to be
reported)
Many different players
Diverse incentives (economic and non-economic)
Uncertainty
Many regulations
2. Why do we need financial accounting?
Financial accounting promotes the exchange of resources
(see Figure 1.1)
Accounting is a complex field contrary to common
perceptions
1-3
Fig. 1.1: Financial Accounting promotes the exchange of
resources
Resources
Today
Outsiders
Company Investors
Suppliers
Accounting Information (e.g financial Creditors
statements)
Resources
Tomorrow
1-4
Fig. 2: Financial Reporting Supply Chain
1-6
Then what is Accounting
An information system to account for business
transactions and communicate the financial
information to users.
Accounting provides a vital service by supplying the
information decision makers need to make reasoned
choice among alternative uses of scarce resources in the
conduct of business and economic activities
It is a link between business activities and decision
makers
Measures business activities by recording data about them for future
use
Data are stored until needed when they are processed to get
information 1-7
Then what is Accounting
Conventional definitions of Accounting.
American Institute of Certified Public Accountants
(AICPA)
Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money transactions and events
which are, in part at least, of a financial character and interpreting the
results thereof
American Accounting Association (AAA)
Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgments and decisions by
users of the information
1-8
Then what is Accounting
Analysis of the two definitions provides the following
characteristics of accounting.
Accounting is the art of recording and classifying business
transactions
The business transactions may be completely or partially of
financial nature
Generally the business transactions are described in
monetary terms
The business transactions are summarised and analysed to
arrive at meaningful interpretation
The analysis obtained are communicated to those who are
responsible to take certain decisions to determine the future
course of business 1-9
What are the business goals
Profitability
Business must make enough money to pay for all the
costs of doing business, with enough left over as profit
for the owners to want to stay in business
Liquidity
A business must have enough cash available to pay
debts of the organization when they are due
1-10
What are the business activities
1. Financing activities
Obtaining capital from owners
Repaying creditors and a return to owners
2. Investing activities
Spending the capital received in a productive manner to
ensure that business achieves its objectives
Buying and selling assets to be used in the business
3. Operating activities
Selling goods and services to customers
Employing managers and workers,
Buying and producing goods and services
Paying taxes 1-11
Types of Accounting
Accounting
Financial Accounting/
Traditional Accounting/ Management
Financial Reporting Accounting
•
• Oriented toward the need of external
decision makers
• Provide information in the form of • Oriented toward the need of internal
financial statements decision makers
• Financial statements report directly • Provides managers with information
regarding how they have done in the past
on the goals of profitability and and what they can expect in the future
liquidity • Emphasizes usefulness and timeliness
•Emphasizes accuracy and compliance which are key components of relevance
1-12
Business transactions
Business transactions as the object of measurement.
Business transactions are economic events that effect
the financial position of a business entity.
Transactions are the raw material of accounting reports.
Transactions must relate directly to a business entity.
1-13
Common terminologies
in Financial Accounting
Accounting concepts and conventions
Accounting has adopted certain concepts and
conventions which help to ensure that accounting
information is presented accurately and consistently
Historical cost
Monetary measurement Conventions
Separate entity
Realisation
Materiality
Going concern
Consistency Concepts
Prudence
Matching/Accruals
1-14
Common terminologies
in Financial Accounting
Elements of financial statements
The financial position of an enterprise is primarily
provided in the Statement of Financial Position. The
elements include:
Asset: An asset is a resource controlled by the enterprise as a result of past
events from which future economic benefits are expected to flow to the
enterprise. (Examples: cash, office supplies, inventories, accounts receivable, buildings,
equipment, etc)
Liability: A liability is a present obligation of the enterprise arising from the
past events, the settlement of which is expected to result in an outflow from
the enterprise' resources, i.e., assets. (Examples: accounts payable, bonds payable etc)
Equity: Equity is the residual interest in the assets of the enterprise after
deducting all the liabilities under the Historical Cost Accounting model.
Equity is also known as owner's equity. Under the units of constant
purchasing power model equity is the constant real value of shareholders´
1-15
equity.
Common terminologies
in Financial Accounting
Elements of financial statements
The financial performance of an enterprise is primarily
provided in an income statement or profit and loss account.
The elements of an income statement or the elements that
measure the financial performance are as follows:
Revenues: increases in economic benefit during an accounting
period in the form of inflows or enhancements of assets, or decrease
of liabilities that result in increases in equity. However, it does not
include the contributions made by the equity participants, i.e.,
proprietor, partners and shareholders.
Expenses: decreases in economic benefits during an accounting
period in the form of outflows, or depletions of assets or incurrences
of liabilities that result in decreases in equity.
1-16
Purpose of Accounting
1-22