Introduction to Accounting

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Introduction to Accounting

• Topic 1

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Learning outcomes

• By the end of this topic you should be able to.
• 1.Explain the purpose of accounting
• 2. Identify users of accounting information
• 3. Describe the importance of accounting
  information to various users
• 4. Identify the various accounting measurement
  basis.
• 5. Explain the importance of professional ethics
  in accounting
• 6. Describe the accounting equation
• 7. Identify organisations that influence the
  accounting profession
• 8. Describe accounting concepts and conventions

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Definition of accounting

• Recording of financial transactions for decision
  making
• Wood and Sangster (2005) defines accounting as a
  systematic recording of transactions having an
  impact in a business and availing the information
  to decision makers on a timely basis.
• Through out the course you will learn
• The basics in accounting
• Importance of accounting information, and
• How to prepare financial statements
• This is an introductory lesson

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Purpose of accounting

• Provide information on financial position of an
  enterprise
• Information on performance over a period
• Balance sheet shows financial position
• Income statement, cash flow statement and
  statement of changes in equity show financial
  performance

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Users of accounting information

• Stock holders
• Potential investors
• Management
• Employees
• Potential investors
• Employees

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Stock holders

• Interested in knowing profitability of an
  organisation
• Use information to determine whether additional
  capital should be done
• Use information to evaluate how management is
  carrying out their roles

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Potential investors

• Are interested in investing in the organisation
• Use financial accounts to evaluate strength of an
  organisation
• Compute intrinsic value of shares using financial
  accounts

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Management

• Require timely accounting information for
  decision making
• Use financial information to make plans
• Use accounting data to perform performance
  evaluation
• In addition to financial accounts, they require
  detailed management accounts

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Employees

• Financial information provide an idea about their
  job security
• Employees unions use information to negotiate
  better terms of service
• Their performance evaluation is informed by
  financial results

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Others

• Students use the information for research and
  training
• Regulatory agencies use the data in assessing
  financial health for a business such as capital
  markets
• Tax authorities use financial accounts to assess
  tax liability

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Accounting measurement

• Attaching monetary value to transactions
• Bases
• Transactional values relates to cost of
  purchases as well as sales values
• Fair value value of present value of future cash
  flows
• Fair value Market price less selling costs

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Accounting measurement contd

• Historical costs purchase price. Mainly used in
  accounting for non current assets
• Replacement cost cost of acquiring a similar
  asset with the same conditions
• Net book value historical cost less depreciation

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Ethical considerations

• Accounting information is of high value to
  decision makers.
• Need to provide credible information
• A number of corporate frauds have involved
  accountants
• Need for one to behave professionally and observe
  code of conduct
• One should be independent, objective, exercise
  due care, professionalism and integrity

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Accounting equation

• Assets Capital Liabilities
• Economic resources (Assets) are generated from
  either owners capital and or debt financiers
  (liabilities)

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Organisations that influence accounting practice

• The profession is highly regulated
• Professional bodies such as MICPA develop code of
  conduct
• Accounting measurement guided by a reporting
  frame work
• International accounting standard setters such as
  IASB guide accounting treatment

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Accounting concepts and conventions

• Five main concepts and conventions
• Matching
• Monetary unit
• Going concern
• Time period
• Separate entity

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Monetary unit

• Transactions can be converted into a unit of
  measure based on the operating currency
• Monetary value attached to non cash items
• Helps to determine value of an entity

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Going concern

• A reporting entity to continue operating into the
  future
• No winding up of activities are foreseen
• Helps to value assets at their net book values

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Time value

• The continuous life time of an entity can be
  separated into distinct reporting periods
• Useful in assessing performance of an
  organisation over time
• Position of an organisation can be determined at
  a certain point in time

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Separate entity

• The business is distinct from owners
• Owners transact with the business as third
  parties
• Helps to assess the value of an organisation
  independent of owners
• Economic value with owners are determined
• Contribution of the entity in enhancing owners
  wealth is evaluated

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Matching

• Resources generated are compared with those used
  up in the process
• Excess (profits) or short falls (loss) on net
  realization used to assess performance
• Organisations generating resources in excess of
  consumption are good performers

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Matching contd

• Resources used in generation of future profits
  are capitalised
• Expenses are charged on the time period for which
  they were used to generate revenues
• Revenues matched with expenses

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Conclusion

• Accounting information is critical in decision
  making for various users
• Accountants should adhere to professional ethics
• Watchdog organisations enhance credibility of
  financial information
• Reporting framework developed to guide
  accountants

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Further reading

• Rice, A (2002). Accounts demystified How to
  understand financial accounting. Prentice Hall
• Wood, F, and Sangster, A. (2005) Business
  Accounting 1 (10th ed.). Prentice Hall

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Questions

• Quiz