Introduction to Accounting Topic 1 10/26/2015Topic 1: Introduction to accounting

Introduction to Accounting

Topic 1

04/20/23 Topic 1: Introduction to accounting

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


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


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


Users of accounting information

Stock holders Potential investors Management Employees Potential investors Employees


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


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


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


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


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


Accounting measurement

Attaching monetary value to transactions

Bases;Transactional values: relates to cost of

purchases as well as sales valuesFair value: value of present value of future

cash flowsFair value: Market price less selling costs


Accounting measurement cont’d

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


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


Accounting equation

Assets = Capital + Liabilities

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


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


Accounting concepts and conventions

Five main concepts and conventions;1. Matching

2. Monetary unit

3. Going concern

4. Time period

5. Separate entity


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


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


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


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


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


Matching cont’d

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


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


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


Questions

Quiz


Documents

Introduction to Accounting Topic 1 10/26/2015Topic 1: Introduction to accounting