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BASICS OF ACCOUNTING AND FINANCIAL ACCOUNTING
Introduction to Accounting Explained – Lect.1

TOPIC LIST

Definitions ,Objectives and Nature of Accounting

Branches of Accounting and use of Accounting Information

Users of Accounting Information

Forms of Business

Qualitative Characteristics of Financial Information

  1. DEFINITIONS, OBJECTIVES AND NATURE OF ACCOUNTING

Accounting is defined as the process of identifying ,recording, classifying and summarizing economic data so as to come up with useful information to help users make decisions.

Financial Accounting refers to the Process of recording (Bookkeeping),classifying, analyzing and summarizing the Financial transactions like Purchase, Sales, Receivables, Payable , etc. and finally with the purpose of producing the Financial Statements which includes: Balance Sheet ( Statement of Financial Position) ,Income Statement ( Statement of Financial Performance ) and Cash Flows statement.

The main objective of financial accounting is to show clearly an accurate and fair picture of the financial affairs of the company.

To understand its fundamentals introduced with a double-entry system , debit & credit and then gradually should understand journal , ledger, trial balance, and ended with financial statements

1.1 Nature of Accounting

Nature of accounting are revealed in different aspects as shown below :

Accounting as a Science or an Art

Arguments exist as to whether Accounting is a science or an art?. Accounting is not a natural science like chemistry or physics, but it is scientific to the extent that it applies scientific methods of observation and measurement in the course of processing financial information for use by management.

On the other hand, art stresses the human attributes of imagination and Judgment. Accounting tends to draw from both science and art, but cannot be said to belong to either one.

Accounting as a service activity

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions.

Accounting as a profession

Accounting is a big and important profession. A profession is a career that involve the acquiring of a specialized formal education before rendering any service.

Accounting as a social force

In early days, accounting was only to serve the interest of the owners. Under the changing business environment the discipline of accounting and the accountant both have to watch and protect the interests of different stakeholders.

Accounting as a language

Accounting is rightly referred to as the “language of business”. It means that ,reporting and communicating information about a business. Accounting is to be learned and practiced to communicate business events.

Accounting as an information system

Accounting discipline will be the most useful one in the acquisition of all the business knowledge in the near future. Accounting is a system of collecting, storing and processing financial and accounting data that are used by decision makers for profit-seeking business and non-profit organizations .

  1. BRANCHES OF ACCOUNTING AND USE OF ACCOUNTING INFORMATION

2.1. Branches of Accounting

Accounting mainly is made up of eight (8) branches as explained below :

Financial Accounting : this is the branch of accounting which is concerned with systematic methods of recording transactions ,with the main purpose of producing financial statements like : Balance sheet (B/S) and Income statement (P/L),{ will be seen later in Further Lecture } which are very useful to Creditors , Banks , Financial institutions , etc.

Cost Accounting : The accounting branch of evaluating cost , cost calculation by considering all factors of both manufacturing and administration and cost control.

Management Accounting: this concerned with taking efficient decisions via management information system (MIS), CVP and BEP analysis , etc which led to the better Administration , Profit enhancement and secrecy of Records that are useful to the Creditors ,shareholders.

Tax Accounting : accounting of Preparing tax, filing of Tax returns , compliance of laws , tax report preparations , reduction of tax in legal ways , and considering other different aspects of taxes.

Government Accounting :this involves keeping records of central and state government for allocations and utilization of various budgets to ensure the proper usage

Auditing : this is another accounting concern of auditing inspections and certifications of the accounts for accuracy.

Forensic Accounting : accounting of settling disputes in legal matters , calculating damages ,and the investigations carried out . this also called legal accounting

Fund Accounting : branch of accounting concerned with keeping records of non governmental organization (NGOs)’s fund and its management.

2.2. Use of Accounting Information

The importance /use as same as Purpose of Accounting

Information are :

To provide records that are the starting point for measuring performance, revising budgets, and reporting progress.

The accounting Information will facilitate high quality financial analysis by various stakeholders.

To provide truthful information to aid clear-sighted management rather than estimation

  1. USERS OF ACCOUNTING INFORMATION

Accounting information is produced in the form of financial statements. These financial statements provide information about an entity’s financial position, performance and changes in financial position.

Financial position of a firm is what the resources business has and how much belongs to the owners and others.

The financial performance reflects how the business has performed, whether it has made profits or losses.

Changes in financial positions determine whether the resources have increased or reduced.

The users of accounting information have an interest in the existence of the firm. Therefore the information contained in the financial statements will affect the decision making process.

The following are the users of accounting information:

Owners:

Those are Different Investors that have invested in the business,

Examples : sole traders (individual), partners (partnerships) and shareholders (company).

This information will enable them to assess how the managers of the business are performing whether the business is profitable or not and whether to make drawings or put in additional capital. they need information in order to assess the quality and the price of shares of a company

Customers

Customers rely on the business for goods and services. They would like to know how the business is performing and its financial position.

This information would enable them to assess whether they can rely on the firm for future supplies.

Suppliers

They supply goods or services to the firm for cash or credit. The suppliers would like to have information on the financial performance and position so as to assess whether the business would be able to pay up for the goods and services provided.

Managers

The managers are involved in the day-to-day activities of the business. They would like to determine whether the business is operating as per the plans.

In case the plan is not achieved then the managers come up with

appropriate measures (controls).

The Lenders

They have provided loans and other sources of capital to the business. Such lenders include banks and other financial institutions.

They would like to assess whether the business is profitable enough to pay the interest on loans and whether it has enough resources to pay back the principal amount when it is due.

The Government and its agencies

To be able to assess the tax to be collected in the case there are any profits made by the business.

The other government agencies are interested : to be able to come with National Statistics. This statistics measure the average performance of the economy.

The Financial Analyst and Advisors

They need information :

To interpret the financial information.

Examples include stockbrokers who advise investors on shares to buy in the stock market.

To advise their clients on how much is the value their investment i.e. whether it is profitable or not and what is the value.

Other advisors would include the press who will then pass the information to other relevant users.

The Employees

They work for the business/entity. They would like to have information so as to make decisions on their terms of employment.

This information would be important as they can use it to negotiate for better terms including salaries, training and other benefits.

They can also use it to assess whether the firm is financially sound and therefore their jobs are secure.

The Public

These are the Institutions and other welfare associations and groups that represent the public.

The responsibility is in form the employment opportunities the firm offers, charitable activities and the effect of firm’s activities on the environment.

  1. FORMS OF BUSINESSES

Business refers to commercial or industrial concern which exists to deal in the manufacturer, resales or supply of goods and Services.

Businesses are Formulated into :

Sole trader business

It is a kind of business owned by one person, the sole traders are not legally separate from the business.

Partnership

This is the type of business owned by two or more persons, the partners. Partners are legally not separate from the partnership.

Company

Is a legally separate business owned by two or more persons, the shareholders.

There are other forms of businesses such as :

Cooperatives: where members come together to start the business to satisfy their needs(to improve the economic interests of members)

Not for profit entities :those Entities that provide a given service or good but they do not wait for Profit as return, their aim is not for Profit basis.

Parastatal : here, a company is wholly owned by the government

  1. QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

Financial information have four (4) characteristics :

Understandability: information provided in the financial statements must be readily understandable by users because they are assumed to have a reasonable knowledge of business with its economic activities and accounting.

Relevance: Information has the quality of being significant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations.

(Example : should I invest, should I lend money to this business? Should I work for this business?).

Reliability: To be reliable then the information should:

  • Be represented faithfully (truly, really),
  • Be accounted for and presented in accordance with their substance and economic reality and not only their legal form,
  • Be neutral i.e. free from bias ( without favoritism, impartial, fairness)
  • Prudence i.e. where alternative procedures or alternative valuations are possible, the one selected should be the one that gives the most helpful presentation of the business’s financial position or results.

Example: Assets and profits should not be overstated/understated

  • Be complete i.e. omission can cause information to be false.

Comparability: Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance.

Compliance with accounting standards also helps achieve this comparability.

End of Lecture

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