basic accounting unit1

THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

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Module 9: Basic Accounting


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LEARNING OBJECTIVES By the end of this module, the students should be able to;• Define accounting and explain its basic framework.• Post and process transactions • Explain the logic of and reasons for year-end adjustments and

provisions in accounting • Prepare year-end financial statements • Articulate the nature of published accounts as well the common

Financial Reporting Standards • Calculate key financial ratios and construct simple financial

projections from relevant information• Explain the basic principles of taxation in Uganda


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Accounting Framework

Posting and Processing Transactions

Year- End Adjustments and Provisions

Preparing Final Accounts

Introduction to Financial Reporting Standards

Published Accounts

MODULE COVERAGE

Financial Ratios and Projections

Elements of Taxation


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What is accounting?• Accounting can be defined as the process of recording, classifying and summarizing

economic transactions in preparation of financial statements that provide information about the financial position, performance and changes in an enterprise or economic entity.

• Everyday, banks engage in thousands of business transactions, which result in money or value changing hands. All these transactions need to be recorded accurately otherwise the bank can easily lose track of its operations.

• The process of recording these financial transactions in the books of accounts and summarizing the results is referred to as book keeping.

• Once the transactions have been recorded and summarized, they need to be interpreted and communicated to the end users.

• Accounting is thus concerned with the interpretation and communication of the financial information resulting from transactions through the financial reports.

• These financial reports include amongst others the Balance Sheet, Income Statement and Cash flow Statements. Through these financial statements, accounting provides most of the necessary financial information.


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The key objectives of accounting for every bank should be to;1. Construct accurate records that are the starting point for measuring

performance and reporting progress2. Provide information to facilitate high quality financial analysis by various

stakeholders3. Avail factual information to aid clear well informed managerial decisions4. Reassure and inspire confidence to shareholders, lenders, the regulator

(Bank of Uganda) and the banking public5. Users of accounting information6. Accounting information is collected, processed and produced with a

focus on its users. Accounting is, in this sense, a clear and standard way of producing financial information and communicating it to internal and external users.


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Below are typical users of accounting information and their respective needsa. Shareholders: As owners of the bank, these are interested in prospects of

receiving dividends, capital growth and the safety of their assets in the institution. It is in their best interest that the financial statements show that the bank is run in a profitable, safe and sound way.

b. Board/Directors: The board members would like to interpret/ analyze financial statements and operational statistics to better perform their key duty of monitoring management performance and steering the bank towards attaining its institutional objectives, which usually include profitability for improving shareholder value and facilitating organic growth.

c. Creditors: The creditors would like to be assured that the bank will be able to service its debts without difficulty. They are concerned with short term liquidity, long term solvency and overall the level of indebtedness in relation to equity.

d. Management: Managers of a bank would like to know how they are performing relative to prior periods and in comparison to targets. They use accounting information to measure their performance with a view to boosting income and lowering costs to continually improve.


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e. Regulators: For banks and other institutions in tier II and III, Bank of Uganda is their regulator. In this capacity, Bank of Uganda would like to ensure that the bank complies with all the relevant laws and regulations, is run professionally and that its financial health remains robust

f. Customers and the general public: The banking public treasures the confidence that a bank is in sound financial position and that it is running profitably. They will usually get this information from the published accounts of the bank. This is one of the reasons that banks are required to publish their audited financial statements in the press and sometimes in their banking hall.

g. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

h. Government entities (tax authorities especially URA) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by the bank.

i. Vendors and Suppliers who extend credit to a business require financial statements to assess the ability of the bank to pay for supplies more so timely.


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Attributes of good accounting informationi. Relevant: i.e relating to the transactions in which the bank was a party.ii. Reliable: i.e. verifiable, accurate/ truthful, neutral and demonstrates representational

faithfulness.iii. Comparable: information must be measured and reported in a similar manner for different

institutions, especially if there is need to to compare their relative performance. Banks and other businesses also need to present prior period accounting information alongside the present period information to facilitate trend analysis (compare this year’s accounts with prior year accounts).

iv. Consistent: the same accounting methods should be applied from period to period. This also facilitates comparison of the financial performance of the bank over a period of time since the same accounting policies would have been used in the preparation of the accounting information being compared.

v. Comprehensible: The users of the accounting information (though not accounting professionals, should be able to understand it and as a result make informed economic decisions based on the information

vi. Timely: The accounting information should be produced on time to be used for making decisions otherwise its value will not be realized.

vii. Objective: accounting information should not be biased but rather be prepared on the basis of facts and good practice.


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International accounting bodiesThe accounting profession is regulated internationally by the International Accounting

Standards Board (IASB) which issues accounting standards known as the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS). There are presently 41 IASs and 8 IFRs (as at Oct 2011). The objectives of IASB are:

i. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their world wide acceptance and observance.

ii. To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.

The accounting standards have been adopted by many countries for the preparation of financial statements by companies in the execution of their regulatory role.

The accounting profession in Uganda is regulated by the Institute of Certified Public Accountants of Uganda (ICPAU) which is a member of the International Federation of Accountants (IFAC). ICPAU has also adopted the IASs and IFRSs to be used in Uganda. We shall therefore be using the IAS and IFRS in this module.


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Accounting principles/ concepts• Accounting information, in order to be

reliable, must be prepared according to generally agreed precepts also referred to as accounting concepts or principles. Accounting principles are the broad basic assumptions which underlie the periodic financial accounts of business enterprises.

• Accounting concepts act as filters of accounting data/facts collected from the environment in which the accounting information system operates. They also govern the processing stage and define what is acceptable as output or information to the users.


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The Accounting profession identifies the following four fundamental principles.1. Going concern principle: The institution is viewed as continuing in operation for the foreseeable future and the

accounts should be prepared on the assumption that the organization has neither the intention nor the necessity of liquidating or of curtailing significantly the scale of its operations.

2. Accruals’ principle (sometimes called the matching concept).This requires that costs should be matched against revenues which are produced as a

result of those costs. The Companies Act 1985 of the Laws of Uganda states that ‘all income and charges relating

to the financial year to which the accounts relate shall be taken into account, without regard to the date of receipt or payment as long as the business is entitled to it’.

In other words, if an expense has been paid in one financial period but the related revenue does not arise until a later one the cost should be carried forward, and if an expense is incurred in one financial period it should be charged against the profit of that period, whether or not it has been paid for by the accounting date.


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3. The Principle of Prudence:A person is said to be prudent when he gives the most cautious presentation of the situation. In

accounting a knowledgeable user assumes that the preparer has been cautious to the extent that he has not anticipated any gains (all gains reported have been realized) and any expenses or losses foreseen with reasonable certainty have been recognized in the financial statements.

Income should not be anticipated in the accounts but rather only included when the BANK is legally entitled to it. However, some expenses may not have been paid by the balance sheet date and yet the services were used like for instance utilities (water, electricity and telephone bills) in which case these expenses are accrued (included in the accounts as expenses and the respective service providers recognized as creditors of the business) at the balance sheet date.

4. Consistency PrincipleThe accounting treatment of like items should be consistent over successive accounting periods.

When policies are consistently applied, it helps facilitate comparison of performance over a range of periods. In case the accounting treatment of any item has changed from one period to another, details of such a change should be disclosed in the notes to the accounts. The impact of the change should be quantified and stated.


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Besides the above four universally agreed fundamental principles or concepts, there are other principles/ concepts;

Entity conceptThis is the assumption that the affairs of an entity are treated as separate

from the other business activities of its owner. The only time that the personal resources of the proprietor affects the accounting records of the business is when the proprietor introduces capital into the business, makes a drawing origin any other transactions with the business.

Duality conceptAny given transaction will affect a minimum of two accounts within assets,

liabilities, or equity. If the accounting equation (ASSETS = CAPITAL + LIABILITIES) is to remain in balance, any change in the assets must be accompanied by an equal change in the liabilities or equity, or by an equal but opposite change (increase or decrease) in another asset account.


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Materiality conceptUnder this concept, items are recorded in

financial statements only if they are material.

Items are material if their omission or misstatement would affect the impact of the financial statements.

Materiality as a concept is relative but some items disclosed in accounts are particularly sensitive and even a very small misstatement of such an item would be seen as a material error for example where the disclosure of the absolute amount is a statutory requirement like for instance the extent of insider lending (loans to the shareholders and persons related to them) in a financial institution.


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Realization concept This requires that revenue be recognized in the

accounting period it is earned, rather than when it is collected in cash. It defines the point at which revenue is recognized.

“Substance over form” ConceptIt stipulates that items in the financial

statements need to be treated more in line with their economic reality than just their legal form, as long as this does not result in violation of materiality. Accordingly, assets, liabilities, income and expenditure items can be grouped in some cases and reported as a single item.

basic accounting unit1

Business

financial transactions

financial reports

financial position

yearend financial statements

key financial ratios

simple financial projections

basic accounting

certified accounting