TOPIC 1

INTRODUCTION TO ACCOUNTING

What is accounting?

What do you think of when you read or hear the word accounting…

What do you believe it means or represents…

Introduction

Accounting is concerned with the recording and classifying and summarising of data, and then communicating what has been learned from it.

is accounting is part of mathematics…

But you need to be able to add, subtract, multiply and divide..

Things you need to be able to do in your daily life..

The history of accounting

Accounting began because people needed to:

• Record business transactions,• Know if they were being financially successful,

and• Know how much they owned and how much

they owed.

8

Brief History of Accounting

• Accounting was introduced to the world by Luca Pacioli (an Italian Monk) in one section of his mathematics book titled "Everything about Arithmetic, Geometry, and Proportions." (Summa de arithmetica, geometria, proportioni et proportionalita). The book was published in 1494.

• Pacioli did not actually invented Accounting. He only described the method used by merchants in Venice during the Italian Renaissance period.

9

Brief History of Accounting

• Pacioli described the accounting cycle that we used today in his book. Such as the used of journals, ledger and trial balance. Pacioli also stressed that Debit must = Credit (the double entry system) in the accounting system.

• The title “Father of Accounting” was given to Pacioli because of his contributions.

• The definition of accounting involves four stages:

1. Recording~where transactions are recorded in the books of the business

2. Classifying~which involves sorting out the mass of accounting data into meaningful categories

3. Summarizing- ~where periodically the accounting data are summarised.

4. Interpreting~where the financial data are analysed and used to assist in more effective decision making.

Importance of Accounting

• An understanding of the basic principles of accounting is important to anyone who hopes to advance his or her career in business or government.

• A manager must be able to supervise others, who are collecting, recording and summarising accounting data.

• Accounting data is then analysed and the information used for decision making because it tells where, when,how and why money has been spent.

• It is helpful in the evaluation of performance and indicates the financing implications of choosing one project over another

How transactions are recorded• Books of account • Bookkeeping

– Manually in books– Computer accounting package

• Summarising

The financial statements • A Statement of Financial Position or Balance Sheet

– What you own - ASSETS– What you owe – CAPITAL and LIABILITIES

• A Statement of Income – What you have earned – INCOME– What it cost you – EXPENSES

Users of Accounting Information

InternalUsers

External users

Creditors

Investors

Unions

Public

Owners

managers

Employees

Gov. agencies

Users of Accounting Information

• External users are individuals or groups outside the business or organization who evaluate the ability , financial position and performance of the organizations.

• External users are also known as stakeholders who have some interest in the accounting information.

• Internal users include the directors, managers and employees in a company or organization who do the analysis of the given information to fulfill their own requirements.

• Owners would be interest in knowing what are the profit they earned from their investment in the business. They also interested in the financial stability and growth of the business.

• Managers - managers have to ensure that the business is operated efficiently. So they need information in planning, organizing and controlling the organization.

• Employees would also interested in the business’s ability to progress and expand. They would look for steady employment, earning capacity and other benefits which are to be gained from a financially stable business.

• Creditor-to determine the firm’s ability to repay loan.

• Investor- to evaluate whether the business is a good investments

Definition of Assets and Types of Assets

AssetsEconomic resources which are controlled by a

business and are expected to be of benefit in the future.

2 types: fixed assets and current assets.

Fixed assetsFixed assets are assets that:1. Were not bought primarily to be sold; but2. Are to be used in the business; and3. Are expected to be of use to the business for

a long time

Example: land and building, motor vehicle, machinery and equipment, fixtures and fittings.

Fixed Assets/ Non Current Assets

• Are assets that are likely to change in the short term and certainly within 12 months of the balance sheet date.

• Example: cash in hands, cash at bank, stock of goods, account receivable(debtor), expenses paid in advance

Current Assets

• LiabilitiesRepresent what the business owes to

outsiders. They are the financial obligations of the business to outsiders.

2 types: Long term liabilities and current liabilities

Definition of Liabilities and Types of Liabilities

Fixed assetsLong term liabilities are items that have to be

paid more than a year after the balance sheet date.

Example: bank loans.

Long-term Liabilities/ Non Current Liabilities

Fixed assetsCurrent liabilities are items that have to paid

within a year of the balance sheet date.

Example: bank overdrafts, amount due to creditors( account payable) , short term loan.

Current Liabilities

• Owners’ equity represents the contribution of assets, usually in the form of cash, into the business, by the owners. Once the business operates, any profits made by the business and not taken out by the owner, becomes part of the owner’s equity.

• Other terms of owners’ equity are capital, and net worth.

Definition of Owners’ Equities

• Revenues are earned (or recognised) when a business sells goods/services to its customers, which results in an inflow of assets such as cash or debtors.

• In other words, revenues are earned when a firm has provided goods/services to its customers.

Revenues

• Expenses (including costs) incurred refer to the using up of assets in earning revenues.

• In other words, expenses incurred can be defined as the sacrifice made to produce revenue.

Expenses

Examples of Revenues and Expenses

Revenues Expenses

Sales Cost of goods sold (cost of sales)

Interest received Wages

Commissions received Salaries

Rent received Insurance

Discounts received Electricity

Postage

Legal fees

Audit fees

Interest expense

Rent expense

Discounts allowed

• The business entity concept implies that the affairs of a business are to be treated as being quite separate from the non-business activities of its owner/s.

• The items recorded in the books of the business are, therefore, restricted to the transaction of the business.

• The only time that the personal resources of the owner affect the accounting records of a business is when he brings in new capital into the business, or take drawings out of it.

Accounting Concepts

Business entity concept

• Business will continue in operational existence for the foreseeable future.

Going concern

Consistency

• In many cases in accounting there are several acceptable accounting methods. However, once a particular accounting method has been adopted, it should be followed consistently in subsequent periods.

• This is to ensure that the accounting reports of a business are comparable from period to period.

• Assets are recorded at cost (historical cost). This cost figure will be recorded in the accounts until the assets is sold or used up.

Historical cost concept

Time interval concept

• Financial statements are prepared at regular interval of one year.

Money measurement concept

• Accounting information has traditionally been concerned only with those facts that:i. It can be measured in monetary units, andii. Most people will agree to the monetary value of

the transaction.

• It means that accounting can never tell you everything about a business. For example, accounting does not show you:i. Whether the business has a good or bad managers, andii. Whether there are serious problems with the workforce.

• Very often accountants have to use their judgement to decide which figure to take for an item.

• They should make certain that assets are not valued too high, liabilities shot not be shown at values that are too low.

• To ensure that financial statements are neutral -that gains and losses are neither overstated nor understated - and this is known as prudence.

Prudence/ Conservative

• This states that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them.

• The concept states that these two aspects are always equal to each other.

• This is in the form of the accounting equation.

Dual aspect concept/ Double Entries Rules

Assets = Capital + Liabilities