CSCD 421 – Accounting Principles

in Computing (3 Credits)
Department of Computer Science
University of Ghana
Module 1a – The Nature and
Function of Accounting
 Why Accounting?
• Questions to ponder upon
• Is Accounting relevant to a Computer Science
Student?
• What would one use it for?
• Do I even need any business knowledge as a
science student?
• How would knowledge in business and
accounting help shape my life?
 Introduction to Accounting
• Accounting has rightly been termed as the
language of the business.
• The basic function of a language is to serve as a
means of communication.
• Accounting also serves this function.
• It communicates the results of business
operations to various parties who have some
stake in the business
• For example, the proprietor, creditors, investors,
Government and other agencies.
 History of Accounting
• Accounting is as old as money itself.
• Accounting began because people needed to:
– Record business transactions; and
– Know how much they owned and how much they owed.
• Accounting was practised in ancient times in Egypt,
China, India, Greece and Rome.
• In India, a system of accounting, called Babi-khata was
developed many centuries ago.
• However, the modern system of accounting based on
the principles of double entry system owes it origin to
Luco Pacioli who first published the principles of
Double Entry System in 1494 in Italy.
 What is Accounting?
• Accounting is a set of concepts and techniques
that are used to measure and report financial
information about an economic unit.
• An economic unit is generally considered to be
a separate enterprise.
• American Accounting Association defines
accounting as "the process of identifying,
measuring, and communicating economic
information to permit informed judgements
and decisions by users of the information”.
 What is Accounting? Cont.
• The American Institute of Certified Public
Accountants has defined the Financial
Accounting as "the art of recording,
classifying and summarising in as
significant manner and in terms of
money transactions and events which in
part, at least of a financial character, and
interpreting the results thereof".
 Basic Accounting Activities
• Identifying involves selecting those events that are
considered evidence of economic activity relevant to
a particular business organization.
• Recording is the keeping of a chronological diary of
measured events in an orderly and systematic
manner in the proper books of accounts.
• Classifying is concerned with the systematic analysis
of the recorded data so as to accumulate the
transactions of similar type at one place. This
function is performed by maintaining the ledger in
which different accounts are opened to which
related transactions are posted.
 Basic Accounting Activities Cont.
• Summarising is concerned with the preparation and
presentation of the classified data in a manner useful
to the users. This function involves the preparation of
financial statements such as Income Statement,
Balance Sheet, Statement of Changes in Financial
Position, Statement of Cash Flow, Statement of Value
Added.
• Communication occurs through the preparation and
distribution of accounting reports.
• Interpreting the contents of the financial statements in
a manner useful to the users. The accountant should
explain not only what has happened but also (a) why it
happened, and (b) what is likely to happen under
specified conditions.
 Bookkeeping
• Bookkeeping involves the recording of
economic events
• It is just one part of the accounting process
• Thus, accounting involves the entire process
of identifying, recording, and communicating
economic events
Distinction Between Bookkeeping and
Accounting
• Bookkeeping is a part of accounting and is concerned with the
recording of transactions which is often routine and clerical in
nature, whereas accounting performs other functions as well,
viz., measurement and communication, besides recording.
• An accountant is required to have a much higher level of
knowledge, conceptual understanding and analytical skill than
is required of the bookkeeper.
• An accountant designs the accounting system, supervises and
checks the work of the bookkeeper, prepares the reports
based on the recorded data and interprets the reports.
• An accountant is required to take part in matters of
management, control and planning of economic resources.
 The Objectives of Accounting
• To keep systematic records: Accounting is done to
keep a systematic record of financial transactions.
• To protect business properties: Accounting
provides protection to business properties by
supplying information about the business that
helps the proprietor to make sure that the funds
of the business are not necessarily kept idle or
underutilised.
• To ascertain the operational profit or loss:
Accounting helps in ascertaining the net profit
earned or loss suffered on account of carrying the
business.
The Objectives of Accounting Cont.
• To ascertain the financial position of the business:
The Balance Sheet or Position Statement helps
the owner of the business know where he stands
- what he owes and what he owns.
• To facilitate rational decision making: The
Collection, analysis and timely reporting of
financial information to management facilitates
rational decision-making.
• Information System: Accounting functions as an
information system for collecting and
communicating economic information about the
business enterprise.
 Users of Accounting Data
• Internal users
– Management
– Finance Managers
– Marketing Managers
– Production Supervisors, and
– Other Company Officers
• External users
– Investors
– Creditors
– Customers
– Governmental Units
 Branches of Accounting
• To meet the information needs of different
interested parties such as owners,
management, creditors, taxation authorities
etc., the various branches of accounting have
come into existence.
• These are as follows:
– Cost Accounting
– Management or Managerial Accounting
– Financial Accounting
 Cost Accounting
• It is the recording of all the costs incurred in a
business in a way that can be used to improve
its management.
• The object of cost accounting is to find out the
cost of goods produced or services rendered
by a business.
• It also helps the business in controlling the
costs by indicating avoidable losses and
wastes.
 Management Accounting
• It is the provision of financial data and advice to a company
for use in the organization and development of its business.
• The object of management accounting is to supply relevant
information at appropriate time to the management to enable
it to take decisions and effect control.
• Management accounting information is intended to serve the
specific needs of management and other internal
stakeholders.
• Business managers are charged with business planning,
controlling, and decision making.
• As such, they may desire specialized reports, budgets, product
costing data, and other details that are generally not reported
to external users.
 Financial Accounting
• Financial accounting is the field of accounting
concerned with the summary, analysis and reporting of
financial transactions pertaining to a business.
• Financial accounting is targeted toward a broad base of
external users, none of whom control the actual
preparation of reports or have access to underlying
details.
• Their ability to understand and have confidence in
reports is directly dependent upon standardization of
the principles and practices that are used to prepare
the reports.
• Without such standardization, reports of different
companies could be hard to understand and even
harder to compare.
 Systems of Accounting
• The main systems of recording
business transactions (also known as
accounting methods) are:
–Cash Accounting System, and
–Accrual (or Mercantile) Accounting
System
 Cash Accounting System
• Cash accounting is an accounting method
where receipts are recorded during the period
they are received, and expenses are recorded
in the period in which they are actually paid.
• Under this system, only actual cash receipts
and actual cash payments are recorded.
• Credit transactions are not recorded at all
until the cash is actually received or paid.
 Accrual Accounting System
• Accrual Accounting is also known as the Mercantile
System of Accounting.
• Under this system the transactions are recognized as
and when they take place.
• The revenue is recorded when it is earned, and the
expenses are reported when they are incurred.
• That is all transactions relating to a period are recorded
in the books of accounts in addition to actual cash
receipts and payments and income receivable and
expenses payable.
• This system gives a complete picture of the financial
transactions of the business as it makes a record of all
transactions relating to a period.
 Professional Ethics
• Ethics refer to the standards of conduct by which
one’s actions are judged as right or wrong, honest
or dishonest, fair or not fair.
• Because investors and creditors place great
reliance on financial statements in making their
investment and credit decisions, it is imperative
that the financial reporting process be truthful
and dependable.
• Accountants are expected to behave in an
entirely ethical fashion (Integrity, Objectivity,
Professional competence and due care,
Confidentiality, Professional behaviour).
Standardization of Financial Reporting
• Standardization derives from certain well-organized
processes and organizations.
• In the United States, a private sector group called the
Financial Accounting Standards Board (FASB) is
primarily responsible for developing the rules that
form the foundation of financial reporting.
• The FASB’s global counterpart is the International
Accounting Standards Board (IASB). The IASB and FASB
are working toward convergence, such that there may
eventually be a single harmonious set of international
financial reporting standards (IFRS).
 Generally Accepted Accounting
Principles (GAAP)
• The accounting profession has developed
standards that are generally accepted and
universally practiced.
• This common set of standards is called
Generally Accepted Accounting Principles
(GAAP)
• These standards indicate how to report
economic events.
 Principles of Accounting
• In this context, principles of accounting refers
to the broad underlying concepts which
guide accountants when preparing financial
statements.
• Principles of accounting can also mean
generally accepted accounting
principles (GAAP).
 Assumptions
• Assumptions provide a foundation for the
accounting process.
• The main assumptions are the;
– The monetary unit assumption
– The economic (business) entity assumption
– The going concern (continuing concern)
assumption
– The time period concept
 Monetary Unit Assumption
• The monetary unit assumption is vital to
applying the cost principle.
• It requires that companies include in the
accounting records only transaction data that
can be expressed in money terms.
• This enables accountants to quantify or
measure economic events.
• It prevents the inclusion of say, the health of
the company’s owner.
 Economic Entity Assumption
• An economic entity can be any organisation or
unit in society.
• This assumption requires that the activities of
the entity be kept separate and distinct from
the activities of its owner and all other
economic entities.
 The Going Concern Assumption
• This accounting principle assumes that a company will
continue to exist long enough to carry out its
objectives and commitments and will not liquidate in
the foreseeable future.
• It means that the business is going to be operated for
non predefined period.
• In other words, there is no ending date for business
life.
• This accounting principle requires companies to use
the accrual basis of accounting by deferring some of its
prepaid expenses until future accounting periods.
 The Time Period Assumption
• This accounting principle assumes that it is
possible to report the complex and ongoing
activities of a business in relatively short,
distinct time intervals.
• For example, the three months ended March
31, 2015, or the 5 weeks ended January 31,
2015.
 Other Accounting Principles
• Cost Principle
• Full Disclosure Principle
• Matching Principle
• Revenue Recognition Principle
• Materiality Principle
• Conservatism Principle
 The Cost Principle
• From an accountant's point of view, the term
"cost" refers to the amount spent (cash or the
cash equivalent) when an item
was originally obtained, whether that purchase
happened last year or thirty years ago.
• For this reason, the amounts shown on financial
statements are referred to as historical cost
amounts.
• Because of this accounting principle asset
amounts are not adjusted upward for inflation.
 Full Disclosure Principle
• If certain information is important to an investor
or lender using the financial statements, that
information should be disclosed within the
statement or in the notes to the statement.
• It is because of this basic accounting principle
that numerous pages of "footnotes" are often
attached to financial statements.
• A company usually lists its significant accounting
policies as the first note to its financial
statements.
 The Matching Principle
• This accounting principle requires companies
to use the accrual basis of accounting.
• The matching principle requires that expenses
be matched with revenues.
• For example, sales commissions expense
should be reported in the period when the
sales were made (and not reported in the
period when the commissions were paid).
 Revenue Recognition Principle
• Under the accrual basis of accounting (as
opposed to the cash basis of
accounting), revenues are recognized as soon as a
product has been sold or a service has been
performed, regardless of when the money is
actually received.
• Under this basic accounting principle, a company
could earn and report GH¢ 10,000 of revenue in
its first month of operation but receive GH¢0 in
actual cash in that month.
 Materiality Principle
• The materiality principle states that an accounting standard
can be ignored if the net impact of doing so has such a
small impact on the financial statements that a reader of
the financial statements would not be misled.
• Under generally accepted accounting principles (GAAP),
you do not have to implement the provisions of an
accounting standard if an item is immaterial.
• This definition does not provide definitive guidance in
distinguishing material information from immaterial
information, so it is necessary to exercise judgment in
deciding if a transaction is material.
• Professional judgement is needed to decide whether an
amount is insignificant or immaterial.
 Conservatism Principle
• The conservatism principle is the general concept of
recognizing expenses and liabilities as soon as possible
when there is uncertainty about the outcome, but to only
recognize revenues and assets when they are assured of
being received.
• If a situation arises where there are two acceptable
alternatives for reporting an item, conservatism directs the
accountant to choose the alternative that will result in less
net income and/or less asset amount.
• Under this principle, if there is uncertainty about incurring
a loss, you should tend toward recording the loss.
• Conversely, if there is uncertainty about recording a gain,
you should not record the gain.
 Business Organizations
• Sole Proprietorship
• Partnership
• Company or Corporation
 Sole Proprietorship
• A sole proprietorship, also known as
the sole trader or simply a proprietorship, is a
type of business entity that is owned and run by
one natural person and in which there is no legal
distinction between the owner and the business.
• For legal purposes, a sole proprietorship and its
owner are considered to be one entity, but for
accounting purposes they are considered to be
two separate entities.
 Partnership
• A business organization in which two or more
individuals manage and operate the business.
• Both owners are equally and personally liable for
the debts of the business.
• In most respects a partnership is like a
proprietorship except that more than one owner
is involved.
• Typically a partnership deed or agreement sets
forth the rights and obligations of each partner
participating in the venture.
 Company or Corporation
• It is a business organised as a separate legal
entity under law and having ownership
divided into transferable shares of stock.
• The holders of the shares
(shareholders/stockholders) enjoy limited
liability.
• That is, they are not personally liable for the
debts of the company beyond their share
contribution in the case of liquidation.
 The Basic Accounting Equation
• The two basic elements of a business are what
it owns (Assets) and what it owes (Liabilities)
• Claims of owners are called owner’s equity.
• We can express the relationship of assets,
liabilities, and owner’s equity as an equation.
• Assets = Liabilities + Owner’s Equity
• Liabilities appear before owner’s equity
because they are paid first if a business is
liquidated.
 Assets
• Assets are resources a business owns.
• The business uses its assets in carrying out
such activities as production and sales.
• Assets common characteristic is the capacity
to provide future services or benefits.
• That service potential or future economic
benefit eventually results in cash inflow
(receipts).
 Liabilities
• Liabilities are claims against assets.
• It is a company's legal debts or obligations
that arise during the course of business
operations.
• These economic activities result in payables of
various sorts.
• Liabilities are settled over time through the
transfer of economic benefits including
money, goods or services.
 Owner’s Equity
• It is the ownership claim on total assets
• It is equal to total assets minus total liabilities.
• The assets of a business are claimed by either
creditors or owners.
• To find out what belongs to owners, we
subtract the creditors’ claims (liabilities) from
assets.
• Owner’s Equity = Assets – Liabilities.
 Increase in Owner’s Equity
• In a proprietorship, owner’s investments and
revenues increase owner’s equity.
• Investments by owner are the assets the owner
puts into the business.
• These investments increase owner’s equity.
• They are recorded in a category called Owner’s
Capital.
• Revenues are gross increase in owner’s equity
resulting from business activities entered into for
the purpose of earning income.
 Decrease in Owner’s Equity
• In a proprietorship, owner’s drawings and
expenses decrease owner’s equity
• Drawings occur when an owner withdraws
cash or other assets for personal use.
• Expenses are the cost of assets consumed or
services used in the process of earning
revenue
• They are decreases in owner’s equity that
result from operating the business.
 Expanded Accounting Equation
• Basic Equation:
Assets = Liabilities + Owner’s Equity

• Expanded Equation:
Assets = Liabilities + Owner’s Capital – Owner’s
Drawings + Revenues - Expenses
• Where Owner’s Equity = Owner’s Capital –
Owner’s Drawings + Revenues - Expenses
 Transaction Analysis
• Transactions (business transactions) are
economic events recorded by accountants for
a business entity.
• External Transactions involve economic events
between the company and some outside
enterprise.
• Internal Transactions are economic events
that occur entirely within one company.
 Transaction Analysis in terms of the
basic accounting equation
• CompuTech is a newly registered enterprise in IT
consultancy services, owned by Ken Wright. The
following are the business transactions in the first
three months of 2016. All figures are in Ghana
Cedis (GH¢)
1. On Jan 4, invested 20,000 cash in the business.
2. Rented an office for 500 a month and made
advance payment of 6,000
3. Purchased furniture for 3,000 cash
 Transactions Cont.
4. Purchased stationery and other supplies on credit
at a cost of 2,500.
5. CompuTech received 3,000 cash from a customer
for networking services it provided.
6. Received a bill for 1,200 from the Internet Service
Provider (ISP).
7. Provided 11,000 of programming services and
received cash of 5,000 from the customer. The
balance was put on the customer’s account.
8. Paid salaries of employees 3,000, and utilities
500. Also spent 900 on advertisement on credit.
 Transactions Cont.
9. Made full payment to the advertising
company and the ISP.
10. The owner made drawings of 2,400 in cash
from the business.
11. Received 4,000 cash from the customer.
12. Supplies consumed amounted to 1,500.
Use a spreadsheet to summarise the
transactions to show their cumulative effect
on the basic accounting equation.
 CompuTech Transactions Analysis
COMPUTECH
TRANSACTIONS ANALYSIS FOR THREE MONTHS ENDED 31ST MARCH, 2016
BASED ON BASIC ACCOUNTING EQUATION: ASSETS = LIABILITIES + OWNER'S EQUITY

Trans # Description ASSETS LIABILITIES OWNER'S EQUITY

Account Account
Cash Receivable Furniture Supplies Payable Capital Drawings Revenues Expenses
1 Capital 20,000 20,000
2 Rent Adv. - 6,000 6,000
2 Rent 3 mths - 1,500 - 1,500
3 Furniture - 3,000 3,000
4 Supplies 2,500 2,500
5 Sales 3,000 3,000
6 Internet Exp. 1,200 - 1,200
7 Sales 5,000 6,000 11,000
8 Salaries - 3,000 - 3,000
8 Utilities - 500 - 500
8 Advert 900 - 900
9 Payment - 2,100 - 2,100
10 Drawings - 2,400 - 2,400
11 Receipt 4,000 - 4,000
12 Consumption - 1,500 - 1,500
Total 15,000 6,500 3,000 1,000 2,500 20,000 - 2,400 14,000 - 8,600
25,500 2,500 23,000
 Financial Statements
• A financial statement (or financial report) is a
formal record of the financial activities and
position of a business, person, or other entity.
• Relevant financial information is presented in a
structured manner and in a form easy to
understand.
• For large corporations, these statements may be
complex and may include an extensive set
of footnotes to the financial statements
and management discussion and analysis.
 Financial Statements
• Companies prepare basic reports as the financial
statements from the summarised accounting data
- Income Statement
- Owner’s Equity Statement
- Balance Sheet
- Statement of Cash Flows
• Also, explanatory notes and supporting schedules
are an integral part of every set of financial
statements.
 Income Statement
• It presents the revenues and expenses that are
shown under the owner’s equity side of the basic
accounting equation.
• It lists revenues first, followed by expenses.
• Finally, the statement shows net income (or net
loss).
• Net income results when revenues exceed
expenses.
• Net loss occurs when expenses exceed revenues.
 Owner’s Equity Statement
• The owner’s equity statement reports the
changes in owner’s equity for a specific period
of time.
• The time period is the same as that covered
by the income statement .
• Data for the preparation of the owner’s equity
statement come from the owner’s equity
columns of the tabular summary and from the
income statement.
 Balance Sheet
• It is the snapshot of a business financial
position at a specific date.
• It reports the following;
– Assets
– Liabilities, and
– Owner’s equity
• Total assets must equal total liabilities and
owner’s equity.
 Statement of Cash Flows
• It summarises information about the cash
inflows (receipts) and outflows (payments) for
a specific period of time.
• It provides answers to the following important
questions.
– Where did cash come from during the period
– What was cash used for during the period
– What was the change in the cash balance during
the period.
 CompuTech Income Statement
COMPUTECH
INCOME STATEMENT
FOR THE THREE MONTHS ENDED 31ST MARCH, 2016

Revenues
Service Revenue 14,000

Expenses
Salaries Expense 3,000
Rent Expense 1,500
Supplies Expense 1,500
Advertising Expense 900
Utilities Expense 500
Internet Expense 1,200
Total Expenses 8,600
Net Income 5,400
CompuTech Owner’s Equity Statement
COMPUTECH
OWNER'S EQUITY STATEMENT
FOR THE THREE MONTHS ENDED 31ST MARCH, 2016

Capital, Jan 1 -
Add Investment 20,000
Add Net Income 5,400
25,400
Less Drawings 2,400
Capital, March 31 23,000
 CompuTech Balance Sheet
COMPUTECH
BALANCE SHEET
AS AT 31ST MARCH 2016

Assets
Cash 15,000
Account Receivable 6,500
Supplies 1,000
Furniture 3,000
Total Assets 25,500

Liabilities and Owner's Equity

Liabilities
Account Payable 2,500
Owner's Equity
Capital 23,000

Total Liabilities and Owner's Equity 25,500

 CompuTech Statement of Cash Flows
COMPUTECH
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED 31ST MARCH, 2016

Cash flows from operating activities

Cash receipts from revenues 12,000
Cash payments for expenses (7,100)
Rent prepaid (4,500)

Net cash provided by operating activities 400

Cash flows from investing activities
Purchase of furniture (3,000)
Cash flows from financing activities
Investment by owner 20,000
Drawings by owner (2,400)

Net Cash flows from financing activities 17,600

Net increase in cash 15,000
Cash at the beginnning of the period 0
Net increase in cash 15,000
Cash at the end of the period 15,000
 Exercise 1a
• Write short notes on the following:
– Cost Accounting
– Management Accounting
– Financial Accounting
 Exercise 1b
S. Wayongo started an accounting firm on 1st April, 2016.
During the first month of operations, the following
transactions occurred.
1. S. Wayongo invested 16,000 cash in the firm
2. Paid one year rent advance of 5,400 for an office space
3. Purchased two computers and a set of furniture
costing 4,600 and 5,000 respectively and paid cash
4. Provided accounting services to clients for a cash of
3,000
5. Took a loan of 8,000 from a local bank
6. Performed services for a client on account 4,000
 Exercise 1b Cont.
7. Paid monthly expenses: salaries 7,500, utilities
600, and telephone 200
8. Bought stationery worth 1,500 and paid 1,000.
The remaining 500 was on account
9. S. Wayongo withdrew 2,000 cash and 200
supplies for personal use.
a)Prepare a tabular summary of the transactions
b)Prepare the income statement, owners equity
statement, balance sheet, and statement of cash
flows for the month of April 2016.