Short Note for Exam: Accounting and Finance

1. Introduction to Accounting:

- Definition: Accounting is an information system providing reports on economic activities and

business conditions.

- Purpose: Communicate results, aid decision-making, and offer informed judgments.

- Process: Identifying, measuring, and communicating economic information to users.

2. Accounting Activities and Users:

- Internal Users: Management for decision-making.

- External Users: Taxing authorities, regulatory agencies, labor unions for compliance and financial
health assessment.

3. Accounting Information Users:

- Accounting Information (AI): A means to an end; facilitates decision-making.

- Users: Owners, management, creditors, government bodies, labor unions, etc.

4. Financial, Cost, and Management Accounting:

- Financial Accounting:

- Purpose: Provides information for external decision-makers.

- Cost Accounting:

- Purpose: Analyzes and evaluates alternative courses of action.

- Management Accounting:

- Purpose: Provides economic and financial information for internal users.

- Use: Setting goals, evaluating performance, making managerial decisions.

5. Financial vs. Management Accounting:

- Similarities: Both deal with economic events, require quantification and communication of a
company's economic activities.

- Differences: Financial accounting for external users, management accounting for internal
decision-makers.
 6. Finance:

- Definition: The study of raising and investing money efficiently.

- Concerns: Processes, institutions, markets, and instruments in money transfer.

- Areas: Business, personal, and public finance; crucial for economic objectives.

7. Financial Management:

- Definition: Integral part of overall management; concerned with efficient capital funds utilization.

- Functions: Procurement of funds, effective fund utilization.

- Decision Areas: Investment, financing, liquidity, and dividend decisions.

8. Financial Decisions in a Firm:

- Investment Decisions: Capital budgeting, evaluating prospective profitability, and measuring cut-off
rates.

- Financing Decisions: Raising funds, determining optimal capital structure.

- Working Capital Management: Handling current assets and liabilities for liquidity and profitability.

- Dividend Decisions: Deciding on profit distribution or retention.

9. Conclusion:

- Role of Accounting: Provides vital information for decision-makers.

- Role of Finance: Uses accounting information, integral to achieving economic objectives.

- Interconnectedness: Finance and accounting closely related to the main functional areas of a firm.

- Financial Management: A separate, crucial aspect to be discussed further.

In summary, accounting serves as the language of business, aiding communication and decision-
making. Finance, intertwined with accounting, plays a vital role in efficiently utilizing capital funds to
achieve a firm's economic goals.

PART 2

1. Introduction to Accounting Activities and Users:

- Financial Accounting: Records daily financial transactions and summarizes them for external users.

- Regulations: Subject to rules imposed by company legislation, stock exchange regulations, and
financial reporting standards.
 - Three Accounting Process Activities:

1. Identifying transactions.

2. Recording transactions.

3. Communicating financial information.

2. Accounting Standards:

- Purpose: Ensure high-quality financial reporting.

- Standards Boards:

- IASB (International Accounting Standards Board): Determines International Financial Reporting

Standards (IFRS).

- FASB (Financial Accounting Standards Board): Determines generally accepted accounting

principles (GAAP) in the U.S.

3. Measurement Principles:

- IFRS Principles:

- Historical cost principle: Records assets at their cost over time.

- Fair value principle: Reports assets and liabilities at fair value.

- Selection: Trade-offs between relevance (decision-making impact) and faithful representation

(factual accuracy).

4. Assumptions:

- Monetary Unit Assumption: Records only transactions in monetary terms.

- Economic Entity Assumption: Separates entity activities from owner and other entities.

- Entity Forms: Proprietorship, partnership, corporation.

5. Financial Statements:

- Income Statement: Lists revenues, expenses, and shows net income or loss.

- Retained Earnings Statement: Explains changes in retained earnings.

- Statement of Financial Position: Snapshot of financial condition, listing assets, liabilities, and equity.

- Statement of Cash Flows: Details cash receipts and payments.

- Comprehensive Income Statement: Reports other comprehensive income items separately.

 6. The Recording Process:

- The Account: Individual record with three parts – title, debit side (Dr.), and credit side (Cr.).

- Dr./Cr. Procedures: Assets and liabilities follow specific rules to maintain balance.

- Equity Relationships: Different accounts for share capital, retained earnings, dividends, revenues,
and expenses.

7. Journalizing Transactions:

- The Journal: Records transactions chronologically and helps prevent errors.

- Simple vs. Compound Entries: Simple entries involve one debit and one credit; compound entries
involve more, listed in a standard format.

8. The Ledger and Posting:

- Ledger: Group of accounts; maintains balances and tracks changes.

- Posting: Transfers information from the journal to the ledger.

9. Adjusting the Accounts:

- Accrual-Basis Accounting: Records events when they occur, in line with IFRS.

- Adjusting Entries: Ensure accurate revenue and expense recognition.

- Types of Adjusting Entries: For deferrals and accruals.

10. Adjusted Trial Balance and Financial Statements:

- Adjusted Trial Balance: Lists accounts and balances after adjusting entries.

- Financial Statements Preparation: Uses adjusted trial balance to prepare income statement,
retained earnings statement, and statement of financial position.

11. Closing the Books:

- Closing Entries: Recognize transfer of net income (or loss) and dividends to retained earnings.

- Purpose: Produces zero balances in temporary accounts.

- Frequency: Done at the end of the annual accounting period.

12. Classified Statement of Financial Position:

- Presentation: Groups similar assets and liabilities for clarity.

 - Assets Classification: Intangible assets, property, plant, equipment, long-term investments, and
current assets.

- Liabilities Classification: Non-current and current liabilities.

13. Equity and Non-Current Liabilities:

- Equity: Differentiated for proprietorship, partnership, and corporation.

- Non-Current Liabilities: Obligations expected to be paid after one year.

14. Current Liabilities:

- Definition: Obligations payable within one year or the operating cycle, whichever is longer.

- Examples: Accounts payable, salaries, notes payable, interest payable, income taxes payable.

1. The Nature of Accounting:

 Explanation: Accounting is the systematic process of identifying, recording, classifying,

and interpreting financial information. It serves as the language of business, providing a
structured framework for organizations to communicate their economic activities.

2. Accounting vs Finance: A Distinction:

 Explanation: While accounting focuses on the systematic recording and reporting of

financial transactions, finance deals with the management of funds, investments, and
financial planning. The distinction lies in accounting's role in providing the necessary
data for financial decisions made by finance professionals.

3. Financial vs Management Accounting: User Perspective:

 Explanation: Financial accounting caters to external users (investors, regulators) by

providing a transparent view of a company's financial health. In contrast, management
accounting serves internal users (managers) by supplying information for decision-
making, planning, and control within the organization.