Accounting principles

LO1:Examine the context & purpose of accounting

Learning objectives
LO1:Examine the context & purpose of accounting

Learning Outcome #1: Examine the context & purpose of accounting:

To achieve the above learning outcome should cover the below learning objectives :

Why we need accounting? What accounting is?

Identify the users , uses & branches of accounting Accounting standards & principles

The career opportunities in accounting Understand why ethics is a fundamental business concept

The Forms of Business Ownership The accounting equation & its components

Analyze the effects of business transactions on the Understand the five financial statements and how they are prepared
accounting equation
 LO1:Examine the context & purpose of accounting

Accounting is often called the language of business, Why ?

Because accounting is used to communicate useful financial information to the
interested users.

If you do not know how to read financial statements, you cannot really know
your business.

To be good at your business, you have to know the numbers.

Success in any business comes back to the numbers, you will rely on them to make
decisions, and managers will use them to evaluate the performance.
LO1:Examine the context & purpose of accounting

Accounting: is an information system consists of three basic activities—it identifies, records, and communicates the economic events of
an organization to interested users.

Identify Records Communicate

Records those events in order to

Identifies the economic provide a history of its financial Communicating the collected Internal users
events relevant to its activities Consists of keeping a information to interested
business. systematic, chronological diary of users by means of
accounting reports. The most
External users
events, measured in monetary
units. common of these reports are
called financial statements.
 LO1:Examine the context & purpose of accounting

What is the Purpose of Accounting?

The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a
business.

This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.

This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized
business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known as journal entries.
 LO1:Examine the context & purpose of accounting

Objectives of Accounting:

1. To maintain full and systematic records of business transactions:

Accounting is the language of business transactions. Given the limitations of human memory, the main objective of accounting is to maintain ‘a
full and systematic record of all business transactions.

2. To ascertain profit or loss of the business:

Business is run to earn profits. Whether the business earned profit or incurred loss is ascertained by accounting by preparing Profit & Loss
Account or Income Statement.
 LO1:Examine the context & purpose of accounting

3. To depict financial position of the business:

A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement called
Balance Sheet is prepared in which assets and liabilities are shown.

Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not, in the same way by looking at the Balance
Sheet one will know the financial health of an enterprise. If the assets exceed liabilities, it is financially healthy, i.e., solvent. In the other case, it
would be insolvent, i.e., financially weak.
 LO1:Examine the context & purpose of accounting

4. To provide accounting information to the interested parties:

Apart from owner of the business enterprise, there are various parties who are interested in accounting information. These are bankers, creditors,
tax authorities, prospective investors, researchers, etc. Hence, one of the objectives of accounting is to make the accounting information available
to these interested parties to enable them to take sound and realistic decisions. The accounting information is made available to them in the form
of annual report.
LO1:Examine the context & purpose of accounting

Who are the users of accounting information?

Internal users External users

 LO1:Examine the context & purpose of accounting

Who are the users of accounting information?

For accounting information to be useful, the accountant must be clear for whom

the information is being prepared and for what purpose it will be used.

There are likely to be various groups of people (usually known as ‘user groups’)

with an interest in a particular organisation, in the sense of needing to make

decisions about it.

 LO1:Examine the context & purpose of accounting

INTERNAL USERS

Internal users of accounting information are managers who plan, organize, and run the

business. These include marketing managers, production supervisors, finance directors, and

company officers.

EXTERNAL USERS

are individuals and organizations outside a company who want financial information

about the company. The two most common types of external users are investors and

creditors.

Stakeholder:
A general term to indicate all those who might have a legitimate interest in receiving financial information about a business because they
have a ‘stake’ in it.
 LO1:Examine the context & purpose of accounting

INTERNAL USER S:

1. Owners * :

“Business owner” is a term that refers to individuals who establish and operate an entity that is engaged in commercial, industrial or professional activities with the

purpose of deriving profits from its successful operations. The prime role the business owner takes on is to maximize the company’s net profits. The secondary role of the

business owner supplements the primary role by reducing the business’ costs and weaknesses.

* The owners here are considered an internal user if the type of company structure is sole, while the term investors is used as an external user in the corporations company
 LO1:Examine the context & purpose of accounting

2. Management :

Those who run business on a daily basis, this group is referred to in broad terms as management, which is a collective term for all those persons who have responsibilities

for making judgements and decisions within an organisation. It is management’s responsibility to employ the resources of the business in an efficient way and to meet

the objectives of the business.

3. Employees :

Employees and their representatives are interested in information about the stability and profitability of their employers. They are also interested in information that

helps them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.
 LO1:Examine the context & purpose of accounting

External USERS

1. Investors:

Where the ownership is separate from the management of the business, as is the case with a limited liability company, the owners are more appropriately viewed

as investors who entrust their money to the company and expect something in return, usually a dividend and a growth in the value of their investment as the

company prospers.

The kinds of judgements and decisions made by investors could include any or all of the following:

• Evaluating the performance of the entity

• Assessing the effectiveness of the entity in achieving objectives

• Evaluating managerial performance, efficiency and objectives, including investment and dividend distribution plans.
 LO1:Examine the context & purpose of accounting

2. Creditor ( lender & suppliers):

A creditor could be a bank , supplier or person that has provided money, goods, or services to a company and expects to be paid at a later date.

3. Customers:

A customer is an individual or business that purchases another company's goods or services. Customers are important because they drive revenues; without them,

businesses cannot continue to exist.

 LO1:Examine the context & purpose of accounting

3. Government :

Government consists of the activities, methods, and principles involved in governing a country or other political unit. Such as; The income tax refers to a

type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income

tax return annually to determine their tax obligations. Income taxes are a source of revenue for governments.

4. Public interest :

Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy by

providing employment and using local suppliers. Financial statements may assist the public by providing information about the trends and recent

developments in the prosperity of the entity and the range of its activities. A strong element of public interest has been aroused in recent years by

environmental issues and the impact of companies on the environment.

 LO1:Examine the context & purpose of accounting

Accounting follows certain standards in reporting financial information. In order to ensure high-quality financial reporting, accountants present
financial statements in conformity with accounting standards that are issued by standard setting bodies.

Accounting Standards

IASB FASB
Find the
following
acronyms IFR S GAAP
 LO1:Examine the context & purpose of accounting

CONCEPTUAL FRAMEWORK

the IASB and FASB completed the first phase of a joint project in which
they developed a conceptual framework to serve as the basis for future
accounting standards.

The framework begins by stating that the primary objective of financial

reporting is to provide financial information that is useful to investors and
creditors for making decisions about providing capital.

According to the IASB, useful information should possess two fundamental

qualities:

1.relevance

2.faithful representation.
LO1:Examine the context & purpose of accounting
 LO1:Examine the context & purpose of accounting

Relevance Faithful Representation

Relevance Accounting information has relevance if it would make a difference in a Faithful representation means that information accurately depicts what
business decision.
really happened.
Information is considered relevant if it provides information that has:
To provide a faithful representation, information must be:
1. predictive value; that is helps provide accurate expectations about the future.
1. complete (nothing important has been omitted),
2. 2.confirmatory value; that is confirms or corrects prior expectations.
2. Neutral (is not biased toward one position or another),
3. Materiality is a company-specific aspect of relevance. An item is material when
3. and free from error.
its size makes it likely to influence the decision of an investor or creditor.
LO1:Examine the context & purpose of accounting

Accounting Assumptions vs Accounting principles

Accounting Assumptions Accounting principles

The Economic Entity Assumption Measurement principle ( historical cost & Fair value )

The Going Concern Assumption Expenses Recognition principle (Matching)

The Time Period Assumption ( periodicity ) Revenue recognition principle

The Monetary Unit Assumptions Full Disclosure

Accrual -
 LO1:Examine the context & purpose of accounting

Accounting Assumptions

1. Economic Entity Assumption: States that the business records are separate from its owners for accounting purposes.

2. Monetary unit assumption: States that the only transactions that can measured in a money unit should recorded.

3. Going concern assumption: States that the business will, continue operate forever instead of liquidating a business.

4. Time period assumption: States that the life of a business should divided into artificial periods, each time referred to as
accounting period.

5. Accrual: Transactions recorded in the periods in which the events occur.

 LO1:Examine the context & purpose of accounting

Accounting Principles
1. Measurement principle
a. Historical cost principle (or cost principle): dictates that companies record assets at their cost. This is true not only at the time
the assets purchased, but also over the time, the assets held.

b. Fair value principle: states that assets and liabilities should reported at fair value (the price received to sell an asset or settle a
liability).

Recognized Vs Reporting
 LO1:Examine the context & purpose of accounting

Accounting Principles

2. Revenue recognition principle: Means that the business should take into consideration the exact period to record revenues. Companies
recognize Revenues when they perform services (rather than when they receive cash)

3. Expenses recognition principle (Matching): Means that expense should be record at the same period when revenues have been record. Expenses
are recognize when incurred (rather than when paid).

4. Full disclosure principles: Means that a company should report the whole details may affect the user
 LO1:Examine the context & purpose of accounting

Ethics in financial reporting

Considered as the important fundamental element of the accounting profession. Integrity requires accountants to be honest, candid and forthright with a client's
financial information. Accountants should restrict themselves from personal gain or advantage using confidential information.

What is Accounting Ethics?

Accounting ethics refers to following specific rules and guidelines set by governing bodies that every person associated with accounting should follow to prevent misuse
of the financial information or their management position.
LO1:Examine the context & purpose of accounting

Accounting Branches

Forensic Governmental
Public Accounting Private Accounting
Accounting Accounting

Management Financial
Auditing Tax Accounting Accounting
LO1:Examine the context & purpose of accounting

Accountant’s roles and responsibilities:

Accounts Clerk Accounts Assistant Qualified accountant

 LO1:Examine the context & purpose of accounting

I. Accounts Clerk:

An Account Clerk, also known as an Accounting Clerk , Bookkeeping Clerk. Account Clerks manage accounts and provide support for the

accounting, finance and sales departments. Generally performs:

1. Billing and accounting responsibilities for a business.

2. Supporting accounts receivable, accounts payable and reconciliations.

3. Acting as a cashier to verify receipts and deposits.

4. Preparing and maintaining records among other job obligations.

 LO1:Examine the context & purpose of accounting

II. Accounts Assistant

Accounts assistants; supply administrative support to accountants by performing clerical tasks such as filing, handling mail, making phone calls,

replying to emails and basic bookkeeping. Accounts assistants can trained on the job for their role or through an apprenticeship programme. It is

not necessary to have a degree in accounting, business or finance to become an accounts assistant.

1. Monitoring daily communications and answering any queries.

2. Ensuring payments, amounts and records are correct.

3. Recording and filing cash transactions.

4. Invoice processing and filing.

5. Processing expense requests for the accountant to approve.

 LO1:Examine the context & purpose of accounting

III. Qualified accountant

As an accountant, you will be responsible for: preparing accounts, budgeting and managing financial information. You could also be advising

and helping clients, whether that is individuals or international companies, on financial situations.

Accountant’s core responsibilities are typically to prepare and examine financial records, assuring information is up to date and accurate.

1. Preparing accounts and tax returns & presenting financial and budget reports.

2. Monitoring spending and budgets as well as Advising on how to reduce costs and increase profits.

3. Auditing , forecasting analyzing financial performance.

4. Ensure that financial statements and records comply with laws and regulations.

Keeping account books and systems up to date.

LO1:Examine the context & purpose of accounting

Keys skills
to become an accountant

Numerical *Ethics
Advanced analytical Time management
& & Communication
& &
Quantitative skills Integrity
problem-solving skills organisation
LO1:Examine the context & purpose of accounting

Keys skills to become an accountant:

I. Enhanced numerical and quantitative skills:

These are key as you will be dealing with all aspects of finance such as budgets and forecasting.

II. Advanced analytical and problem-solving skills:

You need strong analytical skills and excellent attention to detail as you will be analyzing financial performance and handling important
documents.

III. Time management and organisation:

Working in accountancy means you will be dealing with strict deadlines and you will need to have a system to keep track of your
responsibilities and priorities.
 LO1:Examine the context & purpose of accounting

IV. Ethics & Integrity:

Considered as the important fundamental element of the accounting profession. Integrity requires accountants to be honest, candid and
forthright with a client's financial information. Accountants should restrict themselves from personal gain or advantage using confidential
information.

V. Communication
Not only will you have to communicate with different teams, you will also frequently have to communicate with clients. You will need to be
able to communicate complex information in a clear and understandable way.
LO1:Examine the context & purpose of accounting

Base Financial Accounting Management Accounting

Concept The process of identify, recording, classifying and The process of identifying, measuring, accumulating,
summarizing in a significant manner and in terms of analysing, preparing, interpreting, and communicating
money transactions. &communicate useful information [Financial and non-financial information] that managers
to users. (External & internal). use to fulfil organizational objectives.

Function Financial accounting are to record and collect financial Managerial accounting picks up significant data out of
data. It summarizes the data in the form of accounts. collected data and presents them for the use of management.
[selective nature]

Object The main object of financial accounting is to Prepare The main objective of Managerial Accounting is to help
periodical reports to outsiders. internal management in solving various problems and
decision-making.
LO1:Examine the context & purpose of accounting

Base Financial Accounting Management Accounting

Nature Financial Accounting is of historical nature. It records Managerial Accounting stresses the future.
only those transactions which have taken place in the
past.

Accounting Financial accounting is done according to certain No principles and double entry system is Followed in
Principles accounting principles and double entry system. managerial accounting. It emphasis on analysis and
Interpretation.

Prescribed Must follow the GAAP and prescribed format no prescribed Format.
Format (financial statements).

User of External and internal user (both) Internal user only

Information
THANK YOU