Financial Accounting

ACC 101
Course Module
Topic 1
Introduction to
Accounting
WEEK 1
Learning Objectives
Students should be Definition of Role of
able to understand: 1 accounting 2 accounting

Objectives of Elements & brief idea of

3 accounting 4 financial statement

Conceptual Fundamental concepts

5 framework 6 & Assumptions in
accounting
 1
Definition of Accounting
 What is
Accounting ?

Accounting is identifying, measuring, and communicating

financial transactions of an entity for informed judgments
and decision making.
Accounting is the process of:

Identifying Measuring

Communicate
information

Users

Informed Economic
judgements decision
 2
Objectives of Accounting
What are the objectives of
accounting?
Accounting has many objectives, including letting people and
organisations know:

● If the business making a profit or a loss?

● What is the business worth?
● What is a transaction worth?
● How much cash is in the business?
● How wealthy is the business?
● How much is the business owed?
● How much does the business owe?
● Keeping a financial check on activities.
Who are the Users?

Management Investors
Planning, directing and controlling Assessing amounts, timing, and uncertainty of
future cash returns on their investment

Creditors Employees
Assessing probability of collection and the Planning for retirement & future job prospects
risk of late (or non-) payment

Securities & Exchange Commission

Reviewing for compliance of all required information
Two categories of users

STAKEHOLDERS

Internal External
Owners, Customers,
Managers, Creditors,
Employees Government

Accounting
Prepare accounting
reports for stakeholders.
Information
System
 3
Role of Accounting
What are the roles of
Accounting?
● Means of communication
○ As “ language of business”
○ Information conveyed to various parties within organisation
as well as external parties

● Provide information for decision making

What are the roles of
Accounting?
● Means of establishing accountability
“Accountability”: held responsible to a higher authority for actions carried
out.
For example:
▪ Employees accountable to management,
▪ management accountable to owners,
▪ organization accountable to government and society

● Accounting provides information to enable assessment of performance

to be made, as a result accountability can be established
What are the roles of
Accounting?
● Planning and control tool
○ Planning includes determining objectives to be achieve and ways of achieving the
objectives
○ Control involves comparison of actual performance and expected performance

● Aid to users of accounting information/interested parties

 4
Elements & brief idea of
Financial Statements
Financial Accounting

Financial accounting generally refers

to the process that results in the
preparation and reporting of financial
statements for an entity.

Financial accounting is primarily

externally oriented and concerned
with the historical results of an
entity’s performance.
Financial Statement
Accounting reports,
called financial statements,
provide summarized information
to the stakeholders.
Financial statement – the
financial information tool
Income Statement Balance Sheet
Statement of income and other comprehensive income Statement of financial position

The business performance The financial position of the

for the year/ evaluation business as at the
period year end

Statement of
Cash Flow Statement
Changes in Equity
The equity position of the The cash flow of the
company as at the company for the year
year end o Cash in flow
o Cash out flow
Limitations of Financial
Statement

● Limited to information which can be expressed in quantitative

terms (Monetary terms).
● Largely confined to an analysis of past events.
● Accounting is not an exact science.
● Most information expressed in monetary units
 5
Conceptual Framework
Conceptual Framework

• The Conceptual framework for financial reporting is a set of

principles which underpin the foundations of financial
accounting.

• It is a conceptual framework upon which all IFRSs

(International Financial Reporting Standards) are based and
hence which determines how financial statements are
prepared and the information they contain.
Qualitative characteristics of
useful Financial Information
The qualitative characteristics of useful financial information identify the types of
information that are likely to be most useful to existing and potential investors,
lenders and other creditors for making decisions about the reporting business on
the basis of information in its financial report (financial information).

They are categorized into:

● Fundamental qualitative characteristics
● Enhancing qualitative characteristics
Fundamental qualitative
characteristics

● Relevance
○ Information is relevant if it influences a decision
○ Information has predictive value (helps users to make decisions
about the future)
○ Has confirmatory value (helps users to evaluate their past
decisions)
○ Materiality: Information is material if omitting it or misstating it could
influence decisions that users make on the basis of financial
information about a specific reporting entity.
Fundamental qualitative
characteristics

● Faithful representation
○ Financial reports represent economic phenomena in words and
numbers. To be useful, financial information must not only represent
relevant phenomena but must faithfully represent the phenomena that
it purports to represent.
■ Complete information
■ Neutral
■ Free from significant error and bias
Enhancing qualitative
characteristics
Comparability
• Information can be compared with similar information about:
Other periods
Other businesses
• Consistency helps achieve comparability

Understandability
• Users should be able to understand and can make good decision from such
information
• Information should be classifying, characterizing and presented clearly and
concisely
Enhancing qualitative
characteristics
Verifiability
• Different knowledgeable and independent observers could reach agreement that
a particular interpretation is a faithful representation.

Timeliness
• Timeliness means having information available to decision-makers in time to be
capable of influencing their decisions.
 6
Fundamental concepts &
Assumptions in
accounting
Underlying Assumptions
and Accounting concepts
Business Entity concept
Going concern
Accruals
Consistency
Fair presentation
Business Entity Concept
The business entity concept states that the transactions
associated with a business must be separately recorded from
those of its owners or other businesses

There are three basic structures of business

Sole proprietorship
A sole proprietorship is not a legal entity separate from
its owner

Partnership
A partnership is not a legal entity separate from its
owners
These are both sub-components of their
owners/partners for legal purposes

Corporation
A corporation is a separate legal entity
Going concern
• The financial statements are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable
future.

• Examples where the going concern assumption should be rejected are:

o If the business is going to close in a near future;
o Where shortage of cash makes it almost certain that the business
will have to cease trading;
o Where a large part of the business will almost certainly have to be
closed down because of a shortage of cash
Accruals Basis
• The effects of transactions and other events are recognized when they occur
(and not as cash or its equivalent is received or paid) and they are recorded
in the accounting records and reported in the financial statements of the
periods to which they relate.
Consistency Principle
• Required the reporting entity to use the accounting methods over consecutive
time periods (i.e. no changes from year to year)

• All item must be treated similarly from year to year.

• Does not mean that accounting method cannot be changed

• Example: Inventory Valuation (you will learn it in details later in the course)
Fair Presentation
• Financial statements are required to give a fair presentation or present fairly
in all material respects the financial results of the entity.

• Compliance with IFRSs will almost always achieve this.

Thanks you
Questions?