Introduction to Accounting &

Financial Statements

MN 3043 – Business Economics and FinancialAccounting

Faculty of Engineering
University of Moratuwa

Conducted by
Ms Mahimi Kanchana

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 Learning Outcomes

At the end of this lesson you should be able to,

-Identify the meaning of Accounting

& Financial Statements
- Analyze the accounting process
- Describe the Double Entry System
- Analyze the core concepts of accounting
- Record the transactions to calculate the results

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• Why engineers require to
learn accounting?

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 Objective and Need Importanceof
Accounting
• To know whether the business has earned
an adequate profit
• To know whether the financial position of the
business is sound
• To fulfill legal requirements (presentation of
financial reports is a mandatory requirement
by law for some organizations)
• To minimize disadvantages arising through
omission and commission of transactions,
and to organize financial activities
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 Main stages ofAccounting
• Book keeping - merely concerned with orderly record
keeping.

• Accounting - has broader scope

- involves in analysis and
judgment at different stages
(recording of transactions,
classification, summarization
and interpretation)

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 Book-keeping
“Book-keeping is the science and art of correctly
recording in the books of account all those business
transactions that result in the transfer of money or
money's worth.”
-R.N. Carter-

Objectives ;
• To have permanent record of all the business
transactions.
•To keep records of income and expenses in such a way that
the net profit or net loss may be calculated.
• To keep records of assets and liabilities in such a way that
the financial position of the business may be ascertained.

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 Definition of Accounting
“The art of recording, classification and
summarizing in a significant manner and in
terms of money transactions and events
which are, in part at least, of a financial
character, and interpreting the results
thereof.
-The American Institute of Certified Public Accountants -

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 Definition of Accounting Contd.

“The process of identifying, measuring and

communicating economic information to
permit informed judgments and decision by
users of the information”.
- American Accounting Association-

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 Objectives of Accounting
• To maintain accounting records
• To calculate the result of operations
• To ascertain the financial position
• To communicate the information to
users
• To fulfill the statutory requirements
• To attract the shareholders
• For management decision making
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Users of Accounting Information

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 • Internal users
Internal users Purpose

Owners To know the profitability and financial soundness of the

business

Management To take prompt decisions to manage the business

efficiently

Employees and To form judgment about the earning capacity of the

Trade unions business
since their remuneration and bonus depend on it.

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 • External Users
External users Purpose
Creditors, banks and other To determine whether the principal and lending
institutions the interest thereof will be paid in when
due
Present investors To know the position, progress and prosperity of the
business in order to ensure the safety of their
investment

Potential investors To decide whether to invest in the business or not

Government and Tax To know the earnings in order to assess authorities

the
tax liabilities of the business

Regulatory agencies To evaluate the business operation under the

regulatory
legislation

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Branches of Accounting

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 Branches of Accounting
Financial Accounting
•It is concerned with recording of business transactions in
the books of accounts in such a way that operating result
of a particular period and financial position on a
particular date can be known.

Cost Accounting
•It relates to collection, classification and ascertainment
of the cost of production or job undertaken by the firm.

Management Accounting
•It relates to the use of accounting data collected with the
help of financial accounting and cost accounting for the
purpose of policy formulation, planning, control and
decision making by the management.
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Generally Accepted Accounting Principles,
Conventions and Concepts
• Business Entity Concept
• Money Measurement Concept
• Historical Cost Concept
• Periodic Concept
• Realization Concept
• Matching Concept
• Materiality Concept
• Going Concern Concept
• Consistency Concept
• Accrual Concept
• Realization Concept
• Prudence concept 15
 Generally Accepted Accounting Principles,
Conventions and Concepts
Business Entity Concept
➢ Business entity concept requires that the business
should be treated as a distinct accounting entity for the
purpose of treating transactions relating to the
operations.
➢ This is one of the most important and fundamental
accounting principle with which Double Entry system of
accounting has evolved.
➢ Accounts need to be maintained separate from the
owners and provisions providers of capital.

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Generally Accepted Accounting Principles,
Conventions and Concepts
Money Measurement Concept
Recording, classification and summarizing of business
transactions require a common unit of measurement.
Record should be made only of that information which
can be expressed in Monetary Term that is currency
value(USD,Rs & etc.)

Examples:-
• Sole proprietor had 40 tables and chairs. This can’t
be recorded unless a value of furniture is known in
monetary value.
• I am loved so much. This can’t be accounted. This is
flaw in financial accounting as it does not understand
the human value.
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Generally Accepted Accounting Principles,
Conventions and Concepts

Historical Cost concept

Assets are always shown at their cost an not at
their current market value.
Example:-
• A land purchased for 5 Lakhs will be recorded only at
Rs. 5 Lakhs eventhough market value may be lower say
Rs. 4 Lakhs or higher Rs. 6 Lakhs than the cost price.

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Generally Accepted Accounting Principles,
Conventions and Concepts

Periodic Concept
Income (Loss) of a business is measured periodically
known as the accounting period.
Example:-
Calendar year - 01Jan – 31 Dec
Financial year – 01 April to 31 march

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Generally Accepted Accounting Principles,
Conventions and Concepts
Matching Concept
•Matching concept states that expenses that are incurred in
an accounting period should be matching with the revenue
earned during that period. As revenue and expenses are
matched, the profit or loss is not over or under-stated.

• Ex – Cost of Sale matched with Revenue (Sales)

• Identify the sales commission with sales

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Generally Accepted Accounting Principles,
Conventions and Concepts
Materiality Concept
❑ Information is material if its misstatement could
influence the economic decisions of users taken on
the basis of the financial information.
❑ Materiality should be treated individually
and aggregate.
❑ The amount (quantity) and nature (quality)
of misstatements both need to be
considered in determining materiality.

Example:-
A calculator worth Rs.500 not recorded asset ratherthan
charged off as an expenses even though the benefit is
enduring in nature.
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Generally Accepted Accounting Principles,
Conventions and Concepts
Going Concern Concept
• A business entity is assumed to carry on its
operations for a foreseeable future.
• Implies that the resources of the concern would
continue to be used for the purposes for which
they are meant to be used.

Example:-
An entity will not be started with an intention to close
within the specified time period . Business is always
not started with an intention to close and it is expected
to continue forever. 22
Generally Accepted Accounting Principles,
Conventions and Concepts
Consistency Concept
There are number of methods available for treating an
event and recording of it. Once the method is selected, it is
essential to continue it for subsequent events in order to
preserve consistency. There should be a sound reason to
change the method.
Example:-
➢ Period shouldn’t be changed frequently from Jan-Dec to Apr-
Mar
➢ Inventory valuation change from FIFO or Weighted Average
not permitted frequently.

NOTE: If any company decides to change the policy, then that

company has to follow relevant accounting standard (LKAS 08 –
Accounting Policies, Changes in Accounting and Errors ) 23
Generally Accepted Accounting Principles,
Conventions and Concepts
Accrual concept
In general it is assumed that accounts are always
prepared based on accrual basis. However there are
entities which follow cash basis of accounting also.

Examples:-
• Recognize the salary payable and interest payable in the
financial statement.

• Recognized trade receivable and trade payable in the FP

• The company Law Act/ Income Tax Act prescribes all

companies to follow Accrual Basis of Accounting except
for Professional firms and government organization which
are allowed to follow Cash Basis of Accounting.
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Generally Accepted Accounting Principles,
Conventions and Concepts

Realization Concept
The concept of realisation states that revenue is
realized at the time when goods or services are
actually delivered (when satisfy the performance
obligation).

Example:-
If a company is entered to a contract to deliver a machine
to customer. Revenue should be recognized at the point of
deliver.

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Generally Accepted Accounting Principles,
Conventions and Concepts

Prudence Concept
the principle of not showing assets or profits to be
greater than they might be, or losses to be smaller
than they might be, in a company's accounts

Example:-
• Recognize provision for the trade receivable impairment
• Recognize stock losses
• Recognize gratuity provision expenses

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 What are the concepts behind the below
mentioned scenarios?
• Closing stock of the company has been deducted
from the cost – Matching concept
• Owner’s delivery van has been recorded in accounts
on cost – Business entity concept
• Company depreciates assets – Matching concept
• Credit sale record as sales income – Accrual concept
•Company has used same dividend policy for five years-
Consistency concept
•They have capitalized the software they use –
Material concept
• Recognize closing stock at lower vale of cost or
NRV – Prudence concept 27
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