NATURE, FUNCTION AND REGULATORY

FRAMEWORK OF ACCOUNTING
Chapter objectives
Definition and meaning of Accounting
Distinction between Bookkeeping and
Accounting
Regulatory framework of Accounting
International Financial Reporting Standards
(IFRS)
NATURE, FUNCTION AND REGULATORY
FRAMEWORK OF ACCOUNTING

Users of accounting information

Qualitative Characteristics of Useful Accounting
Information
Elements of Financial Statement
• Accounting Concepts and Conventions
 DEFINITION AND MEANING OF
ACCOUNTING

 The American Institute of Certified Public

Accountants (AICPA) defines Accounting as the
art of recording, classifying and summarising 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.
 MEANING OF BOOK KEEPING

 It refers to the aspect of Accounting

which deals with the recording of
business transactions in the various
books of accounts
DISTINCTION BETWEEN BOOK KEEPING AND
ACCOUNTING
 Book keeping is a subset of accounting

 Book keeping ends at the recording stage of

accounting whilst accounting goes on further to include
summarising, analysing and interpreting results.

The one who does thee work of bookkeeping is called

a bookkeeper, eg accounts clerks, however the one who
does the work of accounting is called an accountant
 PURPOSE OF ACCOUNTING

The main purpose of accounting is to provide

quantitative information expressed in terms of
money to users to make economic decisions. This
implies that the work of accounting should lead to
provision of information that is useful in decision
making.
 FUNCTIONS (USES) OF ACCOUNTING
INFORMATION
 Accounting information provides analysed and
summarised information on business activities.
 It also facilitates the efficient allocation of scarce
resources.
 It enables entities to meet the requirements of the law
 It shows the accountability of the affairs of an entity
through the preparation and presentation of financial
statements to owners of the entity.
 FUNCTIONS (USES) OF ACCOUNTING
INFORMATION

It assists in the control of business transactions

 It provides information on persons or objects of
an entity
 It helps in ensuring accuracy in recording of
business trasactions
Accounting information is also used to plan for
future operations
 LIMITATIONS OF ACCOUNTING
INFORMATION
Accounting information ignores non-monetary
information

Accounting information may not contain all the qualitative

characteristics that make it useful for decision making.

Accounting information is expressed in terms of money but

money as a unit of measurement is unstable. Therefore
changes in prices due to inflation may distort the information
presented in the financial statements.
 LIMITATIONS OF ACCOUNTING
INFORMATION
There are sometimes contradictions among some of the
concepts underlying the preparation and presentations of
accounting information eg revenue recognition and prudence
concept.

Accounting information may be subject to human error and

/or manipulation

Financial Accounting information reports past or historical data which



may not be relevant for future decision making.

A COMPLETE SET OF FINANCIAL STATEMENTS
COMPRISE
 An Income Statement (Trading and Profit and Loss Statement)

 A Statement of financial position (Balance Sheet)

 A Cash Flow statement

 A Value Added Statement

 Explanatory Notes to, and forming part of, the Financial Statements
ELEMENTS OF A FINANCIAL

ASSETS
An asset is a resource controlled by an entity
as a result of past events, and from which
future economic benefits are expected to
flow to the entity.
ELEMENTS OF A FINANCIAL

LIABILITIES
A liability is a present obligation of the
entity arising from past event, the
settlement of which is expected to result in
an outflow from the entity of resources
embodying economic benefits.
ELEMENTS OF A FINANCIAL

CAPITAL ( Owner’s Equity)

This is the residual interest in the assets
of the entity after deducting all its
liabilities.
ELEMENTS OF A FINANCIAL

INCOME ( OR REVENUE, GAINS AND PROFITS)

This refers to increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets, or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
ELEMENTS OF A FINANCIAL

Expenses and Losses

This refers to decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets, or the incurrence of liabilities
that results in decreases in equity, other than those
relation to distributions to shareholders.
ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting concepts are the set of rules,

principles, postulates and methods applied
in measuring and recording of business
transactions and reporting financial
information.


ACCOUNTING CONCEPTS AND CONVENTIONS

 Fourfundamental concepts have long time

been recognised: These are:
 Going concern / Continuity
 Prudence / conservatism
 Accrual/ Matching
 Consistency/ Comparability
ACCOUNTING CONCEPTS AND CONVENTIONS

The following are other accounting concepts:

 Business Entity Concept
 Money Measurement Concept
 Materiality Concept
 Duality Concept
 Revenue Recognition or Realisation
ACCOUNTING CONCEPTS AND CONVENTIONS

 Objectivity
 Periodicity
 Historical Cost
 Substance over form
 Full disclosure
ACCOUNTING CONCEPTS AND CONVENTIONS

 Going Concern/ Continuity – this concept

assumes that a business will continue to be
in normal operational existence for the
foreseeable future. It also implies the
business does not intend to curtail its
operations significantly
ACCOUNTING CONCEPTS AND CONVENTIONS

 Accrual/Matching- This concept assumes

that revenue and expenses are accrued or
recognised as they are earned or incurred,
not when money is received or paid.
Revenue earned must be matched against
expenses
ACCOUNTING CONCEPTS AND CONVENTIONS

 Prudence/ Conservatism this concept state

that revenue and profits are not to be
anticipated but are recognised in the profit
and loss account only when it can be
realised with reasonable certainty.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Consistency/ Comparability- this concept

states that there should be consistency of
accounting treatment of similar items
within each accounting period and from
one accounting period to another.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Business Entity Concept- A business is

an entity which is separated and
distinct from its owners and from other
units. For Accounting purposes, a
distinction is made between the
business and the owner.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Materiality concept- in accounting only

items which are significant are given
treatment in the books of account.
Information is material if its omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statements.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Daulity concept- For every transactions

there are two aspects, the giving and the
receiving aspects which must be identified,
measured an recorded as the debit and
credit sides of the transaction.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Revenue recognition or Realisation-

revenue is recognised, realised or earned
when goods are sold to the customer, and
not when money is received from the
customer.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Money Measurement- accounting deals

with only items to which monetary values
can be attributed. Thus revenue, expenses,
assets and liabilities are expressed in terms
of money.
ACCOUNTING CONCEPTS AND CONVENTIONS

Periodicity- Financial statements are prepared

for a given period of time.

 Historical cost- the values of assets, liabilities

and Capital, revenue and expenses are recorded
in the books of accounts at their original cost at
which they are acquired, earned or incurred.
ACCOUNTING CONCEPTS AND CONVENTIONS

 Substance over form- accounting

transactions should be recorded and
presented in accordance with their
substance and financial reality and not
merely with their strict legal form.
ACCOUNTING CONCEPTS AND CONVENTIONS

Objectivity- financial information must be

prepared and presented without any
subjective judgements or personal feelings.
There must be supportive documentation to
every transaction in order to make it
verifiable
EXERCISE FILL IN THE BLANK

(1)For every transaction there are two aspects, the giving

and receiving aspects which must be recognised this is in line
with the ……………… concept.

(2) A financial statement that is prepared on the assumption

that the business will continue to operate for the next twelve
calender months means the business is a ………………..
EXERCISE FILL IN THE BLANK

(3)The book keeper recorded $10,000 as sales

for goods delivered to a customer even
though money was not received, this act was
underpinned by the ………………… concept
 Statement of financial position for
(4)
the year ended 31/12/2019 was
informed by the …………………….
5) The Accrual concepts states that revenue and expenses are
recognised as and when cash is received True/ False

(6) Substance over form encourages that transactions are recorded

and presented in the their strict legal form and not merely the
substance of the transaction. True /False
(7) There is a conflict between prudence concept and realisation
concept True/False
EXERCISE FILL IN THE BLANK

8)Similar items should accorded similar accounting

treatment this is in line the ………………….

(9) If Kofi Bentil buys a wrist watch for his

personal, it does affect the Statement of financial
position of his enterprise as stipulated by the
……………………….
During the preparation of the financial statement of God is Good
enterprise, the accountant was faced with the following concerns
10) The managing director wishes that the company’s good public
image to be reflected in the accounts

11) The future existence of the firm is uncertain.

12) At the end of the year, an amount for electricity consumed
during the accounting period is outstanding.
You are required to state which which of the following principles
and concepts will be used to resolve the above issues

Money measurement
Going concern
Matching principle
FILL IN THE BLANKS

(13) In Accounting, transactions and events recorded are

basically………………….in nature and character.

(14) When drawings are made by the owner of a business, it results

in…………………..

(15) The money measurement concept means items in account are

initially measured in their historical cost . True/False
FILL IN THE BLANK

(16) Comparability usually implies consistency in Accounting policies

from one period to another. True/ Fasle

(17) The Accounting concept/convention which in times of rising

prices, tend to understate asset values and overstate profits is the
……………..
(18) Information in financial statement needs to be neutral True/
False
FILL IN THE BLANK

The following statements relate to concepts, principles and conventions

which govern the preparation of financial statements. State the correct
concepts or convention to which the statements relate.
(19) Our management team was judged the best in the country but our
Accounts cannot reflect this.
(20) Let us adopt a cautious approach because if we overstate our
income we may have serious consequences
(21) The business can defer costs which are to be charged against
revenue of a future period , example prepaid.