Chapter 1

ACCOUNTING INFORMATION: BASIC CONCEPTS

Learning Objectives

• Understand the Definition of Accounting.

• Identify use and users of financial information.
• Explain accounting standards and apply basic accounting concepts.
Definition of Accounting
Definition of Accounting According to A. W. Johnson; “Accounting may be defined as the
collection, compilation and systematic recording of business transactions in terms of money,
the preparation of financial reports, the analysis and interpretation of these reports and the
use of these reports for the information and guidance of management”.

Accounting is the process of recording, classifying ,analyzing ,and summarizing business

transactions. Accounting also communicates financial information for decision-making in
business.

Accounting as Information Systems

Accounting is the information system which determines and communicates the economic
events of an organization to a broad range of interested users. Global economic systems are
dependent upon very transparent and relevant financial reporting.
Functions of Accounting
Identification: Economic events are identified and measured in terms
of money and effect.
Recording: Record business transactions in the books of accounts.
Classifying: The process of grouping transactions or entries of one
nature at one place.
Summarizing: Present classified data in a manner that is
understandable and helpful to internal and external users of the
accounting statements.
Interpreting: The analysis and interpretation of the financial data
contained in the final accounts so that the parties to the business can
make a significant judgment
Users of Accounting
• There are two major groups that use accounting information:
Internal users:
• Almost the users within the organization.
• Shareholders- also referred to as a stockholder, is a person, company,
or institution that owns at least one share of a company's stock,
known as equity.
• Management- The core internal users are the managers. They need
detailed performance information about each segment of the business,
so that they can make ongoing corrections and enhancements to the
organization.
Users of Accounting ….cont’d
2. External users:

There are multiple types of external users of accounting information outside

the organization:
Investors- they use accounting information to buy, sell or hold the shares of the business.
Creditors– they are the bankers and providers of funds and they need the information to
decide whether to grant credit to the business and at what
interest rate.
Suppliers- To know that the company can pay back their rights.
Government– They use accounting information to ensure that a
company is following laws and regulations.
Financial Reporting
All firms provide overall financial statements to external and internal
users such as;
• Income Statement (Revenues, Expenses, Gains, Losses and Net
Profits.
• Balance sheet (Summary of assets, liabilities, and equity at the end of
the year).
• Statement of owners’ equity (changes in owners’ equity).
• Cash flow statement (sources, uses, and changes in cash).
Objective of Financial Reporting
Accounting information is communicated through financial reports (financial
statements)
• The primary purpose of the financial statements is to provide valuable
information to investors and creditors (external users) to assist them in
making decisions.
• To make the decision to invest in a company or lend to a company, users
(investors/creditors) need information about the company's ability to make
money.
Branches of Accounting
Financial Accounting: It deals with the recording of the classification and
synthesis of business events. It determines the profit earned or loss
suffered
during a period and the fiscal period.
Cost Accounting: The purpose of cost accounting is to determine the cost
of goods produced and services provided by a business. The emphasis is
on determining costs and making future decisions.
Management Accounting: Management accounting refers to internal
communication of information to management for planning, decision-
making and formulation of long-term plans.
ACCOUNTING CONCEPTS
Business Entity Concept: Business is treated as a separate entity distinct from its owners.
Money measurement concept: Transactions and events can be expressed in money /money
terms and recorded in the books of accounts.
Going concern concept: The assumption that the business shall have a long life and it will
continue to exist until it is dissolved.
Accounting period concept: Time intervals known as accounting periods, at the end of which
financial statement are prepared to show the performance and financial position.
Cost concept: Under this concept, an asset must be reported at its cost which is the
acquisition cost minus amortization.
Double entry system: A transaction is debited while other is credited.
Matching concept: The costs incurred over a given period should be charged against the
revenues of that period to establish the profits.
BASIC ACCOUNTING TERMS
Business: An economic activity that involves exchange of goods/services
with the intention of profit making.
Transaction: Transaction is a financial event that has a monetary impact on
an firms' financial statements. Therefore , this is recorded in the books of
accounts.
Book Keeping
Book keeping is the initial step in accounting as a process of recording
financial transactions and keeping financial records. It is repetitive in nature;
however, it is an important element of accounting.
BASIC ACCOUNTING TERMS
Assets: refers to any properties or valuables owned or controlled by a
business to be used in business operations.
Assets can be classified to be:
• Fixed Assets: Fixed Assets long-term in nature and purchased for the purpose of operating the
business and not for resale.
Examples are land, building, machinery, furniture, equipment.
• Current Assets: Current Assets are those assets of a business which are kept for short term to
convert them into cash or for resale.
Examples of current assets are Stock or inventory, debtors, bills receivables, cash, prepaid
expenses.
• Intangible Assets: Intangible Assets are a non-physical asset that has a multi-period useful life.
Examples include: goodwill, brand recognition, copyrights, patents, trademarks, trade names,
and customer lists.
BASIC ACCOUNTING TERMS
Liabilities mean the amount which the business owes to outsiders.
Liabilities can b classified into the following:
• Long term Liabilities: financial obligations of a company payable after a
long term, generally more than a year.
Examples are long term loans, debentures.
• Current Liabilities: Liabilities payable in the near future (generally
within a year).
Examples of current liabilities are creditors, bank overdrafts, bills payable,
short term loans, Unearned revenue.
• Capital or Owner’s Equity: Capital means owner's share of the assets of
a business . This is the investment of owners in the business.
Basic Terms

Expense: Expense is the amount spent in order to produce and sell the
goods and services which produce the revenue. Examples of expense
are payment of salaries, wages, rent, insurance; Discount allowed,
depreciation expense, bad debts expense.
Revenues: Revenue refers to the earnings of a business. Examples are
receipts from sale of goods, rent received, commission received,
Discount received.
Debtor: A person who owes money to the firm generally on account of
credit sales of goods is called a debtor.
Creditor: A person to whom a firm owes money is. called a creditor
Basic Terms …cont’d
Goods: Products in which a business is dealing in.
Purchase: Purchase finished products and materials. Purchases include both cash and
credit purchases of goods.
Sale: The exchange of a product or service with money; Sales may include both cash and
credit sales.
Profit: Surplus of revenues of a business over its expenses ; normally categorized into
a. Gross profit: Gross is the difference between sales revenue and the cost of goods
sold.
b. Net profit: Revenue/Sales - Expenses.
Loss: An excess of expenses over revenues for a period.
Drawings: It is the amount of money or the value of goods taken personal use by owners
Basic Terms …cont’d
Cost: It is the amount of expenditure incurred to a specified article, product, or
activity.
Gain: It is a profit that arises from transactions which are incidental to business
such as
sale of investments or fixed assets at more than their book values.
Receivables: The term ‘Receivables’ includes the outstanding amount due from
others.
Payables: The term ‘Payables” include the amounts due to others.
Cost of goods sold” Cost of goods sold is the direct costs of the goods or services
sold.
Entity: An entity means an economic unit which performs economic activities
Companies Types
Sole Proprietorship: A sole proprietorship is an enterprise that is owned by
one individual. The establishment of a sole proprietorship does not require
the authorization of a government agency. Often the business requires little
or no investment of capital.
Partnership: A partnership is defined as the relationship between persons
who have agreed to share the profits of a business conducted by all or one of
them acting.
Corporation: Shareholders elect a board of directors (which usually receives
one vote per share) to appoint and oversee the management of the company
Professional Organizations to ensure
standards and applications
International Accounting Standards (IAS) are older accounting
standards issued by the International Accounting Standards Board
(IASB), an independent international standard-setting body based in
London. The IAS were replaced in 2001 by
International Financial Reporting Standards (IFRS).
Professional Organizations to ensure
standards and applications
International Financial Reporting Standards (IFRS) are a set of
accounting rules for the financial statements of public companies that
are intended to make them consistent, transparent, and easily
comparable around the world.
IFRS have been adopted for use in 120 nations, including those in the
European Union. The United States uses a different system, the
Generally Accepted Accounting Principles (GAAP).
The IFRS are issued by the International Accounting Standards Board
(IASB).
Professional Organizations to ensure
standards and applications
• Institute of Management Accountants: A professional accounting
organization that intends to influence the concepts and ethical
practice of management accounting and financial management.
• IIA – Institute of Internal Auditors - A primary international
professional association that conducts CIA programs ( Certified
Internal Auditor) and also undertakes research on trends and
practices in internal auditing.
Integrity of Accounting Information
The integrity of financial reporting is important because of the trust
users have in financial information, both external and internal to the
representative. The important aspects of financial information that
function together to ensure the integrity of information are
institutional characteristics. Professional organization, competence,
judgement, and ethical behaviour of individual accountants is very
important to maintain the integrity of accounting information.
Free online resources

https://assets.openstax.org/oscms-prodcms/media/documents/Financi
alAc counting-OP_YioY6nY.pdf

https://lifa1.lyryx.com/textbooks/ANNAND_1/marketing/DauderisAnna
n d-IntroFinAcct-2021A.pdf
References
Franklin, M., & Graybeal, P. (2019). Principles of accounting: vol 2:
managerial accounting.

Financial and Managerial Accounting, the basis for business decisions ,

17th Editionby Williams, Haka, Bettner, and Carcello ISBN10:
1259692396