UNIVERSITY OF IRINGA (UoI)

Faculty of Business and Economics

Department of Accounting and Finance

COURSE NAME:ACCOUNTING FOR LEGAL PRACICE

Topic 1 – Introduction to Accounting
Mr.Baraka Mgongolwa
Mob. 0627-499891
[email protected]
 TOPIC 1
Introduction to
“Accounting”
 Meaning of Accounting
Definition by the American Institute of Certified Public
Accountants (Year 1961):
“Accounting is the art of recording, classifying 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
result thereof” OR
Definition by the American Accounting Association (Year 1966):
“The process of identifying, measuring and communicating economic
information to permit informed judgments decisions by the users of
accounting”.
Objectives of Accounting

(i) Providing Information to the Users for Rational Decision-making

The primary objective of accounting is to provide useful information for
decision-making to stakeholders such sales volume, value under
ownership, return of investment, etc. are measured in the accounting
process. All accounting measurements are used by stakeholders
(owners, investors, creditors/bankers, etc.) in course of business
operation. Hence, accounting is identified as ‘language of business’.
 Cont..
2. Ascertainment of Results of the Business entity
‘Profit/loss’ is a core accounting measurement. It is measured by preparing
profit and loss account for a particular period. Various other accounting
measurements such as different types of revenue expenses and revenue
incomes are considered for preparing this profit and loss account.
3. Systematic Recording of Transactions
To ensure reliability and precision for the accounting measurements, it is
necessary to keep a systematic record of all financial transactions of a
business enterprise which is ensured by bookkeeping. These financial records
are classified, summarized and reposted in the form of accounting
measurements to the users of accounting information i.e., stakeholder.
 Cont.…
(iv) Ascertain the Financial Position of Business
‘Financial position’ is another core accounting measurement. Financial
position is identified by preparing a statement of ownership i.e., Assets
and Owings i.e., liabilities of the business as on a certain date. This
statement is popularly known as balance sheet. Various other accounting
measurements such as different types of assets and different types of
liabilities as existed at a particular date are considered for preparing the
balance sheet. This statement may be used by various stakeholders for
financing and investment decision.
 Cont.…
(V) To interpreting and communicating the business information
 BASIC ACCOUNTING TERMS
1. Transaction:
It means an event or a business activity which involves exchange of
money or money’s worth between parties. The event can be measured in
terms of would involve receiving material and making payment money
and changes the financial position of a person.
For Example, purchase of goods or creating an obligation to pay to the
supplier at a future date. Transaction could be a cash transaction or credit
transaction. When the parties settle the transaction immediately by
making payment in cash or by cheque, it is called a cash transaction. In
credit transaction, the payment is settled at a future date as per agreement
between the parties.
 Cont..
2. Goods
These are tangible article or commodity in which a business deals.
These articles or commodities are either bought and sold or produced
and sold. For example shoes ,white flower and computer.
3. Services
These are intangible article or commodity in which a business deals.
These articles or commodities are either bought and sold or produced
and sold. For example education , transportation and communication.
 Cont.…
4. Assets
An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
(a) Resource controlled
The assets of a company represent the resources it has under its direct control. This usually means
that they provide benefits to the organization alone .
(b) Past events
For an asset to become a controlled resource for an organization, a transaction or event must have
taken place in the past. Resources come under the control of an organization when they are
purchased, produced or donated - these are the past events (from the definition above).
The good example of assets is motor vehicles, plant, ,equipment ,machinery ,patent rights and copy
rights
 Continue…
(c) Economic benefits
To be deemed assets, resources must also
(i) Contribute to the cash inflows OR
(ii) Contribute to reducing the cash outflows (e.g. an organization buys
a photocopier so that it can carry out its copying “in-house” at a rate
which is much lower than what it has to pay to outside parties).
 Cont.….

Types of Assets
1.Current assets
Current assets are those assets that the organization intends to turn into
cash within one year. Examples include an organization's receivables
and inventory the aim is to convert them into cash quickly,
prepayments/prepaid, banks and cash balance
2. Non-current assets
Non-current assets are assets that the organization intends to hold i.e.
not liquidate or turn into cash for periods longer than one year.
Examples include an organization's premises, equipment and machinery
 BASIC ACCOUNTING TERMS
5. Liability
A liability is a present obligation of the entity arising from past events, which when paid is
likely to cause an outflow of resources from the entity.
(a) Present obligation
An essential characteristic of a liability is that it must represent a present obligation to the
organization. An obligation involves a duty or responsibility being placed on the
organization to act or perform in a certain way. Present means that this obligation has to
exist on the day it is going to be recorded as a liability
(b) Past events
A liability has to arise out of a transaction or event that has happened in
the past. This transaction or event in turn must create an obligation on
the part of the organization. For instance, merely having the intention to
purchase an asset does not create an obligation and correspondingly a
liability for the organization.
 Continue..
(c) Outflow of resources from the entity
Furthermore a liability requires an outflow of resources from the
organization to settle the obligation. Instances or types of these outflows
are
 Types of Liabilities
1. Current Liabilities
Current liabilities are those that the organization intends to settle within
a period of one year. An example would be an organisation’s payments
to its suppliers. For Example Accounts payables
2. Non-current liability
Non-current liabilities are liabilities of the organization that will be
settled in periods longer than one year. For example loan from Banks
 Cont..
6. Equity / Capital
Equity is the residual interest in the assets of the entity, after
deducting all its liabilities. Or
 Refers to the resources invested in the business
 Cont…
7. Revenue
Represents earnings through the ordinary activities of the business, for
example, sales, fees, interest, dividends, royalties and rent.
 Cont..
8. Expense
Expenses are the costs incurred to earn income. Expenses are defined
as: decreases in economic benefits during the accounting period in the
form of direct outflows OR depletion of an asset OR incurrence of a
liability. Examples;
-Wages and salaries, office maintenance, utilities (gas, water, electricity
consumed).
-Interest paid
-Royalty paid
 Cont..
9. Profit: The excess of Revenue Income over expense is called profit.
It could be calculated for each transaction or for business as a whole.
10. Loss: The excess of expense over income is called loss. It could be
calculated for each transaction or for business as a whole.
 Cont.…
11. Drawings
It represents an amount of cash, goods or any other assets which the
owner withdraws from business for his or her personal use.
12. Accounts receivable/ Debtor:
The sum total or aggregate of the amounts which the customer owe to
the business for purchasing goods on credit or services rendered or in
respect of other contractual obligations, is known as Sundry Debtors or
Trade Debtors, or Trade Payable, or Book-Debts or Debtors.
 Cont..
13. Creditor/Accounts receivables:
A creditor is a person to whom the business owes money or money’s
worth. e.g. money payable to supplier of goods or provider of service.
Creditors are generally classified as Current Liabilities.
14. Prepayments/ Prepaid
Refers to the money paid in advance without the consumption of the
services, for example electricity, water bills can be paid in advance.
They can be current asset OR current liabilities.
15. Owing/Outstanding/Arrears
Refers to the money not yet paid but the consumption of the services
has already done , for example electricity, water bills consumed but not
yet paid. They can be current asset OR current liabilities.
Users of Financial Statements/Information
1. Owners / shareholders and potential investors
The primary users of an organisation’s financial statements are its owners / shareholders. This
is because owners / shareholders have provided the capital that makes it possible for an
organization to begin its operations. Naturally they want as much information and detail as
possible in order to determine if their investment is not only safe but also growing
2. Management
Management will use the financial statements of the organization as a kind of “report card” of
their decisions /activities throughout the year. This is because the financial statements reflect
how profitable (or unprofitable) these decisions or activities have been for the organization.
3. Providers of finance e.g. banks or other financial institutions
Payables such as banks and other financial institutions typically provide the funding an
organization needs to carry on its operations and / or expand its business.
 Cont..
4. Employees
Employees of an organization are interested in the financial condition and performance of an
organization because that is the source of their salaries.
5.Tax authorities
Tax authorities use the financial statements to determine tax amounts. Income shown by the
statement of profit or loss is used as the starting point for calculating taxable income. Revenue and
purchase figures are used to determine VAT liability.
6. Trade relations (suppliers and customer )
Trade relations are the relations between the suppliers and customers of an organization. They will
use these statements to determine the financial condition and performance of the business in order to
find out whether the organization will be able to pay for the goods / services it orders from them.
 Cont..
7. Government and its agencies
Financial statements of organizations serve as a source of data for the
government when it is compiling national economic statistics such as
the country’s GDP (Gross Domestic Product). This helps the
government in taking different policy decisions.
 Types of business entity

There are three main types of business entity:

1.Sole traders
2.Partnerships
3.Limited liability companies
 1.Sole traders
Sole trader is the type of business entity which involves people who
work for themselves. Of course, it doesn't necessarily mean that the
business has only one worker.
The sole trader can employ others to do any or all of the work in the
business. A sole trader owns and runs a business, contributes the capital
to start the enterprise, runs it with or without employees, and earns the
profits or stands the loss of the venture.
 Cont…

Advantages of a sole trading form of organization

 No sharing of profits:
• The business is owned by a proprietor who enjoys the whole profits.
 No chances of disputes:
• All business decisions are taken by the proprietor hence there is no scope for disputes.
 Few legal formalities:
• Generally there are only a few legal formalities required to be fulfilled to start a business
as a sole proprietor.
 Simple accounting procedures:
• a ‘sole trader’ form of organization is not bound by a specific set of accounting rules.
 Cont…
Limitations of a sole trading form of organization
 All business risks are borne by one person.
No scope for sharing of authority and responsibility
 Low growth rate:
 The resources employed in a sole trader business are limited and hence the
growth rate is low when compared to any other form of business.
 Unlimited liability: in the case of bankruptcy, owner’s personal assets are used
to repay loans or other debts of the business e.g. for making payments to trade
payables, the sole trader might have to sell his house, car, personal jewellery etc.
 2. Partnerships

 Two or more persons coming together and sharing the profits - for
example: professional firms: lawyers, doctors, accountants etc.
 A partnership is defined as ‘the relationship between persons carrying
on a business in common with a view of profit.’
 Those engaged in a partnership are called partners.
 Partners are entitled to share all the profits of the partnership in a ratio
agreed between them from the beginning.
 Advantages of Partnership
• Sharing of business risk:
Unlike a sole trader, who bears all the business risks, in a partnership the business risks are
shared between the partners.
• Skills and experience:
Apart from contributing capital to the business, a partnership also provides a better opportunity
for a group of individuals to pool their knowledge, skills and experience.
• Improvement in business:
All the business responsibilities can be distributed amongst the partners who have a larger skill
base than a sole trader.
• Higher investment:
The amount of capital invested in the business is generally higher for a partnership, compared to
a sole trader. This gives more scope for expansion.
• Fewer legal formalities:
A partnership firm is not required to comply with stringent legal formalities as compared to a
limited liability company.
 Disadvantages
• Sharing of profits:
The profits earned by the business are distributed among the partners.
Determining a fair split-up of profits may be difficult as some partners
may work harder than others.
• Chances of disputes:
While managing the affairs of a business, all the partners need to reach a
consensus. However, sometimes this does not happen and disputes
occur.
• Unlimited liability of the partners:
In the case of bankruptcy, the partner’s personal assets are taken away to
repay loans or other debts of the business.
 Limited liability companies
• Limited liability companies are incorporated to take advantage of
'limited liability' for their owners (shareholders).
• This means that, while sole traders and partners are personally
responsible for the amounts owed by their businesses, the shareholders
of a limited liability company are only responsible for the amount paid
for their shares.
• They are not responsible for the company's debts unless they have
given personal guarantees (of a bank loan, for example). However,
they may lose the money they have invested in the company if it fails.
 Advantages
• Large amount of capital: as there is no limit on the number of owners,
large amounts of capital can be amassed. This will allow the business to
expand.
• Better management: as ownership and management are different,
usually professional managers are appointed to manage the running of
the company e.g. finance function may be handled by a professional in
finance such as a Certified Accountant.
• Limited liability: the liability of each member of the company is always
limited to the nominal value of the shares purchased by him. The
nominal value is the amount printed on the shares.
• If the company goes bankrupt, the members are not required to use
their personal assets for repaying the debts of the company.
 END OF PART 1

Any Questions? Any Comments? Suggestions?

Thank you

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