SBU 103 -FOUNDATION OF ACCOUNTING I

Mr. Isaac Kwadwo Anim

Department of Accounting, School of Business, UCC
 COURSE INTRODUCTION
FORMS
ECONOMIC ACTIVITY
Sole proprietorship
Partnership
MOTIVES Companies
Profit and Non-Profit
Earn profit, Making organization
1. Earn profits
Maximize the wealth for the
owners or
2. Maximize the wealth
Provide services to its BUSINESS
for the owners
Members and not to make
Profit e.g sports clubs, social clubs,
3. Provide services to its
Churches etc.

Members and not to make

Profit This team is referred to as
CAN NOT RUN IN ISOLATION
carried out by people coming together an ORGANIZATION
with a purpose to serve a common cause

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 COURSE INTRODUCTION
As the basic purpose of business is to make a
REQUIRES RESOURCES
profit, one must keep an ongoing track of the
Materials
activities undertaken in course of business.
Labour
Machineries
Factories & other Services

BUSINESS

The success of a business depends on how The resources are not free and
efficiently and effectively these resources thus one must be careful to keep
are managed an eye on the cost of acquiring them as well

Therefore, there is a need to ensure the

businessman tracks the use of these resources
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 COURSE INTRODUCTION
Two basic questions would have to be answered
A. What is the result of business This will be answered by finding
operations? out whether it has made profit or loss

The answers to these questions are to be found

continuously and the best way to find them is to
record all the business activities.
B.
What is the position of the resources acquired
and used for business purposes?
How are these resources financed?
Where do the funds come from?
Recording of business activities has to be done in
a scientific manner so that they reveal the correct outcome

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 COURSE INTRODUCTION
COURSE OBJECTIVES
 Define accounting and explain the purpose of accounting information;
 Describe the conceptual and regulatory framework of accounting;
 Explain the qualitative characteristics of financial information;
 Apply the principles of double-entry in recording business
transactions;
 Prepare bank reconciliation statements;
 Prepare basic financial statements for incorporated and unincorporated
private interest entities, including small and medium-sized enterprises
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NATURE, SCOPE AND FUNCTIONS
OF ACCOUNTING
 NATURE, SCOPE AND FUNCTIONS OF ACCOUNTING

• Definition and meaning of accounting

• Evolution of accounting
• Distinction between bookkeeping and accounting
• Purpose of Accounting
• Functions (uses) of accounting information
• Limitations of accounting information
• Branches of accounting
• The accounting process
• Users of accounting
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 NATURE, SCOPE AND FUNCTIONS OF
ACCOUNTING
Accounting has been termed as the language of the business

Accounting communicates the results of business operations to

various parties who have some stake in the business such as the
owner(s), creditors, investors, Government and other agencies

Though accounting is generally associated with business but it is

not only business which makes use of accounting

Government and other individuals also make use of a accounting

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 NATURE, SCOPE AND FUNCTIONS OF
ACCOUNTING
The need for accounting is all the more great for a person who is
running a business because he/she must know
01 What he owns? 02 How much he owes?

03 Whether he has earn a profit or suffered a loss on account of

running a business?

04 What is his financial position i.e. whether he will be in a position

to meet all his commitments in the near future or he is in the
process of becoming a bankrupt?
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 NATURE, SCOPE AND FUNCTIONS OF
ACCOUNTING
Definition and Meaning of Accounting

Accounting is the art of collecting, analysing, recording,

classifying, summarising, presenting and interpreting financial data
of an organisation to interested users.

Accounting can also be defined as the a system for recording and

reporting business transactions in financial terms to interested
parties as a basis for performance assessment, decision making
and control.
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 Meaning & Definition CONT’
Key issues in accounting definition:

• Collecting and recording data that is financial in nature

• Processing of the selected financial data

• Producing output/results that are communicated to interested parties

• Aiding economic decision making

• Accounting does not tell all about a business organization

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 Meaning & Definition CONT’
RECORDING
It mainly involves the use of the journal
to record financial information in an orderly manner

ACCOUNTING

CLASSIFYING
Using the ledger books of account to similar or identical
transactions at one place
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SUMMARIZING
Presenting the grouped data in a manner
which is useful for users
Classified data are prepared and presented per
the objectives of the general purpose of the financial statements.

ACCOUNTING
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INTERPRETATING
The accountants should interpret the statements in a manner
useful for making economic and financial decisions
( i.e. the use of Accounting ratios)

ACCOUNTING

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 EVOLUTION OF ACCOUNTING
Accounting is as old as money itself. As early as 8500 BC,
accounting already existed. Early civilizations trade and
transactions were merger and as such businessmen were able to
account for their transactions on their own.

During 8500 BC, Clay tokens were used for record keeping. after
some time, it was replaced with clay tablets

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 EVOLUTION OF ACCOUNTING
During the 13th to the 15th centuries, there was advancement in
account keeping methods in Florence, Venice and Genoa.

In 1340 AD, double entry records first came out.

However, the modern system of accounting based on the

principles of double entry system owes it origin to Fra Luca Pacioli
(considered as the father of accounting) who first published the
principles of Double Entry System in 1494 at Venice in Italy.
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 EVOLUTION OF ACCOUNTING
According to Luca Pacioli three books are to be kept:
1) the memorandum 2) the journal 3) the ledger

Expansion in business and changes in mode of financing due to

the industrial revolution changed the way of accounting.

Accounting has evolved with the outburst of information

technology.
Currently a number of accounting software are employed
Tally Accounting, SAGE, QuickBooks , Peach Accounting

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 BOOKKEEPING & ACCOUNTING
BOOKKEEPING is a part of accounting and is concerned
with the recording of transactions which
is often routine and clerical in nature

Accounting performs other functions

such as measurement and
communication, besides recording.
An accountant is required to have a much
higher level of knowledge, conceptual
understanding and analytical skill than
is required of the book-keeper.
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 DIFFERENCES BETWEEN BOOKKEEPING AND
ACCOUNTING
Bookeeping Accounting

Definition Bookeeping involves collecting, Accounting goes beyond

analysing and recording financial data bookkeeping. it involves summarizing,
communicating and interpreting
financial information.

Legal Requirement There are no strict and legal Accounting follows down legal,
requirements in Bookkeeping conceptual and regulatory
requirements which must be complied
with

Nature of Books The nature of the books used are not Accounting has well defined books of
well defined accounts

Responsibility A person who does the work of A person who does the work of
bookeeping is called a bookkeeper or Accounting is called a accountant or
an accounts clerk
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an account officer
 PURPOSE OF ACCOUNTING

The main purpose of accounting is to provide quantitative

information expressed in the form of money to users for them to
make economic decisions.

This implies that accounting leads to the provision of

information that is useful for decision making

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 FUNCTIONS (USES) OF ACCOUNTING
INFORMATION
Functions or uses of accounting information includes:
 It provides analysed and summarised information on business
activities
 It facilitates the efficient allocation of scarce resources
 It is used to plan for future operations
 It assists in the control of business transactions
 It enables the business meet the requirement of the law as
they relate to financial reporting

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 LIMITATIONS OF ACCOUNTING INFORMATION
• Accounting ignores important non-financial information
• Accounting does not contain all the qualitative characteristics that makes
it useful for decision making
• Accounting information is expressed in terms of money, but money as a
unit of measure is unstable
• Sometimes, there are contradictions among some of the underlying
concepts. example revenue recognition and prudence
• Accounting information is subject to human error and/or manipulation
• Financial Accounting information reports on historical data which may not
be useful for future decision making

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 BRANCHES OF ACCOUNTING
Financial Accounting
• Other specialized areas:
• Auditing
Cost Accounting • Taxation
• Public sector accounting
• Hospitality accounting
• Sustainability Accounting
Management Accounting • Non-profit Accounting

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 BRANCHES OF ACCOUNTING
Financial Accounting
The objective of financial accounting is to ascertain the results (profit or loss) of
business operations during the particular period and to state the financial position
(balance sheet) as on a date at the end of the period.

Cost Accounting
The object of cost accounting is to find out the cost of goods produced or
services rendered by a business. It also helps the business in controlling the
costs by indicating avoidable losses and wastes.

Management accounting
The object of management accounting is to supply relevant information at
appropriate time to the management to enable it to take decisions and effect
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 Distinction among Financial Acc, Mgt Acc
and Cost Ac
FINANCIAL ACCOUNTING MANAGEMENT / COST
ACCOUNTING
• Recording transactions and • Processing Accounting information
reporting using financial reports. to aid management functions.
• Accounting information mainly for • Accounting information for internal
external users such as users such as Sales managers,
shareholders, creditors, govt production managers FD, MD.
agencies.
• Are prepared and published • Prepared daily or weekly or as and
quarterly, semi-annually and more when management requires.
often annually. • Optional, and prepared when
• Legal requirement for public considered relevant
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 Distinction among Financial Acc, Mgt Acc
and Cost Ac
FINANCIAL ACCOUNTING MANAGEMENT / COST
ACCOUNTING
Reports historical information Reports past, present and future
information
Must conform to GAAP, IFRS, IAS Does not conform to strict GAAP

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 ACCOUNTING PROCESS
Two main aspects

Recording business transactions Reporting financial information

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 ACCOUNTING PROCESS
The accounting process involves the following steps:

1. Identification and measuring transaction from source document

2. Analysing and recording the transaction in the journal
3. Posting the transaction recorded in the journal into the ledger
4. Balancing off accounts in the ledger and extracting a trial balance
5. Preparing financial statement using the information from the trial balance
6. Considering and posting adjusting entries for end of period adjustment
7. Analysing and interpreting the financial statement using ratio analysis

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ACCOUNTING PROCESS

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 USERS OF ACCOUNTING

OWNERS MANAGEMENT

INVESTORS USERS CONSUMERS

EMPLOYEES
CREDITORS

GOVERNMENT AGENCIES
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 USERS OF ACCOUNTING
Owners
The owners provide funds for the operations of a business and they
want to know whether their funds are being properly used or not.
They need accounting information to know the profitability and the
financial position of the concern in which they have invested their funds.

Employees
Employees are interested in the financial position of a concern they
serve particularly when payment of bonus depends upon the size of the
profits earned.
They seek accounting information to know that the bonus being paid
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 USERS OF ACCOUNTING
Management
Accounting information serves as the eyes and ears of management.
Accounting information interpretation serves as an appraisal
technique which checks performance of employees as well as the
organization as a whole.

Investors
They need financial information to know the profitability and the
financial position of the organisation.
They are interested in financial information to make that investment by
making a study of the accounting information given in the financial
statements of the organisation.
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 USERS OF ACCOUNTING
Creditors
Creditors (i.e. supplier of goods and services on credit, bankers and other
lenders of money) want to know the financial position of a concern before giving loans or
granting credit.
They want to be sure that the concern will not experience difficulty in making their
payment in time i.e. liquid position of the concern is satisfactory.
Government
Central and State Governments are interested in the accounting information
because they want to know earnings or sales for a particular period for purposes of
taxation.

Consumers
Consumers need accounting information for establishing good accounting control
so that cost of production may be reduced with the resultant reduction of the prices of
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