About Instructor

• Name: Simon Nahusenay

• E-mail: [email protected]
• Assistant professor of accounting and finance
• Specialized in Microfinance - from European
Microfinance Program at University Libre of Brussels
• Serving as senior lecturer at DMU
• Having more than 12 years teaching and research
experience in the field of Banking/Accounting and
Finance
• Having more than 4 years of academics leadership
experience
• Author of 7 research articles and have 6 non-
published research works
• Member of London Journals Press
• Now, I’m conducting research on DFS
 7 chapters
1. Introduction to accounting
2. Accounting Cycle
3. Financial Statements
4. Cash flow statement
5. Cost accounting
6. Budget and budgetary control
7. Standard costing and variance analysis
 Chapter one: Introduction to Accounting
 Meaning of Accounting
 Accounting is famously known as the "language of
business". Through the financial statements, the end-
product reports in accounting, it delivers information to
different users.
 Accounting is a means through which information about a
business entity is communicated.
 Technical definitions of accounting have been published by
different accounting bodies. The American Institute of
Certified Public Accountants (AICPA) defines accounting as:
 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 financial
character, and interpreting the results thereof.
 Cont…
 studying the statement above will give us a better
understanding of accounting.
1. Accounting is considered an art
• Accounting is considered an art because it requires the use of
skills and creative judgment. One has to be trained in this
discipline to be able to perform accounting functions well.
• Accounting is also considered a science because it is a body of
knowledge. However, accounting is not an exact science since
the rules and principles are constantly changing (improved).
2. Accounting involves interconnected "phases"
• Recording pertains to writing down or keeping records of
business transactions.
• Classifying involves grouping similar items that have been
recorded. Once they are classified, information
is summarized into reports which we call financial statements.
 Cont…
3. Concerned with transactions and events having financial
character
 For example, hiring an additional employee is qualitative
information with no financial character. Hence, it is not
recorded. However, the payment of salaries, acquisition of
an office building, sale of goods, etc. are recorded because
they involve financial value.
4. Business transactions are expressed in terms of money
 They are assigned amounts when processed in an
accounting system. Using one of the examples above, it is
not enough to record that the company paid salaries for
April. It must include monetary figures – say for example,
$20,000 salaries expense.
 Cont…
5. Interpreting the results
• Interpreting results is part of the phases of accounting.
Information is useless if they cannot be interpreted and
understood. The amounts, figures, and other data in the financial
reports have meanings that are useful to the users.
• By studying the definition alone, we learned some important
concepts in accounting. It also gave us an idea of what
accountants do.
• You may not notice but the simple things you do and encounter
everyday can actually be related to some level of accounting. You
make budgets, count change and check the receipts from the
supermarket. You may also have listed things you spent your
money with at one point in your life.
• We are surrounded by business – from managing our own money
to seeing profit statements of big corporations. And where there
is business, there sure is accounting.
Branches of Accounting
 As a result of economic, industrial, and technological
developments, different specialized fields in accounting
have emerged.
 The famous branches or types of accounting include:
• financial accounting,
• managerial accounting,
• cost accounting,
• auditing, taxation,
• AIS,
• fiduciary, and
• forensic accounting.
 Cont…
1. Financial Accounting
 Financial accounting involves recording and classifying business
transactions, and preparing and presenting financial statements to
be used by internal and external users.
 In the preparation of financial statements, strict compliance
with generally accepted accounting principles or GAAP is observed.
Financial accounting is primarily concerned in processing historical
data.
2. Managerial Accounting
 Managerial or management accounting focuses on providing
information for use by internal users, the management. This branch
deals with the needs of the management rather than strict
compliance with generally accepted accounting principles.
 Managerial accounting involves financial analysis, budgeting and
forecasting, cost analysis, evaluation of business decisions, and
similar areas.
 Cont…
3. Cost Accounting
 Sometimes considered as a subset of management accounting, cost
accounting refers to the recording, presentation, and analysis
of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated
costing process.
 Cost accountants also analyze actual and standard costs to help
managers determine future courses of action regarding the
company's operations.
4. Auditing
 External auditing refers to the examination of financial statements
by an independent party with the purpose of expressing an opinion
as to fairness of presentation and compliance with GAAP.
 Internal auditing focuses on evaluating the adequacy of a company's
internal control structure by testing segregation of duties, policies
and procedures, degrees of authorization, and other controls
 Cont…
5. Tax Accounting
 Tax accounting helps clients follow rules set by tax
authorities.
 It includes tax planning and preparation of tax returns.
 It also involves determination of income tax and other
taxes, tax advisory services such as ways to minimize taxes
legally, evaluation of the consequences of tax decisions,
and other tax-related matters.
6. Accounting Information Systems
 Involves the development, installation, implementation,
and monitoring of accounting procedures and systems used
in the accounting process.
 It includes the employment of business forms, accounting
personnel direction, and software management.
 Cont…
7. Fiduciary Accounting
 involves handling of accounts managed by a person
entrusted with the custody and management of property
of or for the benefit of another person.
 Examples of fiduciary accounting include trust accounting,
receivership, and estate accounting.
8. Forensic Accounting
 Involves court and litigation cases, fraud investigation,
claims and dispute resolution, and other areas that involve
legal matters.
 This is one of the popular trends in accounting today.
Objectives of Accounting
 Every activity that a business firm does must be done for a reason
and accounting is no exception.
 Accounting helps the company achieve a myriad of objectives.
Here is the list of objectives that accounting helps the company to
obtain.
1. Permanent Record
 Any business firm needs a permanent record of the transactions
that it indulges in.
 required for internal purpose,
 for taxation purpose or
 for any other purpose.
 Accounting serves this function. Whenever the organization commits
any resource of monetary value either within the firm or outside the
firm, a record is made.
 This permanent record is held on for years and can be retrieved as
 Cont…
2. Measurement of Outcome
 A business firm may indulge in numerous transactions
every day.
 It may make profit in some of these transactions while
it may make losses in some other transactions.
 However, the effect of all these transactions needs to
be aggregated over a period of time.
 There must be daily, weekly and monthly reports
which provides information to the organization about
how well it is performing its activities.
 Accounting serves this purpose by providing periodic
financial statements which help the firm adjust their
operations accordingly.
 Cont…
3. Creditworthiness
 Firms need resources for their functioning.
 Firms do not have any capital stock at hand and
need to obtain them from investors.
 Investors will give money to the firm only if they
have reasonable assurance that the firm will be
able to generate enough profit.
 Past accounting records help a great deal in proving this.
 All kinds of investors from banks to shareholders ask for
past accounting details before they trust the management
with their money.
 Cont…
4. Efficient Use of Resources
 Firms can also conduct useful internal analysis with the help of accounting
data.
 Accounting records tell the firm what resources were committed to
what activity and what time.
 These records also summarize the return that was obtained from
these activities.
 Management can then analyze past behavior and draw lessons
about how they could have performed better and used resources
more efficiently.
5. Projections
 Accounting helps management and investors look forward. Costs and
revenue growths can be projected after substantial data has been
accumulated.
 The assumption made is that the company is likely to behave exactly as it
has done in the past.
 Thus, analysts can make reasonable assumptions about the future based
Fundamental Concepts or Elements of Accounting
 The elements of accounting pertain to assets, liabilities, and capital.
 Assets are resources owned by a company;
 liabilities are obligations to creditors and lenders; and
 capital refers to the interest of the owners in the business after deducting
all liabilities from all assets (or, what is left for the owners after all
company obligations are paid).
A. Assets
 Assets can be classified as current or non-current.
 An asset is considered current if it is for sale, if it can be realized within 12
month from the end of the accounting period or within the company's
normal operating cycle if it exceeds 12 months. In addition, cash is
generally considered current asset.
• Current assets include: Cash and Cash Equivalents, Marketable Securities,
Accounts Receivable, Inventories, and Prepaid Expenses. Assets that do not
meet the criteria to be classified as current are, by default, non-current
assets.
• Examples of non-current assets are: Long-term Investments; Property,
 Cont…
B. Liabilities
 Liabilities can also be classified as current or non-current.
 A liability is considered current of they are payable within
12 months from the end of the accounting period, or within
the company's normal operating cycle if the cycle exceeds
12 months.
• Current liabilities include: Accounts Payable, Short-term
Notes Payable, Tax Payable, Accrued Expenses, and other
short-term obligations.
• Non-current liabilities include those that do not meet the
above criteria. Examples of non-current liabilities are: Loans
Payable and Bonds Payable which are long-term in nature,
and Deferred Tax Liabilities.
 Cont..
C. Capital
 Capital refers to the interest of the owner/s of the business. The owner's
interest is the value of total assets left after all liabilities to creditors and
lenders are settled.
 Capital is increased by contributions by the owner/s and income. It
is decreased by withdrawals by owners (dividends in
corporations) and expenses.
D. Income
 Income refers to an increase in assets or decrease in liability, and an
increase in capital other than that arising from contributions made by
owner/s.
 Examples of income accounts include: Sales, Service Revenue,
Professional Fees, Interest Income, Rent Income, and others.
E. Expense
 Expenses result in decrease in assets or increase in liabilities, and decrease
in capital other than those arising from withdrawals of the owner/s.
 Some examples are: Cost of Sales, Salaries Expense, Rent Expense,
Principles and Rules of Accounting
 Accounting Principles:
 Accounting assumptions and principles provide the bases in
preparing, presenting and interpreting general-purpose
financial statements.
1. Accrual
 Income is recognized when earned regardless of when
collected, and expenses are recognized when incurred
regardless of when paid.
2. Going Concern
 Also known as continuing concern concept or continuity
assumption, it means that a business entity will continue
to operate indefinitely.
 Cont…
3. Accounting Entity Concept
 A specific business enterprise is treated as one
accounting entity, separate and distinct from its owners.
4. Time Period Assumption
 The indefinite life of an enterprise is subdivided into
time periods or accounting periods
 which are usually of equal length for the purpose
of preparing financial reports.
5. Monetary Unit Assumption
Transactions are recorded in terms of
money (quantifiability).
Rules of Accounting
 Golden Rules of Accounting
1. Debit The Receiver, Credit The Giver
 This principle is used in the case of personal accounts.
 When a person gives something to the
organization, it becomes an inflow and
therefore the person must be credit in the
books of accounts.
 The converse of this is also true, which is
why the receiver needs to be debited.
 Cont…
2. Debit What Comes In, Credit What Goes Out
 This principle is applied in case of real accounts.
 Real accounts involve machinery, land and building
etc.
 They have a debit balance by default.
 Thus when you debit what comes in, you are adding
to the existing account balance. This is exactly what
needs to be done.
 Similarly when you credit what goes out, you are
reducing the account balance when a tangible asset
goes out of the organization.
 Cont…
3. Debit All Expenses And Losses, Credit All Incomes And
Gains
 This rule is applied when the account in question is a
nominal account.
 The capital of the company is a liability. Therefore it has a
default credit balance.
 When you credit all incomes and gains, you increase the
capital and by debiting expenses and losses, you decrease
the capital. This is exactly what needs to be done for the
system to stay in balance.
 The golden rules of accounting allow anyone to be a
bookkeeper. They only need to understand the types of
accounts and then diligently apply the rules.
The General Rules Of Debit And Credit
Accounting To Increase To Decrease
Element
1.Assets Debit Credit
2. Liability Credit Debit

3. Capital Credit Debit

Investment
4. Capital Debit Credit
Withdrawal
5. Income Credit Debit
6. Expense Debit Credit
 Double Entry Bookkeeping System in Accounts

 The double entry system of bookkeeping is said to have

revolutionized growth in modern business.
 It is only because businesses are able to keep track of their
growing scale of transactions efficiently that they grow
further.
 This has been facilitated by a well designed, error
preventing accounting system called the double entry
system.
 What Is Double Entry System ?
 In a double entry bookkeeping system there are two sides
to every transaction.
 The sides are equal in magnitude i.e. the debits
must always equal the credits.
 Cont..
 Large Firms
 When a firm grows beyond a certain size it has to use double
entry system of accounting. This is both because it is mandated
by law as well as because it is the most efficient system.
 Complete Records
 Double entry accounting system keeps a record of all major
accounting transactions.
 These could be transactions outside the firm with third
parties.
 Or they could be intra firm transactions where raw
material has now been converted to Work In Progress
(WIP).
 By making sure every record about credit as well as intra firm
transactions is being accounted for, double entry system
provides the most accurate record.
 Cont…
 Automatic Reconciliation
 As the scale of a business grows, it becomes more prone to
clerical errors.
 A clerk accounting for a large number of transactions all
day is bound to make some mistakes.
 However, the double entry system does not allow these
mistakes to have a cascading effect.
 This is because the system is constantly checking whether
total debits equal total credits.
 When they are not, accountants know they are dealing with
an error.
 They can then find out the error, correct it and then move
forward. This saves a lot of time and builds incredible
 Cont…
 However the double entry accounting system is not 100%
error proof. There is a possibility that an entry may have
been completely omitted or that there may have been
compensating errors done while passing the entry.
 Fraud is Difficult
 Just like reconciliation, when a business grows, more and
more responsibilities need to be entrusted to workers.
 Many times this leads to frauds by the workers as they
embezzle cash and make use of resources for personal
benefits.
 However, the double entry accounting system, when used
correctly prevents such situations from arising.
 The system has strong inbuilt controls to avoid misuse of
any resources.
Classification of Accounts
 What is an Account?
 In accounting, an account is a descriptive storage unit used
to collect and store information of similar nature.
 For example, "Cash". Cash is an account that stores all
transactions that involve cash receipts and cash payments.
All cash receipts are recorded as increases in "Cash" and all
payments are recorded as deductions in the same account.
 Types of Accounts
 All accounts within the organization can be split into three
types.
 An account can be of one and only one of the following
type and not more. Here are the various types of accounts.
 Cont…
1. Personal: Personal accounts make most intuitive sense.
 We keep a track of all the transactions that we have undertaken with a
particular person in them.
 We all maintain personal accounts like the money we owe our friends,
the grocer and so on.
2. Real: Real accounts are accounts which have been created to account for
tangible things.
 Accounts such as land and building, machinery a/c etc are called real
accounts.
 Although they are not living beings, we still transact with such entities.
Records of such transactions are kept in real accounts.
3. Nominal: Nominal accounts are a special category of accounts.
 While the other accounts can hold balance and carry it forward, nominal
account are automatically reset to zero as soon as the time period is over.
 Their balance is carried forward to other accounts and the books for that
period are closed.
 Examples of such accounts are Profit a/c, depreciation a/c etc.
End of Chapter one