AC 100: PRINCIPLES OF

ACCOUNTING I

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OFFICE: UDBS BLOCK C #508,
Lecture 1

Introductory Notes about AC 100

• Accounting is an information system that
plays an essential role in our business and
personal lives. We all use accounting data;
• Therefore, it is essential to gain an
understanding of concepts and techniques to
provide a balance between preparation and
use of accounting data;
• This course is fundamental to the business
curriculum and to success in the business
world and non business organisations;
• The focus of this course is to illustrate basic
accounting concepts to assist you in making
informed business and personal decisions.
 Introductory Notes [more]
• The incremental course design allows
an opportunity for a thorough study of
the basics;
• Assignments are planned to assist you
in achieving the course objectives and
to accommodate a variety of learning
styles;
• Assignments are designed to develop
basic knowledge, comprehension, and
application of the concepts and
procedures presented.

Introductory Notes [more]

• Academic success in this course depends on
your desire to learn and your willingness to
devote the time and work. You must take the
initiative to be an active and independent
learner in this process;
• Check your study habits - preview course
objectives, read the chapters, apply your
understanding of the topics by solving the
problems, review all materials and redo all
exercises and problems to determine your
strengths and weaknesses on each topic;
• This learning cycle is time-consuming but
necessary for academic success .
ACADEMIC SUCCESS -> GRADES
• GRADE ‘A’: The student illustrates excellent
performance. Has an unusually sharp insight
into the material; initiates thoughtful
questions. Sees many sides of an issue.
Articulates well and writes logically and
clearly. Integrates ideas previously learned
from this and other disciplines and
anticipates next steps in progression of
ideas;
• Example: “A” work is of such a nature that it
could be put on reserve for all students to
review and emulate. The “A” student is, in
fact, an example to follow.

ACADEMIC SUCCESS -> GRADES

• Grade B+: Student grasps subject
matter at a level considered to be good
to very good. Listens and participates
actively in class. Speaks and writes
well. Accomplishes more than the
minimum required. Work in class and
Study Team is of high quality.
• Example: “B+” work reveals a high
quality of performance and solid work.
“B+” is considered a high grade..
ACADEMIC SUCCESS -> GRADES
• Grade B: Student grasps subject
matter at a level considered to be
good. Listens and participates
actively in class. Speaks and writes
well. Accomplishes more than the
minimum required. Work in class is
of good quality.
• Example: “B” work reveals a high
quality of performance.

ACADEMIC SUCCESS -> GRADES

• Grade C: Student demonstrates a
satisfactory understanding of the material.
The minimum requirements are
accomplished but little or no initiative is
displayed. Oral and written communication
are at an acceptable level for a University
student. Grasps the basic concepts.
Synthesis and analysis are at a basic
University level.
• Example: “C” work represents average work
for the student in the class.
ACADEMIC SUCCESS -> GRADES
• Grade D: Student produces a quality and
quantity of work that are below average and
barely acceptable. Has difficulty grasping the
material and is unable to demonstrate the
interrelationship between concepts.
• Example: “D” work is not passing by a slim
margin, and it is unacceptable if sustained.
• Grade E: Student produces a quality or a
quantity of work that is outright
unacceptable.
• Example: “E” work is insufficient to gain
credit for the course.

Basic Courtesy for AC 100

• Attending class and attending class on time;
• Participating in classroom discussions;
providing information that is relevant to the
topic; contributing to the teaching/learning
environment by being prepared for all
classes;
• Submitting all assignments on or before the
scheduled dates and times;
• Assuring that work performed in class and
submitted for all out-of-class assignments is
your genuine work; and
• Assuring that cell phones or similar devices
are turned "off" during classroom and test
sessions.
 NOW STARTING LECTURE 1

Introduction to Accounting
Concepts

Brief history of Accounting

• Account: ‘give a satisfactory

record of money’
• The Landlord and the Serfs;
• Role of the Steward.
 What is Accounting?

• Is an art of collecting, recording,

classifying, and summarizing Entity’s
transactions and events which are, in part at
least, of a financial character, and
interpreting the results thereof

Need for Accounting

• A business language;
• A set of rules to record business
transactions in a consistent
manner;
• The basis of business operations;
• Accounting information enable
decision makers to make informed
financial decisions
•.
 Work of Management

Planning Coordinating
Directing and
Motivating

Controlling

Why is Accounting Information Needed?

• Decision making purposes -

essential for ‘sound’ management;
• Regulatory purposes;
• Nature of accounting information
produced depends on SIZE and
COMPLEXITY of business; and
• COST BENEFIT basis.
 The Accounting Information
System

ACCOUNTING
INFORMATION
SYSTEM

Users of Accounting Information

Prospective
Investors
Government Owners

Employees AIS Management

Suppliers Financiers
Customers
 Categories of Users

• Internal:
• Management;
• Employees.
• External:
• Investors, Financiers, Suppliers,
Government, Customers.

Meeting needs of Users

• External: • Internal:
• Published Financial • Financial as well as
Statements: Management
• Balance Sheet, Accounting Reports
• Income Statement,
and
• Cash Flow
Statement
 Financial vs Management
Accounting
• Financial • Management
Accounting: Accounting:
• Concern with • Focus at internal
external users, users
• General purpose [Management],
statements. • Need specific.

Exh.
1-2

Managerial
Item Financial Accounting
Accounting

Managers who plan

Users External persons who for
make financial and control an
decisions organization

Time focus Historical perspective Future emphasis

Emphasis on
Verifiability Emphasis on relevance
versus for planning and
relevance verifiability control
 Exh.
1-2
Managerial
Item Financial Accounting
Accounting

Precision
versus Emphasis on Emphasis on
timeliness precision timeliness

Subject Primary focus is on Focuses on segments

the whole
organization of an organization

GAAP Must follow GAAP Need not follow GAAP

and prescribed or any prescribed
formats format

Requirement Mandatory for Not

external reports Mandatory

Basic Accounting
Concepts/Principles
Materiality
Accounting Business
period Entity

Cost Going
FAIS
concept concern

Prudence Accrual
Matching
 Basic Accounting Concepts/Principles

• Business entity: This concept states that the business

exists separately and distinct from its owners. Only
transactions pertaining to the firm should be recorded.
• Going concern: Is an assumption that the business
will continue with operations for the foreseeable
future.
• Accrual: Revenue should be recognized when earned
rather than when cash is collected, and expenses
should be recognized when goods and services are
consumed regardless of when they are paid for.

Basic Accounting Concepts/Principles

• Matching Concept: In determining profit or loss at

all times, revenues should be matched against
expenses incurred in the process of generating that
revenue in the same period.
• Prudence/Conservatism: financial statements
should take a pessimistic rather than an optimistic
approach.
• Unit of measure: accounting is more concerned
with activities capable of being measured in
monetary terms hence money should be used as a
unit of measurement
Basic Accounting Concepts/Principles

• Accounting Period: Although a business is assumed

to continue to exist indefinitely, its life can be broken
into periods of time, usually twelve months, during
which results can be measured.
• Consistency: When there are alternative accounting
methods or policies which a business may use, it is
important that whichever method or policy is adopted
it is used consistently from one accounting period to
another, as well as within one accounting period.
• Materiality: Only significant items should be
considered when preparing financial statements.

Central Question

• Assume you are an officer of a BANK where an

ENTITY has taken a loan. The entity is required to
submit its financial statements on annual basis to
the bank. This is used to assess the entity’s ability
to pay back its loan.

• HOW WILL YOU BE SURE THAT THE

ENTITY HAS PRESENTED TRUE
INFORMATION????
Reliability of Accounting Information

• Users of accounting info need assurance

that the information presented to them by
entities are true and thus they can rely on
them when making their decisions

• Why reliability? To ensure information are

decision-useful

Reliability of Accounting Information

• Integrity of accounting information can be

enhanced through the following mechanisms:
– The use of Generally Accepted Accounting
Principles
– Ethical Considerations and sanctions
– Internal Control Systems
– External Auditing
– Professional Regulatory Bodies
– Various Legislations
 Qualities of Good [Accounting]
Information
• Fundamental Characteristics
– Relevance
– Faithful-Representation

• Enhancing Characteristics
– Comparability,
– Timeliness,
– Objectivity/Verifiability,
– Understandability
1) .

Relevance
üinformation that will enable users to
differentiate the alternatives from one
another, such that the best and worst options
can easily be identified is considered to be
relevant information

ürelevant information must be different

between alternatives
 Faithful Representation

• accounting information must represent the

economic reality of the economic
phenomena [i.e. transactions, events or
circumstances] it aims to depict in a
faithfully manner
• Complete – no ommission
• Neutral – freedom of biasness
• Accurate – free of material errors

Comparability

• information that enables users to identify

similarities in and differences between two or
more sets of economic phenomena

• accounting information of an entity is

considered more useful if it can be compared
with similar information of another entity for
the same period or similar information of the
same entity for different reporting periods
 Verifiability

• accounting information is assured of being

faithful represented if it can be verified by
knowledgeable and independent observers
after reaching similar consensus, although
not necessarily complete agreement

Timeliness

• accounting information must reach the

decision makers while it is still capable to
influence their decisions.

• Delaying delivery of relevant information to

decision makers can rob information of its
potential usefulness
 Understandability

• accounting information must be prepared and

presented in a manner that enables users to
comprehend its meaning

• users of accounting information are also

assumed to have:
– reasonable knowledge that enables them to read
and comprehend the information
– Have readiness to review and analyze the
information

Activity 3

• Discuss in groups the overall Function of

Accounting profession in the
society/economy

• To be done in groups, briefly

The Definition of Accounting [2]

• "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
results thereof."