INTRODUCTION TO ACCOUNTING

HISTORY AND DEVELOPMENT OF ACCOUNTING

In the early days of accounting development, money served as a medium of exchange. This
medium, of exchange was common among the merchants at the Babylonian civilization. As
trade and commerce expanded it became difficult for servant to give a report of stewardship.
For example, the Babylonians business men recorded their sales and lending in clay tablets
while Egyptians used papyrus to show tax collection.

In Greece, accounts were engraved on stones and exposed in the public. The first early works
to be documented was done by Luca Pacioli, a mathematician, in his book “Treatise of Book
Keeping” published in 1494. During the industrial revolution in Great Britain, Professional
Accounting Bodies such as the Institute of Chartered Accountants of England and Wales
improved the development of accounting theories, methods and practice. However, the basic
rule of double entry remained unchanged.

The spillover of the activities of the Chartered Accountants of England and Wales
necessitated the establishment of the Institute of Chartered Accountants of Nigeria (ICAN) by
an act of Parliament no. 15 of 1965. The Institute set professional code of ethics and practice
for its members. It regulates the accounting profession in Nigeria.

However, after the indigenization decrees of 1975 and 1979, the management and control of
enterprises was mostly handled by members of ICAN. The institute saw the need to
standardize accounting practice in Nigeria. This gave rise to the establishment of Nigeria
Accounting Standard Board in 1982 now Federal Reporting Council of Nigeria (FRCN).

Today the introduction of information technology has greatly improved the quality and speed
of accounting information using the basic rule of double entry bookkeeping. Accounting also
has specialized branches such as Financial Management, Cost Accounting, Management
Accounting and Taxation and Auditing.

DEFINITION OF FINANCIAL ACCOUNTING

Financial Accounting is a process of collecting, recording, analyzing and summarizing
financial transactions of a business and interpreting financial information for the various
users of financial statement. The transactions are recorded in the book or original entry,
analysed and posted to the ledgers and finally they are summarized in the financial
statements. The objective of financial statements is to provide information about the financial
position of an enterprise that is useful to a wide range of users in making economic decision.

BOOK KEEPING OF ACCOUNTING

Book keeping is just an aspect of accounting that entails collection and accurate recording of
financial transactions. Accounting is wider in scope than book keeping. Accounting analyses
summarises; interprets, and prepares financial statements using the data collected and
recorded through book keeping.
USERS OF FINANCIAL STATEMENTS AND ACCOUNTING INFORMATION
The following people are likely to be interested, in financial information about a large
company with listed shares:
1. Managers of the company: They need information about the company’s financial
situation as it is currently and as it is expected to be in the future. This is to enable
them to manage the business efficiently and to make effective decisions.
2. Shareholders of the company: They want to assess how well the management is
performing. They want to know how profitable are the company’s operations and how
much profit they can afford to withdraw from the business for their own use.
3. Trade contacts (i.e. suppliers and customers): Suppliers want to know about the
company’s ability to pay its debts; customers’ needs to know that the company is a
secured source of supply and is in no danger of having to close down.
4. Provider of finance to the company: They might include a bank which allows the
company to operate an overdraft, or provides a longer-term finance of grating loans.
The bank wants to ensure that the company is able to keep up interest payment, and
eventually to repay the amounts advanced.
5. The taxation authorities: They want to know about business profit in order to assess
tax payable by the company.
6. Employees of the company: They should have the right to information about the
company’s financial situation, because their future careers and the size of their wages
and salaries depend on it.
7. Financial analysts and advisers: They need information for their clients and
audience. For example, stock brokers need information to advise investors; credit
agencies want information to advise potential suppliers of goods to the company;
journalists need information for their reading public.
8. Government and their agencies: They are interested in the allocation of resources
and therefore in the activities of enterprises. They also require information in order to
prove a basis for national statistics.
9. The public: Enterprises affect member of the public in a variety of ways. For
example, enterprises may make a substantial contribution to a local economy by
providing employment and using local suppliers. Another important factor is the
effect of an enterprise on the environment, example as regard pollution.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Accounting information should possess the following qualities before users can rely on it
i. Relevance: The accounting information must include enough facts to satisfy the need
of the users. For instance, management accounting information should be relevant to
the decision to be taken with it. Financial accounting information should disclose
enough information to satisfy the various users.
ii. Reliability: The source of information must be verifiable and one source of evidence
must corroborate the other.
iii. Comparability: There should be no change in the basis for the preparation of the
accounting information from period to period so that it will be easy to compare the
result of operations over some accounting periods.
 iv. Timeliness: Accounting information must be made available early enough for its use.
For instance, management requires certain information on daily basis or weekly basis
for effective running of the business; if it comes late, it would be useless. Annual
reports and accounts must be published not long after the year end.
v. Objectivity: There must be no bias, window dressing or subjective judgment in the
presentation of accounting information. Objectivity includes ability to trace
transactions to documentary evidence and complying with required regulations in its
presentation.
vi. Comprehensiveness: Accounting information must contain just enough details for
good understanding. The detail must neither be too little nor too much.
vii. Title
viii. Volume
ix. Channel of communication

TYPES OF ORGANISATION
There are basically two types of organisation. They are
A. Profit Making Organisation
B. Non-Profit Making Organisation

PROFIT MAKING ORGANISATION: These are organisation whose primary aim of

going into business is to make profit on the goods produced and services render. They
include:
i. Sole Proprietorship: This is usually a one-man business i.e. it is owned by one person.
The owner is fully liable for the debts incurred in the business and also takes all the
profit of the business
ii. Partnership: This is owned by minimum of two or more person, who are jointly and
fully liable for the debts incurred by the business and also take all the profit in the
agreed sharing ratios
iii. A Company: This is a legal entity in law. A company is an artificial person distinct
from its ownership. The ownership of a company is different from the company. The
company is liable for the debts incurred in the business. People or owners of the
business only act on behalf of the company therefore; all transactions are carried out
in the name of the company.

NON-PROFIT MAKING ORGANISATION: These are organisations whose primary

objective is to provide services at affordable cost without the aim of making profit. They
include:
i. Government ministries
ii. Non-Governmental Organisations (NGOs)
iii. Clubs and societies
iv. Charity organisations
THE ACCOUNTING EQUATION
For proper understanding of the accounting equation, there is need to know the components
of financial statement. For the purpose of this class, we shall be looking into the statement of
financial position and the profit or loss account

The statement of financial position: This is a statement that shows the financial position of
an organisation at a given point in time. There are three sub heads in the statement of
financial position which are: Asset, Capital and Liability
i. Assets: A business organisation requires different types of resources in order to carry
out its economic activities. In accounting, the resources which a business owns are
called ASSETS. Assets are divided into two namely:
 Non-Current Assets: These are assets acquired for the purpose of keeping and
using in the business rather than selling. They are meant to be in the business for
more than one accounting period i.e. a year. Examples are motor vehicles, plant
and machineries, land and building, fixtures and fittings etc.
 Current Assets: These are assets held in form of cash or other forms which are
intended to be converted into cash within the accounting period. Examples are
inventory of goods, receivables, cash in hand, cash at bank, prepayments etc.

Note: the addition of Non-Current Assets and Current Assets = Total Assets

ii. Capital: This is the finance provided by the owners of the business which is not
intended to be repaid in the ordinary course of business. It constitutes the owners’ or
shareholders’ contribution in the assets of the company

iii. Liabilities: These are the portion of the company’s assets provided by outsider e.g.
non-owners of the business. They come in form of loan, credit purchases, bank
overdraft etc. liabilities are also divided into two:
 Non-Current Liabilities: These are finances provided by outsiders that are no
due for payment within the next 12 months e.g. long-term bank loan and
debenture bonds etc.
 Current Liabilities: These are finances provided by outsiders that are due for re-
payment within a relatively short period of time (i.e. paid within the accounting
year which is a year). They include trade payables, accrued expenses, income
received in advance, bank overdraft etc.

Accounting Equation and the Statement of Financial Position

At commencement, the resources (assets) needed to operate the business will be provided by
the owner (capital) if the owners are the only one who have supplied the assets, then the
following equation holds true
Assets = Capital (Owner’s Equity)
Example 1
Assume Aderayo Plc started business on June 1, 2019 with N2,000,000 which was
contributed by its shareholders. The company acquired the following items:
N’000
Building 750
Office Equipment 250
Motor vehicles 100
Furniture 200
The remaining cash was left for operations.

Solution
Statement of Financial Position as at ……..
The accounting equation can be summarized as follows:
Assets: N’000 N’000
Non-Current Assets:
Building 750
Office Equipment 250
Motor vehicles 100
Furniture 200
1,300
Current Assets:
Cash in hand 700
Total Assets 2,000

Equity and Liabilities:

Capital (Owner’s Equity) 2,000

The total value of assets (N2,000,000) is equal to the initial contribution by shareholders
(N2,000,000).
In practice however some of the assets may have been provided by third parties. A loan might
have been taken from bank or a supplier may provide goods on credit. The equation now
becomes:
Assets = Capital (Owners’ Equity) + Liabilities

The whole of accounting is based on this equation and it holds true no matter the complexity
or number of transactions involved.

Example 2
Assume the owner’s equity is insufficient to fund all the assets required by the business and
the company acquired leasehold from LSDPC at N250,000 which it is yet to be paid; then the
equation can be summarized as follows:
 Assets N’000 N’000
Non-Current Assest
Leasehold 250
Building 750
Office Equipment 250
Motor vehicles 100
Furniture 200
1,550
Current Assets:
Cash in hand 700
Total Assets 2,250

Equity and Liabilities:

Capital 2,000
Liabilities
Payables (LSDPC) (250)
2,250

The total assets of the business is now N2,250,000. This is financed by owners’ equity, which
is still N2,000,000 and creditors of N250,000 (liability).
A=C+L

Another way of expressing the equation is as follows:

Assets – Liabilities = Owner’s Equity
Since Assets less liabilities equals net assets, it could be re-written as:
Net Assets = Owner’s Equity/Capital

Net Asset represents the portion of the total assets financed solely by owner’s equity. The
equation holds true for every organization irrespective of the nature of size.

In our discussion so far on the accounting equation, we have familiarized ourselves mainly
with statement of financial position items, i.e. assets, liability and capital. Let now introduce
Profit or Loss Items i.e. revenue, expenses, gains & losses into the accounting equation.
When a company makes profit, it goes to the owners of the business. Profit is the reward for
risk taken by the owners of the business and therefore affects equity (i.e. shareholder’s
funds). The profit will increase the capital i.e. owners’ equity. Therefore, profit is added to
the owners’ capital

From the original accounting equation

Assets = Capital + Liabilities (equation 1)
Where, Capital = Original contribution + Profit

Therefore, equation 1 above can be re-written as follows:

 Assets = Original Contribution + Profit + Liability (equation 2)
Where, Profit = Revenue – Expenses

Therefore, equation 2 above can be expressed as follows:

Assets = Original Contribution + Revenue – Expenses + Liabilities (equation 3)

Therefore, equation 3 above can be expressed as follows:

Assets + Expenses = Original Contribution + Revenue + Liabilities (equation 4)

Final Accounting Equation

A+E = C+R+L
Debit Entry Credit Entry

Class Exercises

1. You are to complete the gaps in the following table:

Assets Liabilities Capital
N N N
55,000 16,900 _______
_______ 17,200 24,400
36,100 ________ 28,500
119,500 15,400 _______
88,000 ________ 62,000
_______ 49,000 110,000

2. Classify the following items into liabilities and assets:

a. Motor vehicles f. Owing to bank
b. Premises g. Cash in hand
c. Creditors for goods h. Loan from D. Jones
d. Inventory of goods i. Machinery
e. Receivables

3. Which of the following are shown under the wrong headings:

Asset Liabilities
Cash Loan from J. Graham
Fixtures Machinery
Payables Motor vehicles
Building
Inventory of goods
Receivables
Capital
 4. Yemi Plc was incorporated on 1 March 2022. On that day, the company acquired the
following:
N’000
Motor vehicle 5,000
Building 10,000
Equipment 2,000
Furniture 2,500
All items were paid for apart from the motor vehicle. Cash in hand after these
transactions was N500,000
Required:

Determine the amount invested by the owners and draw up the statement of financial
position as at 28 February 2023

Statement of Financial Position as at 28th February, 2023

Assets
Non- Current Assets N’000
Motor vehicle 5,000
Building 10,000
Equipment 2,000
Furniture 2,500
19,500
Current Assets
Cash in hand 500
Total Assets 20,000

Equity and Liabilities

Capital (Balancing Figure) 15,000

Liabilities 5,000
20,000

ACCOUNTING CONCEPTS AND CONVENTIONS

This refer to fundamental assumptions made by Accountants in preparation of financial
statements. They are Generally Accepted Accounting Principles (GAAP) for the
preparation of financial statements. They include:

1. Business Entity Concept: The concept regards a business as a separate entity, distinct
from its owners or managers. This concept applies whether the business limited liability
or a sole proprietorship or partnership
2. Duality Concept: this is otherwise known as double entry principles. The concept holds
that every transaction must be recorded twice for control purposes. In essence, all debit
entries must have corresponding credit entries i.e. there is a receiver and there is a giver

3. Money Measurement: Money serve as the common denominator for measuring the
various assets and liabilities of an organisation, therefore accounting transactions are
expressed in monetary values. For any transaction to be recorded in the financial
statement, it must monetary measurement.

4. The Going Concern: The assumption is that the business unit will operate in perpetuity;
that is the business is not expected to be liquidated in the foreseeable future. A business is
considered a going concern, if it is capable of earning a reasonable net income and there
is no intention or threat from any source to curtail significantly its line of business in the
foreseeable future.

5. Periodicity Concept: the operations and performances of a business entity should be

subjected to periodic review. Limited liability companies are required to present their
financial statement to members of the company annually

6. Prudence: This requires that an Accountant should not recognise income until the
income has been earned and that losses should be fully written off when it is probable.
This will ensure that profit and net worth of the organisation are not overstated. The
concept requires Accountant to exercise caution especially in the recognition of income
and make provision for all losses

7. Consistency Concept: This requires that when a method has been adopted in treating an
item in the financial statement, the method should not be changed but used consistently
from period to period. For instance, depreciation of assets can be calculated using straight
line method, reducing balance method and sum of the digit method. If straight line
method is chosen to depreciate assets in one year, the company should continue to
depreciate assets using the straight-line method.

8. Accrual Concept: this states that income should be recognised when they are earned, not
when they are received and expenses should be recognised when they are incurred and
not when they are paid. The application of this concept gives rise to prepayments and
accrued expenses. An accrued expense occurs when an expense has been incurred but it
has not been paid off. Prepaid expenses occur when payment has been made for services
but benefits have not been derived from them.

9. Matching Concepts: The concept holds that for any accounting period, the earned
revenue should be matched with the cost that earned them. If revenue is deferred from
one period to another, all elements of cost relating to them will be carried forward. For
instance, if a trader bought 50 pairs of shoes for N50,000 and sold 35 pairs for N70,000 at
the end of the period, the cost of goods sold will be measured on the 35 pairs sold. That is
 35/50 x N50,000 = N35,000. N15,000 cost of shoes purchased would be deferred to the
next period when the balance of I5 pairs of shoes will be sold.

10. Historical Cost Concept: The basis for initial recognition of an asset’s acquisition,
service rendered or received and an expense incurred is cost. The concepts hold that after
acquisition, cost values are retained throughout the accounting process except to allocate
a portion of the original cost to expense as the assets expire (see matching concept). The
justification for historical cost principle is its objectivity; that is, the cost can be traced to
source document.

11. Realisation Concept: Under accrual concept, we said that revenue should be recorded
when it is earned. The realisation concept is concerned with determining when revenue is
earned. The realisation concept holds that revenue should be recognised at the time goods
are sold and services are rendered; that is the point at which the customer has incurred
liability.

12. Objectivity Concept: this holds that accounting statement should not be influenced by
personal bias of management. The use of historical cost for asset valuations is an attempt
to be objective, because it can be backed up by voucher, invoices, cheques, bills etc (i.e.
source document)

13. Fairness: This is an extension of the objectivity principle. In view of the fact that there
are many users of accounting information, all having differing needs, the fairness
principle requires that accounting report should be prepared not to favour any group or
segment or society.

14. Materiality Concept: the principle of materiality holds that financial statements should
separately disclose items which are significant enough to affect evaluation or decisions. It
refers to relative importance of an item; therefore some level of judgment may be
required in determining what is material to an organisation; as what is material to a sole
trader may be immaterial to a mega firm

15. Substance over Form: Business transactions are usually govern by legal principles;
nevertheless they are accounted for and presented in accordance with their financial
substance and reality and not mere by their legal form e.g. lease contract. In essence,
when legal form of a business differs from the economic substance, the economic
substance should be used to prepare the financial statement. This will enable assets and
liabilities to be accounted for accurately