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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020

Introduction to
The Language of a Business

Accounting - the systematic process of collecting, recording, summarising, communicating and

analysing the financial, economic and sustainable information of a business for decision making.

The Branches of Accounting

Accounting

Financial Managerial Cost Tax Forensic Fiduciary

Auditing
Accounting Accounting Accounting Accounting Accounting Accounting

Branches Explanation
Financial accounting involves recording and classifying business transactions, and preparing and
presenting financial statements to be used by internal and external users.
Managerial or Management focuses on providing information for use by internal users, the 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.
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 implemented by management.
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns.
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.
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.

Welcome to Financial
Accounting
The Financial Accounting
Lecturer| Mr. Mc Koy
Terminologies Session|#1
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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020

 Book-keeping:
The recording of business transactions into various books of accounts in monetary
terms to ascertain the financial performance of the entity at the end of an accounting
period.

 Accounting:
The analysis, interpretation and reporting of business transactions to enable
Information for decision-making by various stakeholders.
Accounting deals with:
1. Debit and Credit
2. Journal and Ledger
3. Assets & Liabilities
4. Profit & Losses
5. Recording & Reporting

 An Asset:
A resource owned and controlled by a business entity from which
economic benefits are expected to flow into the entity from its use.

 A Liability:
An obligation (debt) arising for a past event for which cash is expected
to flow out of the entity to settle the obligation.

 Capital/Equity
An investment of resources into the business by the proprietor(s) or owners. E.g.
Cash, Deposit into a bank account, Buildings, Equipment, Machinery, Furniture.

 Drawings:
Resources/Amounts withdrawn by the proprietor for personal use. It can be anything
other than cash

 Business Transaction
The exchange of goods or services in return for some form of settlement such as cash.

 Inventory:
Goods held by an entity for the primary purpose of re-sale.

 Purchases:
Goods bought primarily for re-sale and not for administrative or for productive activities.

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
 Sales:
Goods previously bought for re-sale, now being sold by the business entity.

 Sales Return:
Goods returned by a customer because of damages or wrong type.

 Purchase Return:
Goods returned to a supplier because of damage or a wrong type.

 Carriage Inwards /Transport Cost:

The cost incurred by a business for the transport of goods into the business.

 Carriage Outwards/Delivery cost/ Transfer cost:

The cost of transporting goods from the business premises to another location.

 Receivables:
The amount of money owed by customers or clients to a business after goods
or services have delivered and/or used.

 Payables:
The amount of money a company owes creditors (suppliers, etc.) in return
for goods and/or services they have delivered.

 General Ledger:
The main book used by a business entity to record business transactions.

 Double Entry:
A system used by a business to record business transactions, with
one entry being a debit and the other entry being a credit.

 Accounting Cycle:
A systematic process used by a business to account for all business transactions
and to provide information on the Financial Performance to stakeholders.

 Revenues. Revenues are inflows or other enhancements of assets of an entity or

settlements of its liabilities (or a combination of both) from delivering or producing
goods, rendering services, or other activities that constitute the entity’s ongoing
major or central operations.

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
 Expenses are outflows or other consumption or using up of assets or incurrences of
liabilities (or a combination of both) from delivering or producing goods, rendering
services, or carrying out other activities that constitute the entity’s ongoing major or
central operations.

 Gains. Gains are increases in equity (net assets) from peripheral or incidental
transactions of an entity and from all other transactions and other events and
circumstances affecting the entity during a period except those that result from
revenues or investments by owners.

 Losses. Losses are decreases in equity (net assets) from peripheral or incidental
transactions of an entity and from all other transactions and other events and
circumstances affecting the entity during a period except those that result from
expenses or distributions to owners.

Asset Types:
 Non-Current Asset (NCA)
Anything owned and controlled by a business for administrative, productive and
rental purposes. It is held by the business for more than 1 year.
Examples: Land, Building, Machinery, Motor Vehicle, Furniture, Equipment,
Fixtures & Fittings.

 Current Asset
Anything owned and controlled by a business which will change value within 1
year. The intention of the entity, is to convert these types of assets into liquid cash
within 12 months.
Inventory, Cash in hand, Cash at bank , Receivables
Classes of Accounts:
There are three classes/ categories of accounts. They are:

Class 1 Class 2 Class 3

Asset Account: Nominal Account: Personal Accounts:
Resources owned Deals with expenses and Revenues. Names of persons and businesses

 Cash in Hand – Cash held on the business premises or for petty cash transactions.
 Cash in Bank – Cash held in a bank account (off site of the business)
 Bank overdraft – a facility between the business and the bank allowing the

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
owner to withdraw money than is not actually in his/her account. This
facility usually attracts an interest figure.
 Revenue - The amount of money that a company receives during a
specific period from the sale of goods, provision of services, discounts etc.
 Expenses - The fixed, variable, accrued or day-to-day costs that a
business may incur during its day-to-day operations.
 Fixed expenses (FE): payments like rent that will happen in a regularly scheduled
cadence.
 Variable expenses (VE): expenses, like labor costs, that may change in a given time
period.
 Accrued expense (AE): an incurred expense that hasn’t been paid yet.
 Operation expenses (OE): All cost incurred in running the business on a daily basis and
getting inventory from the supplier and then to the customers. It also includes cost
associated with the production of goods or services—for example, advertising costs,
property taxes or insurance expenditures.

Objectives of
$
$
Financial Reporting
To provide credible, reliable and accurate financial statements to various user groups.
To increase the confidence of current and prospective investors.
$ To promote accountancy for the practitioners, preparers of financial statements and those charged
with governance.
$ To facilitate comparison and analysis of the financials by users.
$ To serve as a platform for transparency and openness.
$ To provide information on management accountability to judge management’s effectiveness in
utilising the resources and running the enterprise, and for the purpose of planning, analysis,
benchmarking and decision making.
$ To aid in determining a company's cash flows.
$
A Scroll Down
Compliance represents another objective of financial reporting. The Internal Revenue Service
requires corporations to report their financial results on their income tax return.

Memory Lane
$ To provide information about the economic resources of an organisation and claims to those
The need for accounts Renaissance scholar Luca Pacioli wrote the first printed explanation of
resources
double entry (liabilities
bookkeeping& owner’s equity) Double-entry
in 1494. by third parties. bookkeeping involves entering every
$ To provide information to the statutory auditors which in turn facilitates audit.

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
transaction as a debit in one account and a corresponding credit in another account, and ensuring
that they 'balance'. Pacioli's description of the method was widely influential.
The first English book on the subject was written in 1543. The practice of double entry
bookkeeping has barely changed since then and is standard across the world, based upon the
concept that every transaction has a dual effect that balances to zero. The original role of the
accounting function was to record financial information and this is still its main focus.
Why do businesses need to produce accounts? If a business is being run efficiently, why should
it have to go through all the bother of accounting procedures in order to produce financial
information?
A business should produce information about its activities because there are various groups of
people who want or need to know that information. This sounds rather vague: to make it clearer,
we should look more closely at the classes of people who might need information about a
business. We need also to think about what information in particular is of interest to the members
of each class.
Large businesses are usually of interest to a greater variety of people than small businesses, so
we will consider the case of a large public company whose shares can be purchased and sold on
the Stock Exchange.

Users of Financial
Information
ᴥ Managers of the company.
These are people appointed by the company's owners to supervise the day-to-day activities 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 take
effective control and planning decisions.

ᴥ Shareholders of the company, i.e. the company's owners.

These will want to assess how effectively management is performing its stewardship function. They
will want to know how profitably management is running the company's operations and how much
profit they can afford to withdraw from the business for their own use.

ᴥ Trade contacts, including suppliers and customers.

Suppliers will want to know about the company's ability to pay its debts; customers need to know that
the company is a secure source of supply and is in no danger of having to close down.

ᴥ Providers of finance to the company

These might include a bank which permits the company to operate an overdraft, or provides longer-

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
term finance by granting a loan. The bank will want to ensure that the company is able to keep up with
interest payments, and eventually to repay the amounts advanced.

ᴥ Inland Revenue and Customs Department

They will want to know about business profits in order to assess the tax payable by the company.

ᴥ Employees of the company

These should have a right to information about the company's financial situation, because their future
careers and the size of their wages and salaries depend on it.

ᴥ Financial analysts and advisers, who need information for their clients or audience.
For example, stockbrokers will need information to advise investors in stocks and shares;
credit agencies will want information to advise potential suppliers of goods to the company;
and journalists need information for their reading public.

ᴥ Governments and their agencies.

Governments and their agencies are interested in the allocation of resources and therefore in the
activities of enterprises. They also require information in order to provide a basis for national statistics.

ᴥ The public
Enterprises affect members 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, for example as regards
pollution.

ᴥ Trade Unions

The Conceptual Framework of

Financial
setting Reporting
In financial reporting, a conceptual framework is a theory of accounting prepared by a standard-
body (called the International Accounting Standard Board, IASB) against which practical
problems can be tested objectively.
A conceptual framework deals with fundamental financial reporting issues such as the objectives
and users of financial statements, the characteristics that make accounting information useful, the
basic elements of financial statements (e.g., assets, liabilities, equity, income, and expenses), and
the concepts for Recognising and measuring these elements in the financial statements.

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020
Benefits of a Conceptual Framework for Financial Reporting Include:

 Providing guidance to accounting standard setters when developing and reviewing

financial reporting rules;
helping to ensure that accounting standards are internally consistent;
 Helping preparers and auditors to resolve financial reporting problems in the absence of
an accounting standard;
 Helping to limit the volume of accounting standards by providing an overarching theory
of accounting that can be applied to specific reporting problems.
 Facilitate discussion of accounting issues;

Accounting
Cycle
An accounting cycle is the collective and sequential process of identifying, analysing, and
recording the accounting events of an entity. The series of steps begin when a transaction occurs
and end with its inclusion in the financial statements. Additional accounting records during the
accounting cycle are ledgers and the trial balance.

Lecturer| Mr. Mc Koy Session|#1

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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020

⅏ The accounting process starts with identifying and analysing business transactions and events.
The transactions identified are then analysed to determine the accounts affected and the amounts
to be recorded. This first stage includes the preparation of business documents, or source
documents. A business document serves as the basis for recording a transaction.

⅏ The use of Journals- transactions are recorded based on their nature.

Receipts & Payments: Sales, Purchases, Cash inflows, Cash outflows
Credit: Sales, Purchases of inventory
Returns: Sales Returns, Purchases Returns for inventory
Acquisition/ Returns: Non-Current Assets (Capital Expenditure)
Petty Cash: Cash Payments under certain limits

⅏ The posting to Ledgers also known as Books of Final Entry records the collection of accounts
affected from each business transaction resulted from past events. Account balances are then
reported on the Financial Statements providing that errors, omission and adjustments are taken
into consideration.
⅏ A trial balance is prepared to test the equality of the debits and credits. All account balances are
extracted from the ledger and arranged in one report. Afterwards, all debit balances are added.
All credit balances are also added. Total debits should be equal to total credits.

⅏ Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of
the accounting period, some expenses may have been incurred but not yet recorded in the
journals. Some income may have been earned but not entered in the books. An adjusted trial
balance may be prepared after adjusting entries are made and before the financial statements are
prepared. This is to test if the debits are equal to credits after adjusting entries are made.

⅏ When the accounts are already up-to-date and equality between the debits and credits have been
tested, the financial statements can now be prepared. The financial statements are the products of
an accounting system.

Regulatory Framework of
Financial Reporting
IFRS
Foundation
(22 Trustees)

Lecturer| Mr. Mc Koy Session|#1

International
Accounting
Standard Board
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Introduction to Financial
An investment in knowledge pays the best interest
Accounting
September 7, 2020

Lecturer| Mr. Mc Koy Session|#1