What is accounting?

-It is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit or loss for a
given period, and the value and nature of a firm's assets, liabilities and owners' equity.

-Accounting can be defined as the orderly & systematic recording of the monetary values of
financial transactions of a business, reporting of results and providing financial information as a
basis for decision making

Three main processes define the accounting process:

1. Identifying: selecting evidence of economic / financial activity (transactions)

2. Recording: transactions to provide a permanent history of the businesses financial activities

3. Communicating: the recorded information to interested users by use of accounting reports IE

Financial Statements

Users of financial statements

There are many users of the financial statements produced by an organization. The following list
identifies the more common users of financial statements, and the reasons why they need this
information:
• Company management. The management team needs to understand the profitability, liquidity,
and cash flows of the organization every month, so that it can make operational and
financing decisions about the business.
• Competitors. Entities competing against a business will attempt to gain access to its financial
statements, in order to evaluate its financial condition. The knowledge they gain could
alter their competitive strategies.
• Customers. When a customer is considering which supplier to select for a major contract, it
wants to review their financial statements first, in order to judge the financial ability of a
supplier to remain in business long enough to provide the goods or services mandated in
the contract.

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• Employees. A company may elect to provide its financial statements to employees, along with
a detailed explanation of what the documents contain. This can be used to increase the
level of employee involvement in and understanding of the business.
• Governments. A government in whose jurisdiction a company is located will request financial
statements in order to determine whether the business paid the appropriate amount of
taxes.
• Investment analysts. Outside analysts want to see financial statements in order to decide
whether they should recommend the company's securities to their clients.
• Investors. Investors will likely require financial statements to be provided, since they are the
owners of the business, and want to understand the performance of their investment.
• Lenders. An entity loaning money to an organization will require financial statements in order
to estimate the ability of the borrower to pay back all loaned funds and related interest
charges.
• Rating agencies. A credit rating agency will need to review the financial statements in order to
give a credit rating to the company as a whole or to its securities.
• Suppliers. Suppliers will require financial statements in order to decide whether it is safe to
extend credit to a company.
Unions. A union needs the financial statements in order to evaluate the ability of a business to
pay compensation and benefits to the union members that it represents.

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Ethics are the moral standards you rely on when making decisions. They define what is right and
wrong and outline the kind of behaviour that business should not engage in. For responsible
decision making in a business environment, a good set up of ethics is key.

A professional accountant is required to comply with the following fundamental principles:

(a)Integrity-A professional accountant should be straightforward and honest in all professional

and business relationships. Integrity – having a consistent character that is demonstrated by an
alignment of your thoughts, words and action.

(b) Objectivity-A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments

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(c) Professional Competence and Due Care-A professional accountant has a continuing duty to
maintain professional knowledge and skill at the level required to ensure that a client or
Confidentiality employer receives competent professional service based on current
developments in practice, legislation and techniques. A professional accountant should act
diligently and in accordance with applicable technical and professional standards when providing
professional services.

(d) -A professional accountant should respect the confidentiality of information acquired as a

result of professional and business relationships and should not disclose any such information to
third parties without proper and specific authority unless there is a legal or professional right or
duty to disclose. Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of the professional accountant or
third parties

(e) Professional Behavior-A professional accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.

(f) Honesty-You need to be honest in all your actions and everyday communication you make.

(g) Keeping your promise - keep every promise that you make and always fulfil a commitment.

(h) Loyalty –you need to be loyal to your company, your team and yourself while operating
within a strong moral compass.

(i) Fair- in all your actions, you must strive to be fair and just. An ethical executive is committed
to fairness in all that they do and do not seek to exercise their power for an unfair advantage or
use indecent methods to gain a competitive edge.

(j) Caring – this involves having a genuine concern for others as well as sense of compassion.

Respect –being ethical means treating everyone with respect, demonstrating this by being
courteous and having an equal treatment of people regardless of who they are.

(h) Obeying the law – ethical executive always obeys the law and never breaks the rules,
regulations or laws surrounding their business activities.

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Excellence –being ethical in business is also about pursuing excellence in everything that you
do. Delivering the highest quality of service or products makes business sense especially if there
is constant endeavour to always improve

Being a leader –you need to demonstrate the principles and ethics you want your team to live by
and take an active role as a leader to be a positive role model.

Accountable – being ethical means holding you accountable and acknowledging and accepting
personal accountability for their decision and any consequences.

Types of business organizations

1. Formal business organizations

Formal organization is one with a fixed set of rules of intra-organization procedures and
structures. As such, it is usually set out in writing, with a language of rules that ostensibly leave
little discretion for interpretation.

2. Informal business organizations

The informal organization is the interlocking social structure that governs how people work
together in practice. It is the aggregate of, norms, personal and professional connections through
which work gets done and relationships are built among people who share a common
organizational affiliation or cluster of affiliations. It consists of a dynamic set of personal
relationships, social networks, communities of common interest, and emotional sources of
motivation. The informal organization evolves, and the complex social dynamics of its members
also.

BRANCHES OF ACCOUNTING

Branches of accounting

1. Financial Accounting
2. Financial reporting
3. Cost Accounting
4. Management Accounting

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1. Financial accounting is a specialized branch of accounting that keeps track of a company's
financial transactions. Using standardized guidelines, the transactions are recorded, summarized,
and presented in a financial report or financial statement such as an income statement or a
balance sheet. Financial Accounting -Involves recording and classifying business transactions
and preparing and presenting financial statements to be used by internal and external users.

2. Financial Reporting involves the disclosure of financial information to the various

stakeholders about the financial performance and financial position of the organization over a
specified period of time. These stakeholders include – investors, creditors, public, debt providers,
governments & government agencies. In case of listed companies the frequency of financial
reporting is quarterly & annual. Financial reporting – financial results of an organisation that
are released to the public. It is the process of producing statements that disclose an organisation’s
financial status to management, investors and the management.

3. Management Accounting- focuses on providing information for use by internal users

(management). This branch deals with the needs of the management rather than strict compliance
with the generally accepted accounting principles.

According to the Institute of Management Accountants (IMA): "Management accounting is a

profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of an organization's strategy".

4. Cost Accounting – considered subset of management accounting. Cost accounting refers to

the recording, presentation and analysis of manufacturing cost. It is very useful in a
manufacturing business. Cost accounting is an accounting method that aims to capture a
company's costs of production by assessing the input costs of each step of production as well as
fixed costs, such as depreciation of capital equipment. Cost accounting will first measure and
record these costs individually, then compare input results to output or actual results to aid
company management in measuring financial performance.

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ACCOUNTING PRINCIPLES

Accounting has developed a number of rules which must be applied by everyone who is involved
with the recording of financial information. Accounting needs rules because if every accountant
or bookkeeper followed their own rules it would be impossible for others to fully understand the
financial position of the business. In the same way, it would be impossible to make a comparison
between the financial results of two or more businesses if they had each applied their own rules
in the preparation of their accounting statements

ACCOUNTING PRICIPLES

Accounting principles are sometimes referred to as concepts and conventions. A concept is a rule
which sets down how the financial activities of a business are recorded. A convention is an
acceptable method by which the rule is applied to a given situation.

Business entity

This means that the business is treated as being completely separate from the owner of the
business. For this reason, personal assets of the owner, the personal spending of the owner do not
appear in the accounting records of the business. The accounting records of the business relate
only to the business and record the assets of the business, the liabilities of the business, the
money spent by the business etc. If there is a transaction concerning both the business and its
owner then it is recorded in the accounting records of the business. When the owner introduces
capital to the business it is credited to the capital account to show funds coming from the owner.
The capital account shows a credit balance representing the amount owed by the business to the
owner.

Money Measurement

Only information which can be expressed in terms of money can be recorded in the accounting
records. There are many aspects of a business which cannot be measured in terms of money and
therefore do not appear in financial records e.g. no entry is made in accounting records of
Jaggers Wholesellers when a competitor reduces his prices by 15%.

Duality

The term double entry system is used because the two effects of a transaction a giving and a
corresponding receiving account. Debit the receiver and credit the giver.

The prudence principle

This is also known as the principle of conservatism. Accountants should ensure that profits and
assets are not overstated and that liabilities are not understated. Profit should only be recognised

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when it is reasonably certain that such a profit has been realised and all possible losses should be
provided for.

Realisation

Income is brought into account as soon as it has been earned and realised. For income to be
realised, the collectability of the income must be reasonably certain and it must be measurable.
This principle emphasises the importance of not recording a profit until it has actually been
earned. This means that profit is only regarded as being earned when legal title to goods or
services passes from the seller to the buyer, who has an obligation to pay for the goods. When an
order is placed by a customer no goods change hands and no profit is earned. Profit is regarded
as being realised when the goods actually change hands. This is the same even if the goods are
sold on credit and the customer does not pay for them immediately.

Consistency

There are some areas of accounting where a choice of method is available e.g. calculation of
depreciation. Once an accounting method has been selected, the method must be used
consistently from one accounting period to the next. If this is not done, a comparison of the
financial results from year to year is impossible.

Materiality

This principle applies to items of very low value i.e. items which are not material which are not
worth recording as separate items. Other principles can be ignored if the time and cost involved
in recording such low value items far outweigh any benefits to be gained from strict application
of these principles.eg a pocket calculator purchased for office use is strictly a non-current asset,
part of its value being lost each year through normal usage. The cost of calculating and recording
the depreciation of the calculator each year would amount more than the cost of the asset. Instead
of the calculator being recorded as a non-current asset, it would be regarded as an office expense
in the year of the purchase N.B what is material for one business may not be so for another
business. This principle is also applied by entering small expenses in one account known as
general expenses or sundry expenses rather than having individual ledger accounts for office
expenses like light bulbs, pens, rubbers and rulers. Materiality is also applied in relation to
inventories of office supplies like envelopes when the total cost of envelopes purchased during
the year is treated as an expense even though there are some left at the end of the year.

The Accrual Principle

Any transaction or event that takes place has an influence on the financial position of a business
enterprise. Any transaction or event must be recorded in the financial period in which it occurs
irrespective of when the cash is received or paid. This is an extension of the realisation principle.
Profit is earned when the ownership of goods passes to the customer, not when the goods are

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actually paid for. The figures shown in a statement of comprehensive income must relate to the
period of time covered by that statement, whether or not any money has changed hands

Matching Principle

The matching principle is based on the accrual principle. Income and expenses incurred in
generating that income must be brought into account during the same financial period. This
means that expenses which are incurred in producing income must be matched against that
income in the same financial period.

Going Concern

The accounting records of a business are always maintained on the basis of assumed continuity.
This means that it is assumed that the business will continue to operate for an indefinite period of
time and that there is no intention to close down the business or reduce the size of the business
by any significant amount. This continuity means that the non – current assets shown in a
statement of financial position will appear at their book value which is the original cost less
depreciation. Inventory will appear at the lower of cost or net realisable value.

If it is expected that the business will cease to operate in the near future the asset values in the
statement of financial position will be shown at their expected sale values.

Substance over form

It is an accounting concept which means that the economic substance of transactions and events
must be recorded in the financial statements rather than just their legal form in order to present a
true and fair view of the affairs of the entity.