Introduction to Accounting

GBCO 602

Week 1
 What is Accounting

• The process of identifying, measuring,

and communicating economic
information to permit informed
judgments and decisions by users of that
information.
 Why Is Accounting Important?

• Accounting plays a vital role in running a

business because it
– helps you track income and expenditures,
– ensure statutory compliance, and
– provide investors, management, and government
with quantitative financial information which can
be used in making business decisions.
It Helps in Evaluating the Performance of Business

• Your financial records reflect the results of

operations as well as the financial position of your
small business or corporation. In other words, they
help you understand what’s going on with your
business financially. Not only will clean and up to
date records help you keep track of expenses,
gross margin, and possible debt, but it will help
you compare your current data with the previous
accounting records and allocate your budget
appropriately.
 It Ensures Statutory Compliance
• Laws and regulations vary from country to
country, state to state, but proper accounting
systems and processes will help you ensure
statutory compliance when it comes to your
business.
• The accounting function will ensure that
liabilities such as sales tax, VAT, income tax,
and pension funds, to name a few, are
appropriately addressed.
It Helps to Create Budget and Future Projections

• Budgeting and future projections can make or

break a business, and your financial records
will play a crucial role when it comes to it.
• Business trends and projections are based on
historical financial data to keep your
operations profitable. This financial data is
most appropriate when provided by well-
structured accounting processes.
 It Helps in Filing Financial Statements

• Businesses are required to file their financial

statements with the Registrar of Companies.
• Listed entities are required to file them with
stock exchanges, as well as for direct and
indirect tax filing purposes.
• Needless to say, accounting plays a critical role
in all these scenarios.
 The objectives of accounting
• If they are making profit or loss

• What their business is worth

• What a transaction was worth to them

• How much cash they have

 The objectives of accounting
• How wealthy they are

• How much they are owed

• How much they owe to someone else

• Enough financial information

 Branches of Accounting

• Financial Accounting---It is concerned with record-keeping

directed towards the preparation of trial balance, profit and
loss account and statement of financial position.
• Management Accounting---is primarily concerned with
the supply of information which is useful to the management
in decision-making, increasing efficiency of business and
maximizing profits.
• Cost Accounting---is the process of accounting for costs. It is
a systematic procedure for determining the unit cost of
output produced or services rendered. The main functions of
cost accounting are to ascertain the cost of a product and to
help the management in the control of cost.
 Careers in Accounting

• Chartered Accountant

• Chartered Financial Analyst

• Auditing

• Taxation

• Financial Consultant
 Users of Accounting Information
• Managers---In large business organizations and in corporations, there is
a separation of ownership and management functions. The managers of
such business houses are more concerned with the accounting
information because they are answerable to the owners.
• Owners of the business---The primary aim of accounting is to provide
necessary information to the owners/shareholders related to their
business.
• A prospective buyer---The persons who are contemplating an
investment in a business will like to know about its profitability and
financial position. They derive this information from the accounting
reports of the concern.
• Banks, Creditors and other Lending institutions--Trade creditors,
bankers and other lending institutions would like to be satisfied that they
will be paid on time. The financial statements help them in judging such
position. Banks and other lending agencies rely heavily upon accounting
statements for determining the acceptability of a loan application.
 Users of Accounting Information
• Regulatory Agencies--Various Government departments and agencies such
as Company Law Board, Registrar of Companies, Tax Authorities etc. use
accounting reports not only as a basis for tax assessment but also in
evaluating how well various businesses are operating under regulatory
legislation.
• Researchers: Accounting data are also used by the research scholars in their
research in accounting theory as well as business affairs and practices.
• Competitors compare their performance with rival companies to learn and
develop strategies to improve their competitiveness.
• Prospective Investors: The persons who are contemplating an investment in
a business will like to know about its profitability and financial position. They
derive this information from the accounting reports of the concern.
• Customers---Customers may also have either short-term or long-term
interest in the business entity to know the profitability, liquidity and solvency
position of the company.
• General Public-- may be interested in the effects of a company on the
economy, environment and the local community.
 Users of Accounting Information
• Government---The Government is interested
in the financial statements of business
enterprise on account of taxation, labour and
corporate laws.
• Employees---Employees are interested in
financial statements because increase in their
salaries and wages and payment of bonus
depends on the size of the profit earned.
• A prospective partner
 Professional Ethics
• The fundamental principles within the Code –
integrity, objectivity, professional
competence and due care, confidentiality and
professional behaviour – establish the
standard of behaviour expected of a
professional accountant and it reflects the
profession's recognition of its public interest
responsibility.
 Professional Ethics
• Integrity--A professional accountant should be
straightforward and honest in all professional and
business relationships.
• A professional accountant should not be associated
with reports, returns, communications or other
information where they believe that the information:
– Contains a materially false or misleading statement;
– Contains statements or information furnished recklessly;
or
– Omits or obscures information required to be included
where such omission or obscurity would be misleading.
 Professional Ethics
• Objectivity
• A professional accountant should not allow
bias, conflict of interest or undue influence of
others to override professional or business
judgments.
• Relationships that bias or unduly influence the
professional judgment of the professional
accountant should be avoided.
 Professional Ethics
• Professional competence and due care
• The principle of professional competence and due care imposes
the following obligations on professional accountants:
– To maintain professional knowledge and skill at the level
required to ensure that clients or employers receive
competent professional service;
– To act diligently in accordance with applicable technical and
professional standards when providing professional services.
• Continuing professional development develops and maintains
the capabilities that enable a professional accountant to perform
competently.
•
 Professional Ethics
• A professional accountant should take steps to
ensure that those working under the professional
accountant’s authority in a professional capacity
have appropriate training and supervision.
• Where appropriate, a professional accountant
should make clients, employers or other users of
the professional services aware of limitations
inherent in the services to avoid the
misinterpretation of an expression of opinion as an
assertion of fact.
 Professional Ethics
• Confidentiality
• The principle of confidentiality imposes an obligation on professional
accountants to refrain from:
– Disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business
relationships without proper and specific authority or unless there is a
legal or professional right or duty to disclose; and
– Using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of
third parties.
• A professional accountant should take all reasonable steps to ensure that
staff under the professional accountant’s control and persons from whom
advice and assistance is obtained respect the professional accountant’s duty
of confidentiality.
• The need to comply with the principle of confidentiality continues even after the
end of relationships between a professional accountant and a client or employer.
 Confidentiality (Disclosure of confidential
information)

• The following are circumstances where professional accountants are or may be

required to disclose confidential information or when such disclosure may be
appropriate:
– Disclosure is permitted by law and is authorized by the client or the employer;
– Disclosure is required by law, for example:
– There is a professional duty or right to disclose, when not prohibited by law.
• In deciding whether to disclose confidential information, professional
accountants should consider the following points:
– Whether the interests of all parties, including third parties whose interests
may be affected, could be harmed if the client or employer consents to the
disclosure of information by the professional accountant;
– Whether all the relevant information is known and substantiated, to the
extent it is practicable;
– The type of communication that is expected and to whom it is addressed.
 Professional Ethics
• Professional behavior
• The principle of professional behaviour imposes an obligation on
professional accountants to comply with relevant laws and regulations
and avoid any action that may bring discredit to the profession.
• This includes actions which a reasonable and informed third party,
having knowledge of all relevant information, would conclude
negatively affects the good reputation of the profession.
• In marketing and promoting themselves and their work, professional
accountants should not bring the profession into disrepute.
Professional accountants should be honest and truthful and should not:
– Make exaggerated claims for the services they are able to offer, the
qualifications they possess, or experience they have gained; or
– Make disparaging references or unsubstantiated comparisons to the
work of others.
 Forms of Accounting Reports

• Income statement—a record of income

generated and expenditure incurred. It shows
in detail how the profit or loss of a period has
been made

• Statement of financial position—a list of all

assets owned by the a business and liabilities
owed by a business at a particular date. It is a
snapshot of a financial position of a business
at a particular moment.
 Forms of Accounting Reports
Statement of changes in equity
– It is a reconciliation of the beginning and ending balances in a
company’s equity during a reporting period.
• Beginning equity + Net income – Dividends +/- Other changes
= Ending equity

– Net profit or loss during the accounting period attributable to

shareholders
– Increase or decrease in share capital reserves
– Dividend payments to shareholders
– Gains and losses recognized directly in equity
– Effect of changes in accounting policies
– Effect of correction of prior period error
 Forms of Accounting Reports
Cash flow statement
• It is a financial statement that shows how
changes in balance sheet accounts and
income affect cash and cash equivalents, and
breaks the analysis down to operating,
investing, and financing activities.
 Forms of Business Organizations

• Sole trader--also known as sole proprietorship – is a

simple business arrangement, whereby one individual runs
and owns the entire business.
• Partnership---is a type of business organizational
structure where the owners have unlimited personal
liability for the business. The owners share in the profits
(and losses) generated by the business.
• Limited liability company---is where a person's financial
liability is limited to a fixed sum, most commonly the value
of a person's investment in a company or partnership. If a
company with limited liability is sued, then the claimants
are suing the company, not its owners or investors.
 Questions
• Discuss the features and differences among
the various types of business
• Thank You