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Financial Accounting 1

The document outlines the differences between financial and managerial accounting, highlighting that financial accounting focuses on external reporting and compliance with standards, while managerial accounting is concerned with internal processes and decision-making. It also discusses key accounting principles such as separate legal entity, going concern, and historical cost, emphasizing their objectives and importance in financial reporting. Additionally, it covers concepts like conservatism, materiality, and matching, which guide the recording and reporting of financial information.

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Usama Iqbal
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4 views

Financial Accounting 1

The document outlines the differences between financial and managerial accounting, highlighting that financial accounting focuses on external reporting and compliance with standards, while managerial accounting is concerned with internal processes and decision-making. It also discusses key accounting principles such as separate legal entity, going concern, and historical cost, emphasizing their objectives and importance in financial reporting. Additionally, it covers concepts like conservatism, materiality, and matching, which guide the recording and reporting of financial information.

Uploaded by

Usama Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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FINANCIAL ACCOUNTING (LECTURE 1 AND 2)

FINANCIAL AND MANAGERIAL ACCOUNTING


PRINCIPLES OF RECORDING FINANCIAL INFORMATION
FINANCIAL AND MANAGERIAL ACCOUNTING

Financial Accounting Managerial Accounting

 In general, financial accounting refers


 managerial accounting refers to the
to the aggregation of accounting internal processes used to account for
information into financial state. business transaction.
 Financial accounting reports on the  Managerial accounting almost always
results of an entire business. It’s reports reports at a more detailed level, such as
are more likely to be distributed to profits by product, product line,
outsiders. customer, geographic region. the results
 Financial accounting reports on the of managerial accounting are more
profitability (and therefore the likely to only be used by insiders.
efficiency) of a business, It’s reports are  whereas managerial accounting reports
used by outsiders to decide whether to on specifically what is causing problems
invest in or lend to a business. and how to fix them. Its reports are
more likely to be of use in improving
FINANCIAL AND MANAGERIAL ACCOUNTING

 Financial accounting must comply with  managerial accounting does not have to
various accounting standards. comply with any standards when
 Financial accounting requires that information is compiled for internal c
financial statements be issued following  Managerial accounting may issue reports
the end of an accounting period. much more frequently, since the
 Financial accounting is concerned with the information it provides is of most
relevance if managers can see it right
financial results that a business has
away. consumption.
already achieved, so it has a historical
orientation.  Managerial accounting may address
budgets and forecasts, and so can have a
future orientation.
PRINCIPLES OF GAAP AND IFRS
BASIC ASSUMPTIONS IN THE COMPILATION OF FINANCIAL REPORTS
SEPARATE LEGAL ENTITY
 This accounting principle treats the owner and the business as two
different entities and they both have different legal liabilities. The
transactions of the business should be kept and treated separately
from the owners and other businesses.
 Economic entity stands on its own, doing business, getting into a
contract with its name (seal) and bind the corporation to a contract.

 Objectives:
 To signify the limited liability of owners (potential investor).
 To ensure the viability of a business.
GOING CONCERN

 This accounting principle assumes that the business may continue


forever. It will carry out its objectives and plans in the
foreseeable future with no intention of liquidation.

 Objectives:
 To disregard the possibility of bankruptcy and liquidation.
 To classify the assets and liabilities.
TIME PERIOD OR REPORTING PERIOD

 This accounting principle states that there should be the


standardized time period of reporting the financial statements. The
time period is usually monthly, quarterly or annually. The header of
the financial statements should cover the time period (financial
year, fiscal year, natural business year).
 Although life of a business is for an indefinite period but the
reporting period should be well defined.
 Objective:
 To fulfilled the requirements of regulatory authorities
 To uphold the confidence of a stakeholder.
MONETARY UNIT

 This accounting principle states that there should be the recordation


of only those transactions that carry a monetary value. The
transactions stated in terms of a currency (for example $ in the U.S.)
should only be recorded. The monetary unit should be stable and
dependable.

 Objective:
 To presents the information in meaningful way.
 To access the financial health of an entity in better way.
HISTORICAL COST

 According to this accounting principle, the assets in the financial


statements should be stated in the financial statements with their
purchased values. Then, may they be purchased today or twenty
years ago. There may be a change in the value of the assets over
time due to the depreciation or inflation. But one does not show this
change in the financial statements due to the Historical Cost
principle.
 Objective:
 To reflect the nature of an asset.
 To make valuation more objective or determinable.
NOTE: implementation, IFRS and exceptions.
FULL DISCLOSURE

 Financial statements normally provide information about a


company's past performance. However, pending lawsuits,
incomplete transactions, or other conditions may have imminent
and significant effects on the company's financial status. The full
disclosure principle requires that financial statements include
disclosure of such information.
 Objective:
 To facilitate the better decision making process.
 To built confidence among the various stakeholders.
CONSERVATISM

 Accountants must use their judgment to record transactions that


require estimation. Meaning that accountant must choose the
measurement with the least favorable effect on net income. Also
known as doctrine of prudence : anticipating possible future losses
more strongly than future gains.
 Objective:
 Losses and costs are recorded when they are probable and
reasonably estimated. Gains are recorded when realized.
 Policy tends to avoid future adjustments in more practical way.
MATERIALITY

 It states that the requirements of any accounting principle may be


ignored when there is no effect on the users of financial information.
There is no definitive measure of materiality, the accountant's
judgment on such matters must be sound. Sine an item may be
significant or material to one entity but may not hold equal
significant to another entity.
 Objective:
 To reflect the relative size and importance of an item to a firm or an
entity.
 To make system cost effective and efficient.
MATCHING

 The costs of doing business are recorded in the same period as the revenue they help to
generate. Examples of such costs include the cost of goods sold, salaries and commissions
earned, insurance etc.

 Objective:
 To Match the cost/expenses of each period with its related revenue.
 To reflect the accounting cycle in precise manner.
BASIC QUALIFICATION OF AN ASSET

 It is an economic resource with a defined monetary value.


 It is owned and controlled by the entity.
 It is convertible in terms of another asset/cash.
 It will generate revenue or probable future benefits to the
entity.

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