Accounting principles

LO1:Examine the context & purpose of

accounting
Learning objectives
LO1:Examine the context & purpose of accounting

Learning Outcome #1: Examine the context & purpose of accounting:

To achieve the above learning outcome should cover the below learning objectives :

Why we need accounting? What accounting is?

Identify the users , uses & branches of Accounting standards & principles
accounting
The career opportunities in accounting Understand why ethics is a fundamental business
concept
The Forms of Business Ownership The accounting equation & its components

Analyze the effects of business Understand the five financial statements and how
transactions on the accounting equation they are prepared
 LO1:Examine the context & purpose of accounting

Accounting is often called the language of business,

Why ?
Because accounting is used to communicate useful
financial information to the interested users.

If you do not know how to read financial statements,

you cannot really know your business.

To be good at your business, you have to know the

numbers.

Success in any business comes back to the numbers,

you will rely on them to make decisions, and managers
will use them to evaluate the performance.
LO1:Examine the context & purpose of accounting

Accounting: is an information system consists of three basic activities—it identifies,

records, and communicates the economic events of an organization to interested users.

Communicat
Identify Records
e

Records those events in Communicating the

Identifies the order to provide a collected
economic events history of its financial information to Internal users
relevant to its activities Consists of interested users by
business. keeping a systematic, means of
accounting reports.
External users
chronological diary of
events, measured in The most common
monetary units. of these reports are
called financial
statements.
 LO1:Examine the context & purpose of accounting

What is the Purpose of Accounting?

The purpose of accounting is to accumulate and report on financial information about the
performance, financial position, and cash flows of a business.

This information is then used to reach decisions about how to manage the business, or invest in it, or
lend money to it.

This information is accumulated in accounting records with accounting transactions, which are
recorded either through such standardized business transactions as customer invoicing or supplier
invoices, or through more specialized transactions, known as journal entries.
 LO1:Examine the context & purpose of accounting

Objectives of Accounting:

1. To maintain full and systematic records of business transactions:

Accounting is the language of business transactions. Given the limitations of human memory, the
main objective of accounting is to maintain ‘a full and systematic record of all business transactions.

2. To ascertain profit or loss of the business:

Business is run to earn profits. Whether the business earned profit or incurred loss is ascertained by
accounting by preparing Profit & Loss Account or Income Statement.
 LO1:Examine the context & purpose of accounting

3. To depict financial position of the business:

A businessman is also interested in ascertaining his financial position at the end of a given period.
For this purpose, a position statement called Balance Sheet is prepared in which assets and liabilities
are shown.

Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not,
in the same way by looking at the Balance Sheet one will know the financial health of an enterprise.
If the assets exceed liabilities, it is financially healthy, i.e., solvent. In the other case, it would be
insolvent, i.e., financially weak.
 LO1:Examine the context & purpose of accounting

4. To provide accounting information to the interested parties:

Apart from owner of the business enterprise, there are various parties who are interested in
accounting information. These are bankers, creditors, tax authorities, prospective investors,
researchers, etc. Hence, one of the objectives of accounting is to make the accounting information
available to these interested parties to enable them to take sound and realistic decisions. The
accounting information is made available to them in the form of annual report.
LO1:Examine the context & purpose of accounting

Who are the users of accounting

information?

Internal users External users

 LO1:Examine the context & purpose of accounting

Who are the users of accounting information?

For accounting information to be useful, the accountant

must be clear for whom the information is being

prepared and for what purpose it will be used.

There are likely to be various groups of people (usually

known as ‘user groups’) with an interest in a particular

organisation, in the sense of needing to make decisions

about it.
 LO1:Examine the context & purpose of accounting

INTERNAL USERS

Internal users of accounting information are managers who

plan, organize, and run the business. These include marketing

managers, production supervisors, finance directors, and

company officers.

EXTERNAL USERS

are individuals and organizations outside a company who want

financial information about the company. The two most

common types of external users are investors and creditors.

Stakeholder:
A general term to indicate all those who might have a legitimate interest in receiving financial
information about a business because they have a ‘stake’ in it.
 LO1:Examine the context & purpose of accounting

INTERNAL USERS:

1. Owners * :

“Business owner” is a term that refers to individuals who establish and operate an entity that is engaged in

commercial, industrial or professional activities with the purpose of deriving profits from its successful operations.

The prime role the business owner takes on is to maximize the company’s net profits. The secondary role of the

business owner supplements the primary role by reducing the business’ costs and weaknesses.

* The owners here are considered an internal user if the type of company structure is sole, while the term investors is used as an

external user in the corporations company

 LO1:Examine the context & purpose of accounting

2. Management :

Those who run business on a daily basis, this group is referred to in broad terms as management, which is a

collective term for all those persons who have responsibilities for making judgements and decisions within an

organisation. It is management’s responsibility to employ the resources of the business in an efficient way and to

meet the objectives of the business.

3. Employees :

Employees and their representatives are interested in information about the stability and profitability of their

employers. They are also interested in information that helps them to assess the ability of the entity to provide

remuneration, retirement benefits and employment opportunities.

 LO1:Examine the context & purpose of accounting

External USERS

1. Investors:

Where the ownership is separate from the management of the business, as is the case with a limited liability

company, the owners are more appropriately viewed as investors who entrust their money to the company and

expect something in return, usually a dividend and a growth in the value of their investment as the company

prospers.

The kinds of judgements and decisions made by investors could include any or all of the following:

• Evaluating the performance of the entity

• Assessing the effectiveness of the entity in achieving objectives

• Evaluating managerial performance, efficiency and objectives, including investment and dividend distribution

plans.
 LO1:Examine the context & purpose of accounting

2. Creditor ( lender & suppliers):

A creditor could be a bank, supplier or person that has provided money, goods, or services to a company and

expects to be paid at a later date.

3. Customers:

A customer is an individual or business that purchases another company's goods or services. Customers are

important because they drive revenues; without them, businesses cannot continue to exist.
 LO1:Examine the context & purpose of accounting

3. Government :

Government consists of the activities, methods, and principles involved in governing a country or other

political unit. Such as; The income tax refers to a type of tax that governments impose on income

generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax

return annually to determine their tax obligations. Income taxes are a source of revenue for governments.

4. Public interest :

Enterprises affect members of the public in a variety of ways. For example, enterprises may make a

substantial contribution to the local economy by providing employment and using local suppliers. Financial

statements may assist the public by providing information about the trends and recent developments in

the prosperity of the entity and the range of its activities. A strong element of public interest has been

aroused in recent years by environmental issues and the impact of companies on the environment.
 LO1:Examine the context & purpose of accounting

Accounting follows certain standards in reporting financial information. In order to ensure high-quality
financial reporting, accountants present financial statements in conformity with accounting standards
that are issued by standard setting bodies.

Accounting
Standards

IASB FASB
Find the
following
acronym
IFRS GAAP
s
 LO1:Examine the context & purpose of accounting

CONCEPTUAL FRAMEWORK

the IASB and FASB completed the first phase of a

joint project in which they developed a conceptual
framework to serve as the basis for future
accounting standards.

The framework begins by stating that the primary

objective of financial reporting is to provide financial
information that is useful to investors and creditors
for making decisions about providing capital.

According to the IASB, useful information should

possess two fundamental qualities:

1.relevance

2.faithful representation.
LO1:Examine the context & purpose of accounting
 LO1:Examine the context & purpose of accounting

Relevance Faithful Representation

Relevance Accounting information has relevance if it would Faithful representation means that information
make a difference in a business decision.
accurately depicts what really happened.
Information is considered relevant if it provides information
To provide a faithful representation, information must
that has:
be:
1. predictive value; that is helps provide accurate
expectations about the future. 1. complete (nothing important has been omitted),

2. 2.confirmatory value; that is confirms or corrects prior 2. Neutral (is not biased toward one position or

expectations. another),
3. Materiality is a company-specific aspect of relevance. An 3. and free from error.
item is material when its size makes it likely to influence
the decision of an investor or creditor.
LO1:Examine the context & purpose of accounting

Accounting Assumptions vs Accounting principles

Accounting Assumptions Accounting principles

The Economic Entity Assumption Measurement principle ( historical cost & Fair
value )
The Going Concern Assumption Expenses Recognition principle (Matching)

The Time Period Assumption Revenue recognition principle

( periodicity )
The Monetary Unit Assumptions Full Disclosure

Accrual -
 LO1:Examine the context & purpose of accounting

Accounting Assumptions

1. Economic Entity Assumption: States that the business records are separate from its
owners for accounting purposes.

2. Monetary unit assumption: States that the only transactions that can measured in
a money unit should recorded.

3. Going concern assumption: States that the business will, continue operate forever
instead of liquidating a business.

4. Time period assumption: States that the life of a business should divided into
artificial periods, each time referred to as accounting period.

5. Accrual: Transactions recorded in the periods in which the events occur.

 LO1:Examine the context & purpose of accounting

Accounting Principles
1. Measurement principle
a. Historical cost principle (or cost principle): dictates that companies record assets at
their cost. This is true not only at the time the assets purchased, but also over the time,
the assets held.

b. Fair value principle: states that assets and liabilities should reported at fair value
(the price received to sell an asset or settle a liability).

Recognized Vs Reporting
 LO1:Examine the context & purpose of accounting

Accounting Principles

2. Revenue recognition principle: Means that the business should take into consideration the
exact period to record revenues. Companies recognize Revenues when they perform services
(rather than when they receive cash)

3. Expenses recognition principle (Matching): Means that expense should be record at the
same period when revenues have been record. Expenses are recognize when incurred (rather than
when paid).

4. Full disclosure principles: Means that a company should report the whole details may affect
the user
 LO1:Examine the context & purpose of accounting

Ethics in financial reporting

Considered as the important fundamental element of the accounting profession. Integrity requires accountants to be
honest, candid and forthright with a client's financial information. Accountants should restrict themselves from
personal gain or advantage using confidential information.

What is Accounting Ethics?

Accounting ethics refers to following specific rules and guidelines set by governing bodies that every person
associated with accounting should follow to prevent misuse of the financial information or their management
position.
LO1:Examine the context & purpose of accounting

Accounting Branches

Forensic Governmental
Public Accounting Private Accounting
Accounting Accounting

Manageme
Financial
Auditing Tax nt
Accounting
Accounting
LO1:Examine the context & purpose of accounting

Accountant’s roles and responsibilities:

Accounts Qualified
Accounts Clerk
Assistant accountant
 LO1:Examine the context & purpose of accounting

I. Accounts Clerk:

An Account Clerk, also known as an Accounting Clerk, Bookkeeping Clerk. Account Clerks manage

accounts and provide support for the accounting, finance and sales departments. Generally

performs:

1. Billing and accounting responsibilities for a business.

2. Supporting accounts receivable, accounts payable and reconciliations.

3. Acting as a cashier to verify receipts and deposits.

4. Preparing and maintaining records among other job obligations.

 LO1:Examine the context & purpose of accounting

II. Accounts Assistant

Accounts assistants; supply administrative support to accountants by performing clerical tasks such

as filing, handling mail, making phone calls, replying to emails and basic bookkeeping. Accounts

assistants can trained on the job for their role or through an apprenticeship programme. It is not

necessary to have a degree in accounting, business or finance to become an accounts assistant.

1. Monitoring daily communications and answering any queries.

2. Ensuring payments, amounts and records are correct.

3. Recording and filing cash transactions.

4. Invoice processing and filing.

5. Processing expense requests for the accountant to approve.

 LO1:Examine the context & purpose of accounting

III. Qualified accountant

As an accountant, you will be responsible for: preparing accounts, budgeting and managing

financial information. You could also be advising and helping clients, whether that is individuals or

international companies, on financial situations.

Accountant’s core responsibilities are typically to prepare and examine financial records, assuring

information is up to date and accurate.

1. Preparing accounts and tax returns & presenting financial and budget reports.

2. Monitoring spending and budgets as well as Advising on how to reduce costs and increase profits.

3. Auditing , forecasting analyzing financial performance.

4. Ensure that financial statements and records comply with laws and regulations.

Keeping account books and systems up to date.

LO1:Examine the context & purpose of accounting

Keys skills
to become an accountant

Numerical Advanced Time *Ethics

& analytical management
& Communication
Quantitative & &
skills problem-solving Integrity
organisation
skills
LO1:Examine the context & purpose of accounting

Keys skills to become an accountant:

I. Enhanced numerical and quantitative skills:

These are key as you will be dealing with all aspects of finance such as budgets and forecasting.

II. Advanced analytical and problem-solving skills:

You need strong analytical skills and excellent attention to detail as you will be analyzing
financial performance and handling important documents.

III. Time management and organisation:

Working in accountancy means you will be dealing with strict deadlines and you will need to
have a system to keep track of your responsibilities and priorities.
 LO1:Examine the context & purpose of accounting

IV. Ethics & Integrity:

Considered as the important fundamental element of the accounting profession. Integrity requires
accountants to be honest, candid and forthright with a client's financial information. Accountants
should restrict themselves from personal gain or advantage using confidential information.

V. Communication
Not only will you have to communicate with different teams, you will also frequently have to
communicate with clients. You will need to be able to communicate complex information in a clear
and understandable way.
LO1:Examine the context & purpose of accounting

Base Financial Accounting Management Accounting

Concept The process of identify, recording, The process of identifying, measuring,
classifying and summarizing in a accumulating, analysing, preparing,
significant manner and in terms of interpreting, and communicating
money transactions. &communicate [Financial and non-financial information]
useful information to users. (External & that managers use to fulfil organizational
internal). objectives.

Function Financial accounting are to record and Managerial accounting picks up

collect financial data. It summarizes the significant data out of collected data and
data in the form of accounts. presents them for the use of
management.[selective nature]

Object The main object of financial accounting The main objective of Managerial
is to Prepare periodical reports to Accounting is to help internal
outsiders. management in solving various problems
and decision-making.
LO1:Examine the context & purpose of accounting

Base Financial Accounting Management Accounting

Nature Financial Accounting is of historical Managerial Accounting stresses the
nature. It records only those future.
transactions which have taken place
in the past.
Accounting Financial accounting is done according No principles and double entry system is
Principles to certain accounting principles and Followed in managerial accounting. It
double entry system. emphasis on analysis and Interpretation.

Prescribed Must follow the GAAP and prescribed no prescribed Format.

Format format (financial statements).

User of External and internal user (both) Internal user only

Information
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