1 Introduction to Financial Accounting

7/28/2019 1 Introduction to Financial Accounting

1/66

By Annie WPL

1Compiled by Annie WPL


2/66

Define the term accounting. Summarise the nature and purpose of

accounting.

Identify the main users of accountinginformation.

Identify the characteristics of financialinformation.

Differentiate between managerial accountingand financial accounting.

Identify the forms of business organisation.



3/66



4/66

Accounting is the process of recording,

classifying,

summarising,

reporting business transactions, interpreting their effects

on the affairs of a company.



5/66

This is the process of systematicallyrecording all business transactions in thebooks of accounts in accordance withaccepted principles.



6/66


7/66

Information from the accounting records aresummarised by means of various financiallistings.

For example, a debtors listing provides asummary of amount owing by individualcustomers.



8/66

Financial information is communicated tousers by means of financial statements, suchas Trading, Profit and Loss Account and theBalance Sheet.



9/66

This is a process of interpreting or evaluatingthe financial performance of the businessactivities during the period.



10/6610Compiled by Annie WPL


11/66

Book-keeping is the systematic recording inbooks of accounts of the businesstransactions of a company.

Clearly, book-keeping is only the first andsimplest step in the whole accountingprocess.



12/6612Compiled by Annie WPL


13/66

A businessman would always want to find out the amount of profit his business makes,

the assets he owns and

the amount of money owed to other people.

Unless he keeps proper records of hisbusiness transactions, he would not be ableto keep himself informed.



14/66

If they are making a profit or a loss. What their business is worth.

What a transaction was worth to them.

How much cash they have. How wealthy they are.

How much they are owed by others.

How much they owe to someone else.

Provide information for decision making.



15/66

Fundamental relationships in the decision-making process:

Event

Accountants

analysis &

recording

Financial

Statements

Users



16/66

Compiled by Annie WPL 16


17/66

Owners. Managers.

Loan creditors.

Prospective investors. Employees/Labour unions.

Governments.

General public.



18/66



19/66

Profitability of the firm. The return yield to the contribution of capital.

Financial stability of the firm as an index tothe safety of their investment.

Resources owned.

Decision on whether to increase or decreasetheir existing ownership in the firm.



20/66



21/66

Profitability (to obtain the maximum returnson invested capital).

Operational efficiency (day to day operation).

Planning, budgeting, control purposed, anddecision making.



22/66



23/66

Interested in the firms ability to pay thedebts as they fall due.

Whether to grant a credit limit or advancemoney to business.



24/66



25/66

Decision to invest in a business. Earning capacity of business.

Solvency or financial strength.

The ability of the management.



26/66



27/66

An assurance of steady employment. The information helps them discuss and

arrange labour contracts.

The ability of the firm to pay increase inwages.



28/66



29/66

Evaluate or review tax returns. Checks that business enterprises are

following government rules, regulations andlaws.



30/66



31/66

The effects of the firms activities on otherpeople (eg effect of pricing on customers orby affecting the environment like pollution).

The ability of the firm to survive long enough

to honour its product warranties.



32/66

1. The Government requires that all firmssubmit their annual financial reports.Describe the reasons why the governmentrequires such reports.

2. Differentiate between internal and externalusers of accounting information. Outlinesome reasons for these internal users.



33/66



34/66


Characteristics

Relevance Reliability Comparability Understandability


35/66

Financial information cannot be useful unlessit is relevant to the needs of users and helpthem to make economic decisions.

Relevant information which has predictive

value helps users to make decisions aboutthe future.

Relevant information with confirmatory valuehelps users to evaluate their past decisions.



36/66

Reliable information is complete and freefrom significant error.

It is also free from bias.



37/66

Users may need to compare the financialinformation produced by a business with: Information produced by the same business in

previous years.

Information produced by other business.



38/66

The degree of financial sophistication of theintended users should be taken into accountwhen preparing and presenting informationfor their use.



39/66



40/66

Financial statements are used by bothexternal users and internal management andprovide general information about the entirecompany.

For example, the balance sheet reports totalinventories and the income statement reportscost of goods sold, but the costs of individualproducts are not disclosed to the public.



41/66

Internal management needs detailedinformation to make decisions about itsbusiness. A comparison of managerial andfinancial accounting shows the differences

between the two sets of information: Managerial accounting.

Financial accounting.



42/66


43/66

Examples of the information provided by amanagerial accounting system might be: A report on the costs of manufacturing a

particular product.

A report on the costs of running a particulardepartment.

A monthly analysis of expenditure, comparingactual and planned expenditure over a variety of

budget headings.



44/66

A projection of sales volumes over the next 6months, analysed by product group.

A forecast of income and expenditure for eachmonth of the year ahead, highlighting months in

which the business might run into financialdifficulties.



45/66

The main features of managerial accountinginformation are: The information are much more detailed.

The information is often confidential and is

intended for internal use only not for externalpublication.



46/66

There is no legal obligation to produce anymanagerial accounting information all and theinformation actually produced will differ widelyfrom one business to another.

The information often incorporates forecasts andprojections. This predictive information helpsmanagers to make plans for the future of thebusiness.



47/66

Financial accounting is concerned with theprovision of accounting information toowners, investors and other external userswho are not involved in the day-to-day

running of the business. The accounting information provided for

these users consists of a number of

financial statements which are usuallyprepared once a year.



48/66

The two most important financialstatements are: The profit and loss account, which summarises

the financial performances of the business during

the past year and reveals the profit or loss forthat year.

The balance sheet, which shows the financialposition of the business at the end of the year.



49/66

The main features of financial accountinginformation are as follows: The information is provided in summarised form

at annual intervals and lacks the detail associated

with management information. There is a legal obligation to produce at least a

minimum amount of financial accountinginformation.

The information is usually restricted to a reviewof past financial performance and a statement ofthe current financial position.



50/66



51/66

Three basic forms of ownership: Sole proprietorships.

Partnerships.

Corporations.



52/66

It is an organisation with a single owner. Tend to be small retail establishments and

individual professional or service business for example, a single dentist, attorney, or

public accountant. The owner has unlimited liability. The sole proprietorship is an individual entity

that is separate and distinct from the owner.



53/66

It is an organisation with two or moreindividuals who act as co-owners.

Dentists, doctors, attorneys, and accountantstend to conduct their activities as

partnerships. Some can be large international firms.



54/66

The owners have unlimited liability. The partnership is an individual entity that is

separate and distinct from each of thepartners.



55/66

It is an organisation with many owners. An artificial entity created under state laws.

Corporations have limited liability corporatecreditors have claims against corporate

assets only. Individual investors are at risk only up to the

amount they have invested in the corporation.

Creditors cannot hold investors liable for the

corporations debts.



56/66

The owners are called shareholders orstockholders. Publicly owned vs privately owned

corporations. Public Shares in the ownership are sold to the

public on a stock exchange; the corporation canhave many thousands of shareholders.

Private Shares in the ownership are owned byfamilies, small groups of shareholders, and sharesare not sold to the public.



57/66

Corporations Advantages:

Limited liability.

Easy transfer of ownership Shares of stock can be

bought and sold easily (stock exchanges). Ease of raising ownership capital Many potential

stockholders.

Continuity of existence Life of the corporation

continues even if its ownership changes.



58/66

Corporations Disadvantages:

Possibility of double taxation Corporation paystax at the entity level and its owners pay taxes on

distributions of earnings to them.



59/66

Proprietorships and Partnerships Advantages:

No taxation at the entity level Income of soleproprietorship and partnership is attributed to the

owners as individual taxpayers.



60/66

Proprietorships and Partnerships Disadvantages:

Unlimited liability Creditors of the business canlook to the owners personal assets for repayment.

Not easy to transfer ownership.



61/66

Proprietorships and Partnerships Disadvantages:

Not easy to raise ownership capital Few, if anyindividuals interested in a particular proprietorship

or partnership. No continuity of existence Changes in ownership

terminate the proprietorship or partnership.



62/66



63/66

Elements ofAccounting

Assets Liabilities Owners equity



64/66

Assets are items with money value that areowned by a business.

Some examples are cash, accounts receivable(selling goods or services on credit), office

equipment, premises.



65/66

Liabilities are debts owed by the business. Paying cash is often not possible or

convenient, so businesses purchase goodsand services on credit. The name of the

account used is Accounts Payable. Another type of liability is Notes Payable. This

is a formal written promise to pay a specificamount of money at a definite future date.



66/66

The difference between assets and liabilitiesis owners equity.

This can also be called capital, proprietorship,or net worth.

1 Introduction to Financial Accounting

Documents

Transcript of 1 Introduction to Financial Accounting