CHAPTER 1: INTRODUCTION to accounting
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CHAPTER 1: INTRODUCTION to accounting. Learning objectives:. To understand the importance of financial information in business. To understand the definition of accounting and book keeping. To identify the users of accounting information. To introduce the fundamental accounting concepts - PowerPoint PPT Presentation
Transcript of CHAPTER 1: INTRODUCTION to accounting
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PRINCIPLES OF ACCOUNTING
CHAPTER 1: INTRODUCTION TO ACCOUNTING
KE1013 Chapter One 1
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PRINCIPLES OF ACCOUNTING
Learning objectives:• To understand the importance of financial
information in business.
• To understand the definition of accounting and book keeping.
• To identify the users of accounting information.
• To introduce the fundamental accounting concepts
• To introduce the types of business and differences KE1013 Chapter One
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PRINCIPLES OF ACCOUNTING
Definition of Accounting• Kieso and Weygandt “ process of
identifying, recording and communicating economic activities of the organization to the users of the information.”
• Generally accepted definition: “accounting is the process of identifying, measuring, summarizing and communicating economic information to permit informed judgments and decisions by users of the information.”
KE1013 Chapter One 3
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PRINCIPLES OF ACCOUNTING
Accounting: Definition
KE1013 Chapter One 4
Measuring Identifying
Recording Reporting
Interpreting Analyzing
Bookeeping
Designing Information
Provide useful information to users
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PRINCIPLES OF ACCOUNTING
Fields in Accounting
Accounting
Financial Accounting
Management Accounting
Auditing Tax
Public Sector AccountingAnd Non-ProfitOrganization
Accounting InformationSystem
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PRINCIPLES OF ACCOUNTING
Accounting Professional Bodies
MICPA MIA
MASBCPA
ACCA
GAAP
IFRS
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PRINCIPLES OF ACCOUNTING
Characteristics of Accounting Information
• Understandability - clarity in expression• Relevance - in decision making• Consistency - in treatment of similar items
and accounting policies• Comparability - similar companies in an
industry• Reliability - accurate, complete and
verifiable• Objectivity - prepared in a neutral way and
not biased toward a user group
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PRINCIPLES OF ACCOUNTING
Users of Accounting Information
Users
Internal External
DirectInterest
IndirectInterest
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PRINCIPLES OF ACCOUNTING
Users of Accounting Information
• Owner (s) of the business- profitability - financial resources
• Prospective buyer
• Prospective partner
• Bank- ability to pay loans and interest when they fall due
• Employees- stability and continuing profitability of business
Profitability, prospects for growth
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PRINCIPLES OF ACCOUNTING
Users of Accounting Information
• Creditors- ability to pay short term borrowed money.
• Tax inspectors (IRB)- business profitability in order to levy corporate tax.
• Analysts - analyze business (especially listed companies) competitiveness in relation to an industry or sector.
• Investors (existing and prospective)- whether they should invest in a business.
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PRINCIPLES OF ACCOUNTING
Underlying Accounting Concepts• Historical cost - transactions recorded at ruling
price and resources (assets) valued at cost price.
• Money measurement - accounting is only interested in facts that can be measured in monetary terms.
• Business entity - affairs of business treated
separately from private transactions of owners.
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PRINCIPLES OF ACCOUNTING
Underlying Accounting Concepts
• Dual aspect - two aspects of accounting; resources (assets) and claims against them.
• Time interval -preparation of financial statements at regular intervals.
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PRINCIPLES OF ACCOUNTING
Fundamental Accounting Concepts• Going concern-business will continue to
operate into the foreseeable future.
• Consistency- in treatment of similar items and accounting policies.
• Prudence/Conservatism- anticipate no profits unless with reasonable certainty and provide for possible losses.
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PRINCIPLES OF ACCOUNTING
Fundamental Accounting Concepts
• Realisation - profits and gains recognized when it can determined with reasonable certainty.
• Accruals/Matching- income should be properly matched against expenses.
• Materiality- include items that are useful to the users of accounts.
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PRINCIPLES OF ACCOUNTING
Types of Business
• Sole Proprietor
• Partnership
• Limited companies
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PRINCIPLES OF ACCOUNTING
Difference between businesses
Sole Proprietor Partnership Public Company
Management Owner Partners BOD
Liability Unlimited Unlimited Limited
Profit Unlimited According to agreement
Dividend on shares.
Tax Owner’s income tax
Partners’ income tax
Tax based on the profit of the co.
Regulation None Agreement, Partnership Act 1961.
Companies Act 1965,
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PRINCIPLES OF ACCOUNTING
Thank You
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