LECTURE 1 (for Students)
-
Upload
ken-love-piano -
Category
Documents
-
view
214 -
download
0
Transcript of LECTURE 1 (for Students)
ACC30105 Principles of Accounting
LECTURE 1:Understanding Accounting
Equation Concept
Learning Objectives…After studying this chapter, you should be able to: Explain the nature of accounting and its main
function Identify the users of accounting information Understand the role of accounting in decision
making Understand the differences between accounting for
management and accounting for external users Understand the importance of ethics in business Understand the different areas of the economy in
which accountants work
What is Accounting?
A service activity To provide and interpret financial
information which is useful for making economic decisions
Definition of Accounting…
The process of identifying measuring recording communicating economic information to allow informed judgments and economic decisions by users of the information.
Role of Accounting in Business…
People make decisions
Business transactions happen
Accountants prepare reports to show the results of business operations
Types of Business Entities…
Sole traders Partnerships Companies
Sole Traders… Owned by one person Owners supply cash/assets to business Owners entitled to all profits Owner legally liable for debts Not a separate legal entity But is a separate accounting entity
Partnership… A relationship between two or more people,
carrying on a business with the aim to generate profits
Three main criteria: Must have agreement (oral or written) between
two or more legally competent persons or entities to carry on a business
An aim to earn profits Members must be co-owners of business
Partnership…
Partners supply resources and share profits Not a separate legal entity Individual partners are personally liable Is a separate accounting entity
Characteristics of Partnership…
Mutual agency Unlimited liability
Characteristics of Partnership…
Partnership interest can be sold off legally Limited Life
can be dissolved through death of a partner bankruptcy of partnership or individual partner expiration of period specified in contract judgment by court
Companies…
Limited company by shares personal liability of members is limited to the par
value of their shares and the number of shares taken by them
Advantages and Disadvantages of Different Types of Business
Entity Sole Proprietorship: Advantages easy and least expensive form of business owner in complete control owner receives all income easy to dissolve
Sole Proprietorship: Disadvantages unlimited liability owner personally liable limited source of funds hard to attract talented employees
Advantages and Disadvantages of Different Types of Business
Entity Partnership: Advantages pool resources and multiple skills easier and less costly to establish not subject to much government regulation/supervision flexible – not subject to board of directors tax advantages
Partnership: Disadvantages unlimited liability can be liable for other partner’s actions in relation to the
partnership limited life
Advantages and Disadvantages of Different Types of Business
Entity Companies: Advantages limited liability broad source of capital continuity of existence transferability of shares use of professional management
Companies: Disadvantages greater regulation separation of ownership and management higher cost of incorporation
Basic Accounting Terminologies…
Assets resources controlled by the entity result of past events future economic benefits expected to flow into
the entity the amount can be reliably measured
Basic Accounting Terminologies (con’t)…
Liabilities present obligation of the entity arising from past events settlement expected to result in outflow of
economic benefits from the entity the amount can be reliably measured
Basic Accounting Terminologies (con’t)…
Income/Revenue increase in economic benefits inflows or enhancements of assets decrease in liabilities not including receipts from shareholders/business
owners
Basic Accounting Terminologies (con’t)…
Expenses decrease in economic benefits outflow or depletion of assets
Basic Accounting Terminologies (con’t)…
Capital/Equity resources supplied by the owners/shareholders
Users of Accounting Information… Internal and External Users
Internal Employees Managers Chief Executive Officers (CEO) General Managers Accounts Managers Special Purpose Financial Report
Users of Accounting Information (Con’t)…
External Shareholders Lenders/Bankers Potential Investors Creditors Government General Purpose Financial Report
Management and Financial Accounting
Management Accounting concerned with providing financial and other
information to all levels of management
Financial Accounting concerned with reporting information to users that
are external to an entity/business.
Accounting Concepts…
Established concepts to guide the preparation of financial statements
To ensure objectivity and consistency in the way financial information is prepared
Historical Cost Concept/Cost Concept
Assets are normally shown at cost price and this is the basis for valuation of assets so that every one can agree on the same amount
Meaningful comparison can be made
Money Measurement Concept/
Monetary Assumption Money is used as the common measurement by which economic activity is measured and reported
Accounting information is concerned with the following: measurable in monetary units most people will agree to the measurement used
Business Entity Concept/Accounting Entity Concept
Activities of the entity are separated from both the personal activities of the owners and other entities
The only time when the owners’ resources affect accounting record is: owner brings in new/additional capital drawings (money, inventory, other assets)
Separate Legal Entity Concept
A company is not seen as being exactly the same as its shareholders/owners
A company can sue one or more of its shareholders
A shareholder can sue the company Only apply to Limited Company
not partnership and sole proprietorship
Dual Aspect Concept
There are two aspects of accounting assets of the business claims against those assets
These two aspects are always equal to each other Assets = Capital + Liability
Time Interval Concept/ Period Assumption
Life of an entity can be subdivided into arbitrary time periods of equal length
For periodic determination of financial performance and financial position
Reports can be monthly/annually/quarterly Term
accounting period
Accrual Basis Assumption
The effects of all transactions and other events are recognized in the accounting records during the period in which they occur
Not when cash is received or paid Provides better information for users
Going Concern Assumption/ Continuity Assumption
Financial reports are prepared under the assumption that the entity will continue to operate for the foreseeable future
Foreseeable future 12 months
Disclosure of Accounting Policies…
Accounting policies used must be disclosed in the notes to the accounts
e. g., depreciation methods, valuation of inventory
Qualitative Characteristics of Financial Statements
Understandability Relevance Free or error Substance over form Neutrality Prudence Completeness Comparability
Understandability
Information in financial statements should be readily understandable by users.
Relevance
Information relevant for users’ decision making
Material information are relevant Information is material if its omission or
misstatement could influence decisions of users.
Every information that appears in financial statements should be material
Substance Over Form
The legal form of a transaction is different from its real substance e. g., car on hire-purchase legally, the car belongs to the bank until
installments are fully paid however, the car is used by the business and
generating benefits from it therefore, the business will treat it as an asset
Neutrality & Completeness
Neutrality Information in financial statements is free from
bias Completeness
Information presented in the financial reports should be complete
Prudence
Accountants must exercise caution when dealing with uncertainty
Do not overstate assets and income Do not understate liabilities and expenses
Comparability
Comparability requires consistency Treatment of transactions must be consistent
throughout an entity and over time for that entity
Then only financial information is comparable
Accounting as a Profession…
Public Accounting Auditing and Assurance Services Taxation Services Advisory Services Insolvency and Administration
Accounting as a Profession…
Accountants in Commerce and Industry General Accounting Cost Accounting Accounting Information System Budgeting Taxation Accounting Internal Auditing and Audit Committee