CHAPTER 1: INTRODUCTION to accounting KE1013 Chapter One
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
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
Accounting: Definition Measuring Identifying Bookeeping Reporting Recording Interpreting Analyzing Provide useful information to users Designing Information KE1013 Chapter One
Fields in Accounting Accounting Information System Financial Accounting Accounting Public Sector Accounting And Non-Profit Organization Management Accounting Auditing Tax
Accounting Professional Bodies MICPA MIA ACCA IFRS MASB CPA GAAP
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
Users of Accounting Information Users External Internal Indirect Interest Direct Interest
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
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.
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.
Underlying Accounting Concepts • Dual aspect - two aspects of accounting; resources (assets) and claims against them. • Time interval -preparation of financial statements at regular intervals.
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.
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.
Types of Business • Sole Proprietor • Partnership • Limited companies KE1013 Chapter One
Thank You KE1013 Chapter One