Introduction to Accounting

Prepared by Kipangula Henrique 11/14/2024

 American Institute of Certified Public
Accountants (AICPA) defines
accounting as “the art of recording,
classifying and summarizing in a
significant manner and in terms of
money, transactions and events, which
are, in part at least, of a financial
character and interpreting the results
thereof”.

Prepared by Kipangula Henrique 11/14/2024

 Accounting can also be defined as a
systematic process of identifying,
recording, measuring, classifying,
verifying, summarizing, interpreting
and communicating financial
information to the users of such
information.

Prepared by Kipangula Henrique 11/14/2024

 Itreveals profit or Loss for a
given accounting period and
the value and nature of a
firm`s Assets, Liabilities and
owner`s equity (capital).

Prepared by Kipangula Henrique 11/14/2024

1. To provide useful financial
information for decision making:
2. To ascertain the financial
position of the business(Assets,
Liabilities and capital)
3. To ascertain the operational
profit or loss.
4. To keep systematic records.
Prepared by Kipangula Henrique 11/14/2024
5. Fair tax assessment.
6. To track the cash inflow and cash
outflow of the business.

Prepared by Kipangula Henrique 11/14/2024

At the end of the accounting period
we expect Financial accounting to
come up with financial statements.

Definition; Financial statements are a

collection of reports about
organization`s financial results,
conditions and cashflows.

Prepared by Kipangula Henrique 11/14/2024

OR;
Financial statements are the
summary of the results of the
operations of the business, its
financial position, cash flows and
changes in owner`s
equity(Capital) over a particular
accounting period.

Prepared by Kipangula Henrique 11/14/2024

I. Statement of comprehensive
income.
Shows the performance of the
business in terms of profit/Loss
in a particular accounting period.
II. Statement of financial position.
Portrays the financial position of
the business in terms of Assets,
Liabilities and Capital.
Prepared by Kipangula Henrique 11/14/2024
III. Statement of Cash flow.
Shows the cash flows of the
business in terms of cash inflows
and cash outflows under
categories of;
▪Operating Activities
▪Financing Activities
▪Investing Activities

Prepared by Kipangula Henrique 11/14/2024

iv. Statement of changes in
owner`s equity.
Shows the changes in capital over a
particular accounting period.

Prepared by Kipangula Henrique 11/14/2024

 Users of Accounting information
are categorized into two
categories:
1. Internal users; these are the
users who are found within the
company/Organization,
includes.

Prepared by Kipangula Henrique 11/14/2024

 Managers. These are the day-
to-day decision-makers. They
need to know how well things
are progressing financially and
about the financial status of
the business.

Prepared by Kipangula Henrique 11/14/2024

 Owner(s) of the business. They
want to be able to see whether or
not the business is profitable. In
addition they want to know what
the financial resources of the
business are. L
 Other employees. They want to
know their job security.

Prepared by Kipangula Henrique 11/14/2024

2. External users; these are the
users who are found outside
the organization.
 A prospective buyer. When the
owner wants to sell a business
the buyer will want to see such
information.
Prepared by Kipangula Henrique 11/14/2024
 The bank. If the owner wants
to borrow money for use in
the business, then the bank
will need such information.
 Tax inspectors/Authorities.
They need it to be able to
calculate the taxes payable.
Prepared by Kipangula Henrique 11/14/2024
 A prospective partner. If the owner
wants to share ownership with
someone else, then the would-be
partner will want such information.
 Investors, either existing ones or
potential ones. They want to know
whether or not to invest their money
in the business.

Prepared by Kipangula Henrique 11/14/2024

The changing business scenario over
the centuries gave rise to specialized
branches of accounting which could
cater to the changing requirements.
The branches of accounting are;
i) Financial accounting;
ii) Cost accounting;
iii) Government Accounting
iii) Management accounting.

Prepared by Kipangula Henrique 11/14/2024

Financial Accounting
The accounting system
concerned only with the
financial state of affairs and
financial results of operations
is known as Financial
Accounting. It is the original
from of record accounting Info

Prepared by Kipangula Henrique 11/14/2024

 Itis mainly concerned with the
preparation of financial
statements for the use of
outsiders like creditors,
debenture holders, investors
and financial institutions. The
financial statements i.e.,

Prepared by Kipangula Henrique 11/14/2024

 the profit and loss account
and the balance sheet, show
them the manner in which
operations of the business
have been conducted during a
specified period.

Prepared by Kipangula Henrique 11/14/2024

Cost Accounting
In view of the limitations of
financial accounting in respect
of information relating to the
cost of individual products,
cost accounting was
developed.

Prepared by Kipangula Henrique 11/14/2024

 It
is that branch of accounting
which is concerned with the
accumulation and assignment
of historical costs to units of
product and department,
primarily for the purpose of
valuation of stock and
measurement of profits.
Prepared by Kipangula Henrique 11/14/2024
 Cost accounting seeks to
ascertain the cost of unit
produced and sold or the
services rendered by the
business unit with a view to
exercising control over these
costs to assess profitability and
efficiency of the enterprise.
Prepared by Kipangula Henrique 11/14/2024
 It
generally relates to the future
and involves an estimation of
future costs to be incurred.

 The process of cost accounting

based on the data provided by
the financial accounting.

Prepared by Kipangula Henrique 11/14/2024

Management Accounting
It is an accounting for the
management i.e., accounting
which provides necessary
information to the
management for discharging
its functions.
Prepared by Kipangula Henrique 11/14/2024
According to the Anglo-American
Council on productivity,

“Management accounting is the

presentation of accounting
information is such a way as to
assist management in the creation
of policy and the day-to-day
operation of an undertaking.”

Prepared by Kipangula Henrique 11/14/2024

 It
covers all arrangements and
combinations or adjustments
of the orthodox information to
provide the Chief Executive
with the information from
which he can control the
business e.g. Information
about funds, costs, profits etc.
Prepared by Kipangula Henrique 11/14/2024
 Management accounting is not
only confined to the area of
cost accounting but also
covers other areas (such as
capital expenditure decisions,
capital structure decisions,
and dividend decisions) as
well.
Prepared by Kipangula Henrique 11/14/2024
 Accounting principles refer, to certain
rules, procedures and conventions
which represent a consensus view by
those involved in crafting good
accounting practices and procedures.
To be more reliable, accounting
statements are prepared in conformity
with these principles.
i) Business Entity Concept: A
business unit is an organization
of persons established to
accomplish an economic goal.
Business entity concept implies
that the business unit is separate
and distinct from the persons
who provide the required capital
to it.
 This concept can be expressed through an
accounting equation,

Assets = Liabilities + Capital

The equation clearly shows that
the business itself owns the
assets and in turn owes to
various claimants. It is worth
mentioning here that the
business entity concept as
applied in accounting for sole
trading units is different from
the legal concept
 The expenses, income, assets
and liabilities not related to
the sole proprietorship
business are excluded from
accounting. However, a sole
proprietor is personally liable
and required to utilize non-
business assets or private
assets also to settle the
business creditors as per law.
ii) Money Measurement Concept: In
accounting all events and transactions
are recode in terms of money. Money
is considered as a common
denominator, by means of which
various facts, events and transactions
about a business can be expressed in
terms of numbers
 In other words, facts, events and
transactions which cannot be
expressed in monetary terms are not
recorded in accounting. Hence, the
accounting does not give a complete
picture of all the transactions of a
business unit. This concept does not
also take care of the effects of
inflation because it assumes a stable
value for measuring.
iii) Going Concern Concept: Under
this concept, the transactions are
recorded assuming that the
business will exist for a longer
period of time, i.e., a business
unit is considered to be a going
concern and not a liquidated
one.
 Keeping this in view, the
suppliers and other companies
enter into business
transactions with the business
unit. This assumption
supports the concept of
valuing the assets at historical
cost or replacement cost.
 Thisconcept also supports the
treatment of prepaid expenses
as assets, although they may
be practically unsalable.
iv) Dual Aspect Concept:
According to this basic concept
of accounting, every transaction
has a two-fold aspect,
1. Giving certain benefits
and(Decrease)
2. Receiving certain
benefits(Increase)
 Thebasic principle of double
entry system is that every
debit has a corresponding and
equal amount of credit.
 This is the underlying
assumption of this concept.
The accounting equation viz.,
Assets = Capital + Liabilities
or Capital = Assets –
Liabilities, will further clarify
this concept, i.e.,
 atany point of time the total
assets of the business unit are
equal to its total liabilities.
Liabilities here relate both to
the outsiders and the owners.
Liabilities to the owners are
considered as capital.
V) Periodicity Concept: Under this
concept, the life of the business
is segmented into different
periods and accordingly the
result of each period is
ascertained. Though the
business is assumed to be
continuing in future (as per
going concern concept),
the measurement of income and
studying the financial position of the
business for a shorter and definite
period will help in taking corrective
steps at the appropriate time. Each
segmented period is called “accounting
period” and the same is normally a
year. The businessman has to analyse
and evaluate the results ascertained
periodically
vi) Historical Cost Concept: According
to this concept, the transactions are
recorded in the books of account with
the respective amounts involved. For
example, if an asset is purchases, it is
entered in the accounting record at
the price paid to acquire the same and
that cost is considered to be the base
for all future accounting.
 It means that the asset is recorded at
cost at the time of purchase but it
may be methodically reduced in its
value by way of charging
depreciation. However, in the light
of inflationary conditions, the
application of this concept is
considered highly irrelevant for
judging the financial position of the
business.
vii) Matching Concept: The essence of
the matching concept lies in the view
that all costs which are associated to a
particular period should be compared
with the revenues associated to the
same period to obtain the net income
of the business. Under this concept,
 the accounting period concept is
relevant and it is this concept
(matching concept) which
necessitated the provisions of
different adjustments for
recording outstanding expenses,
prepaid expenses, outstanding
incomes, incomes received in
advance, etc., during the course
of preparing the financial
viii) Realisation Concept: This
concept assumes or recognizes
revenue when a sale is made.
Sale is considered to be complete
when the ownership and
property are transferred from the
seller to the buyer and the
consideration is paid in full.
ix) Accrual Concept: According
to this concept the revenue is
recognized on its realization
and not on its actual receipt.
Similarly the expenses are
recognized when they are
incurred and not when
payment is made.
 This assumption makes it
necessary to give certain
adjustments in the preparation
of income statement regarding
revenues and costs. But under
cash accounting system, the
revenues and costs are
recognized only when they are
actually received or paid.
 Hence, the combination of
both cash and accrual system
is preferable to get rid of the
limitations of each system.
x) Objective Evidence Concept: This
concept ensures that all accounting
must be based on objective evidence,
i.e., every transaction recorded in the
books of account must have a
verifiable document in support of its,
existence.
 Only then, the transactions can
be verified by the auditors and
declared as true or otherwise.
The verifiable evidence for the
transactions should be free from
the personal bias, i.e., it should
be objective in nature and not
subjective.
 However, in reality the
subjectivity cannot be avoided in
the aspects like provision for bad
and doubtful debts, provision for
depreciation, valuation of
inventory, etc., and the
accountants are required to
disclose the regulations followed.
xi) Consistency: The convention of
consistency refers to the state of
accounting rules, concepts,
principles, practices and
conventions being observed and
applied constantly, i.e., from one
year to another there should not
be any change
 Ifconsistency is there, the
results and performance of
one period can he compared
easily and meaningfully with
the other. It also prevents
personal bias as the persons
involved have to follow the
consistent rules, principles,
concepts and conventions.
 This convention, however,
does not completely ignore
changes. It admits changes
wherever indispensable and
adds to the improved and
modern techniques of
accounting.
xii) Disclosure: The convention of
disclosure stresses the
importance of providing
accurate, full and reliable
information and data in the
financial statements which is of
material interest to the users and
readers of such statements.
 However, the term disclosure
does not mean all information
that one desires to get should
be included in accounting
statements. It is enough if
sufficient information, which is
of material interest to the
users, is included.
1. The differences between
bookkeeping and accounting
2. Accounting equation
3. The Accounting cycle
4. Double entry system of accounting

Prepared by Kipangula Henrique 11/14/2024