Introduction to Accounting

Lecture 1

Module Tutor:
 What is Accounting

• Numerical Data
• Relating to Past Event
• Information presented to Managers
• A basis for Decision Making
• Control Purpose
What is accounting ?
 1- What is Accounting?

1.
 Recording
Identifying
economic
economic
events
events 
Communicating
economic
events

To help users to make

useful decisions.
4
(Wegandt et al 2013)
 Objective 1

To satisfy demand for

Stewardship and accountability

Arises from separation of ownership and

management
Linked to corporate governance
 Objective 2
To supply useful information for
Decision-making
“The objective of general purpose financial reporting
is to provide financial information about the reporting
entity that is useful to existing and potential investors,
lenders & other creditors in making decisions about
providing resources to an entity.”
International Accounting Standards Board (2010)
 Users

So who uses accounting information, and

what do they use it for?
Main users of financial information relating to a business

Owners Customers Competitors

Employees
Managers and their
representatives
Business

Lenders Government

Suppliers Investment Community

analysts representatives
 4 Basic Terms
• Assets
• Liability
• Income
• Expense
 Characteristics of Accounting Information
Accounting information should be useful. What
characteristics do you think accounting information
should have in order to satisfy the needs of its users:
Characteristics of useful information

Information
characteristics

Faithful
Relevance
representation

IASB, 2010 cited in Jones, 2013, p316

 Characteristics of Accounting Information
Relevance
Relevant information:
• Must be capable of making a difference in
the decisions made by users
 Relevance

Confirmatory Value Predictive Value

Assist user to assess the

Assist user in making
accuracy of past
prediction about future
predictions
 Characteristics of Accounting Information
Faithful representation
• …faithfully represent the substance of the
phenomena that it purports to represent
• Information must be reliable that is it can be
depended upon to represent faithfully the
transactions and events it claims to represent
 Faithful Representation

Freedom from
Completeness Neutrality
error

Includes all Information should Reported amount

necessary be unbiased reflect the best
information available
information
 Enhanced by….

Comparability Verifiability Timeliness Understandability

IASB, 2010 cited in Jones, 2013, p316

 Characteristics of Accounting Information

Comparability
• Information should be comparable over time

Last This
year year
 Characteristics of Accounting Information

Verifiability
• Assurance for users
• It should be possible to verify
information presented is
accurate in all major respects
by observation or recalculation
• Financial information subject to
independent audit
 Characteristics of Accounting Information

Timeliness
• ..available to users in time for it to be capable of
influencing their decisions
 Characteristics of Accounting Information

Understandability
• ≠ simplicity
• Financial report readers are assumed to have
reasonable knowledge of business and
economic activities to make sense of what
reports present
• To help users understand information
presented, that information should be
classified, characterised and presented clearly
Limitations of Accounting Information

Can ignore
Doesn’t always
external effects
measure quality
e.g. pollution

Excludes things SoFP shows

that can not be position at a single
quantified point in time
 Types of Business Entities (Ownership)

Limited
Sole-trader Partnership companies
•A business
• A business that
that is • A business that is incorporated
is owned and to take
owned and run by two or advantage of
more individuals 'limited liability'
run by one for their owners
individual
 Sole-trader (Proprietorship)
• A business owned and operated by one
person.
• The owner is responsible for all
operations of the business and assumes
all the risk.
• Must keep accounting records for tax
purposes
• Unlimited liability of the owner
 Advantages of a Sole
Proprietorship
• Owner makes all decisions
• Owner is own boss
• Owner keeps all the profits
• All financial information can be kept secret
as there is no requirement to disclose
financial information
• This type of business is easy to start or close
 Disadvantages of a Sole
Proprietorship

• Owner has responsibility for all debts

• Costs and time commitment can be high
• Funding can be difficult to obtain
• Owner is responsible for all aspects of the
business
• Owner doesn’t have fringe benefits
Partnership
• a form of business organisation in which two or more
people own and operate the business together
• In the absence of a partnership deed, the Partnership
Act 1890 applies to profit sharing, interest on capital,
interest on loans and partners’ salaries
– Capital is restricted to what partners can invest
– Partners have ‘joint and several’ liability for debts
– Must keep accounting records for tax purposes
– No requirement to disclose financial information
Advantages of a Partnership

• Partners share responsibilities

• They may have greater financial
resources than sole proprietors
• They share business losses
• They share time commitment
 Disadvantages of a Partnership

• Partners have unlimited personal liability

• They may have conflicts
• Profits are shared
• Partnerships are more difficult to close
down than sole proprietorships
Limited Company
• A legal entity that exists independently of its
owners
• Capital is raised by issuing and selling shares
• Owners are called shareholders
• Two main types:
– Private
– Public
Jargon alert!
– A company is not a generic term for a business
 Main Features of Limited Company

• Legal name
• Statutory requirements to prepare
accounts
• Rules and regulations governing the
preparation of accounts
• Limited liability
Advantages of a Limited Company

• The owners are shareholders. They have

limited liability for the debts of the company
• Divorce of ownership from management of
the company
• Company can usually raise funds more easily
than sole proprietorship or partnership
businesses
Advantages of a Limited Company

• Companies usually have a lower tax rate

than private owners
• A company can continue to exist after
the death of its owners
 Disadvantages of a Limited Company

• Companies have more complicated

structures than sole traders or
partnerships
• Employees who are not owners may not
be committed to the business
 Disadvantages of a Limited Company

• Companies must publish annual reports,

which could give away important secrets
to competitors
• The value of company shares can change
depending on changes in the stock
market