Introduction to Accounting &

Financial Statements

MN 3042 – Business Economics and Financial Accounting

offered by Department of Management of Technology

Faculty of Business
University of Moratuwa

Conducted by
Ms. Mandree Dissanayake

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 Learning Outcomes

At the end of this lesson you should be able to,

- Identify the meaning of Accounting &

Financial Statements
- Analyze the accounting process
- Describe the Double Entry System
- Analyze the core concepts of accounting
- Record the transactions to calculate the results

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• Why engineers require to learn
accounting?

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 Evolution of Accounting
• Barter System
• The Industrial Revolution
✔ Commercial activities
✔Mass production
✔Credit terms
• Change of technologies and marketing along
with stiff competition

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 Objective and Need Importance of
Accounting
• To know whether the business has earned an
adequate profit
• To know whether the financial position of the
business is sound
• To fulfill legal requirements (presentation of
financial reports is a mandatory requirement
by law for some organizations)
• To minimize disadvantages arising through
omission and commission of transactions, and
to organize financial activities
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 Are these terms similar?

Accounting Finance

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 Main stages of Accounting
• Book keeping - merely concerned with orderly
record keeping.

• Accounting - has broader scope

- involves in analysis and
judgment at different stages
(recording of transactions,
classification, summarization
and interpretation)
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 Book-keeping
“Book-keeping is the science and art of correctly
recording in the books of account all those business
transactions that result in the transfer of money or
money's worth.”
-R.N. Carter-

Objectives ;
• To have permanent record of all the business
transactions.
• To keep records of income and expenses in such a way
that the net profit or net loss may be calculated.
• To keep records of assets and liabilities in such a way
that the financial position of the business may be
ascertained.
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 Definition of Accounting
“The art of recording, classification 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.”
-The American Institute of Certified
Public Accountants -

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 Definition of Accounting Contd.

“The process of identifying, measuring and

communicating economic information to permit
informed judgments and decision by users of the
information”.
- American Accounting Association
-

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 Objectives of Accounting
• To maintain accounting records
• To calculate the result of operations
• To ascertain the financial position
• To communicate the information to users
• To fulfill the statutory requirements
• To attract the shareholders
• For management decision making

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 Users of Accounting Information

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 • Internal users
Internal users Purpose

Owners To know the profitability and financial soundness of the

business

Management To take prompt decisions to manage the business efficiently

Employees and To form judgment about the earning capacity of the business
Trade unions since their remuneration and bonus depend on it.

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 • External Users
External users Purpose
Creditors, banks and other To determine whether the principal and lending
institutions the interest thereof will be paid in when due

Present investors To know the position, progress and prosperity of the

business in order to ensure the safety of their investment

Potential investors To decide whether to invest in the business or not

Government and Tax To know the earnings in order to assess authorities the
tax liabilities of the business

Regulatory agencies To evaluate the business operation under the regulatory

legislation

Researchers
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To use in their research work 14
 Branches of Accounting

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 Branches of Accounting
Financial Accounting
• It is concerned with recording of business transactions in the
books of accounts in such a way that operating result of a
particular period and financial position on a particular date can
be known.

Cost Accounting
• It relates to collection, classification and ascertainment of the
cost of production or job undertaken by the firm.

Management Accounting
• It relates to the use of accounting data collected with the help
of financial accounting and cost accounting for the purpose of
policy formulation, planning, control and decision making by the
management.
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Generally Accepted Accounting Principles,
Conventions and Concepts
• Business Entity Concept
• Money Measurement Concept
• Duality Concept
• Cost Concept
• Time Period Concept
• Realization Concept
• Matching Concept
• Materiality Concept
• Going Concern Concept
• Consistency Concept
• Accrual Concept
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Realization Concept 17
Generally Accepted Accounting Principles,
Conventions and Concepts
Business Entity Concept
• Business entity concept requires that the business
should be treated as a distinct accounting entity for the
purpose of treating transactions relating to the
operations.
• This is one of the most important and fundamental
accounting principle with which Double Entry system of
accounting has evolved.
• Accounts need to be maintained separate from the
owners and provisions providers of capital.
Example:- Sole proprietary, Partnership firm, company

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Generally Accepted Accounting Principles,
Conventions and Concepts
Money Measurement Concept
Recording, classification and summarizing of business
transactions require a common unit of measurement.
Record should be made only of that information which can
be expressed in Monetary Term that is currency
value(USD,GBP,Rs)
Examples:-
• Sole proprietor had 40 tables and chairs. This can’t be
recorded unless a value of furniture is known in monetary
value.
• My wife loves me so much. This can’t be accounted. This is
flaw in financial accounting as it does not understand the
human value.

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Generally Accepted Accounting Principles,
Conventions and Concepts
Duality Concept
In a business, the sum of sources of funds must equal
to the sum of uses of funds. Whatever funds are raised
by the business, either through capital or operation or
from outsiders, must be tied up in one or the other
form of uses.
Fundamental Accounting Equation
Owner’s Equity + Outside Liability = Assets

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Generally Accepted Accounting Principles,
Conventions and Concepts
Cost concept
Assets are always shown at their cost an not at their
current market value.
Example:-
• A land purchased for 5 Lakhs will be recorded only at
Rs. 5 Lakhs eventhough market value may be lower
say Rs. 4 Lakhs or higher Rs. 6 Lakhs than the cost
price.
• You are acquiring a business for a million USD and its
value as per books is 0.8 million, then the difference of
0.2 million is termed as goodwill and you should
records the assets and liabilities at the price you have 21
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Generally Accepted Accounting Principles,
Conventions and Concepts
Time Period Concept
Income (Loss) of a business is measured periodically
known as the accounting period.
Example:-
Calendar year – 01.Jan – 31 Dec
Fiscal year – 01 Apr- 31 March

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Generally Accepted Accounting Principles,
Conventions and Concepts
Matching Concept
In order to determine the profits or losses
accrued in an accounting period, the expenses
must relate to the goods and services sold during
the period.
Example:-
1. Insurance Premium paid for Jan-Dec whereas
your accounting period closes on March. In this
case only three months premium need to be
treated as Expense and balance 9 months treated
as advance premium paid as an asset.

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Generally Accepted Accounting Principles,
Conventions and Concepts
Example:-
2. Generally employees salaries are paid for the
previous month at the beginning of the next
month. But they have rendered their services to
produce goods and sold and sales revenue is
recognized in previous month. So to match the
cost with the revenue earned, we need to make
provision for salaries in previous month itself
that is March salary paid in April, but a salary
Payable Provision will be made in March itself.

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Generally Accepted Accounting Principles,
Conventions and Concepts
Materiality Concept
• Information is material if its misstatement could
influence the economic decisions of users taken on the
basis of the financial information.
• Materiality should be treated individually and
aggregate.
• The amount (quantity) and nature (quality) of
misstatements both need to be considered in
determining materiality.
Example:-
A calculator worth Rs.500 not recorded asset rather than
charged off as an expenses even though the benefit is
enduring in nature.
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Generally Accepted Accounting Principles,
Conventions and Concepts
Going Concern Concept
• A business entity is assumed to carry on its operations
for a foreseeable future.
• Implies that the resources of the concern would
continue to be used for the purposes for which they
are meant to be used.
Example:-
An entity will not be started with an intention to close
within the specified time period . Business is always
not started with an intention to close and it is expected
to continue forever.
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Generally Accepted Accounting Principles,
Conventions and Concepts
Consistency Concept
There are number of methods available for treating an event and
recording of it. Once the method is selected, it is essential to
continue it for subsequent events in order to preserve consistency.
There should be a sound reason to change the method.
Example:-
• Period shouldn’t be changed frequently from Jan-Dec to Apr-Mar
• Inventory valuation change from FIFO to LIFO or Weighted
Average not permitted frequently.

NOTE: If any company decides to change the policy, then that

company has to report on the effect of profit/loss due to the
change for past 5 years
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Generally Accepted Accounting Principles,
Conventions and Concepts
Accrual concept
In general it is assumed that accounts are always
prepared based on accrual basis. However there are
entities which follow cash basis of accounting also.
Examples:-
• Salary payable to employees (March salary paid in
April), interest receivable on investments(NSC interest),
dividend receivable on shares, tax payable to
government(March sales tax and annual income tax)
• The company Law Act/ Income Tax Act prescribes all
companies to follow Accrual Basis of Accounting except
for Professional firms and government organization
which are allowed to follow Cash Basis of Accounting
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Generally Accepted Accounting Principles,
Conventions and Concepts
Realization Concept
Deals with the point in time at which revenue may be
deemed to be realized or when a sale can be said to
have taken place.
Example:-
If a company is awarded a contract to build an office
building the revenue from that project would not be
recorded in the one lump sum but rather it would be
divided over time according to the work that is actually
being done.

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 What are the concepts behind the
below mentioned scenarios?
• Closing stock of the company has been deducted from
the cost
• Owner’s delivery van has been recorded in accounts on
cost
• Company depreciates assets
• Nimal has not paid for sales but it has been recorded as
sales
• Company has used same dividend policy for five years
• Company is situated in attractive area in Negombo which
enhance business
• They have capitalized the software they use.
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