TOPIC 1.

INTRODUCTION TO ACCOUNTING

OBJECTIVES

After going through this topic students should be able to:

understand the meaning of accounting;
discuss the nature and functions of accounting;
explain the importance of accounting in the business activity;
list the main regulatory framework from the accounting field;
exemplify the principles of accounting;
distinguish between different types of accounting;
describe users of accounting information.

KEY-WORDS: Accounting, Law of accounting and financial reporting, National Accounting

Standards (NAS), International Financial Reporting Standards (IFRS), Accounting principles,
Financial accounting, Managerial accounting, Users of accounting information.

1.1. MEANING AND FUNCTIONS OF ACCOUNTING.

THE ROLE OF ACCOUNTING IN THE DECISION-MAKING PROCESS
The history of accounting can be traced back to ancient civilizations of China, Babylonia,
Greece and Egypt. According to some beliefs, accounting was used to keep records regarding
the cost of labour and materials used in building great structures like the Pyramids. During
1400s, accounting grew further because the needs for information of merchants involved in
trade increased.
Later, the industrial revolution led to more sophisticated accounting system, rather
than pricing the goods based on guesses about the costs. In the nineteenth century, companies
came up in many areas of infrastructure like the railways, steel, communication, which led to a
rapid growth in accounting.
Modern accounting is understood as the language of a business, a language that
provides information about the financial position and performance of an entity. When you

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study accounting, you are essentially learning this specialized language. By learning this
language, you can communicate and understand the financial operations of all types of entities.
The Law on Accounting and Financial Reporting No. 287 from 15.12.2017 define
accounting as a complex system for collection, identification, grouping, processing,
registration, generalization and presentation of information on accounting items. Accounting
is an information and measurement system that identifies records and communicates relevant
information about the activities of an entity.
The main functions of accounting are as follows:
 the information function - represents the basic function of accounting and consists in
collecting, processing and providing information regarding the economic transactions and
activities that take place at the enterprise. The information provided by accounting is
widely used for planning, developing strategies and tactics for future action, and for
financial analysis.
 the control function –consists in checking the way the company's resources are used. For
example, norms can be established for the consumption of materials, electricity,
remuneration of labour. This function would contribute to the most efficient use of the
company's resources.
 the analytical function – in the conditions of the market economy and competition, this
function is very important to increasing the efficiency of the business. Based on the
information provided by accounting, a variety of indicators is calculated that characterizes
the financial position and performance of the entity. Based on which the management of
the company adopts decisions or undertakes certain measures regarding the investment
policy, the financial policy, the policy of lending to buyers.
 the legal function - in the business activity all economic transactions are recorded in
certain documents, which later, in case of litigation, serve as proof in the Law Court that
confirms the reality and establishes the rights and obligations of the parties.
The primary objective of accounting is to provide useful information for decisions-making
process. A business aims to sell goods and/or provide services to customers at prices that will
provide an adequate return to its owners. This need to earn enough profit to attract and hold
investment capital is the goal of profitability. In addition, businesses must meet the goal of
liquidity. Liquidity means having enough funds on hand to pay debts when they are due. To be
able to assure the profitability and liquidity of a company, we need to have information
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generated through the accounting process. The people who take policy decisions and frame
business plans use such information from all business activities.
Here, we should mention that all businesses have the following activities:
 Operating activity includes selling of goods and services to customers, employing
managers, and workers, buying and producing goods and services, and paying taxes to the
government.
 Investing activity includes buying lands, buildings, equipment, and other long-term
resources needed in the operation of the business.
 Financing activity includes obtaining capital from owners and from creditors, such as
banks and suppliers. This activity also includes repaying creditors and paying a return to
the owners.
Summarizing, we can tell that accounting serves as an effective tool for measuring the
financial pulse rate of the company. It is a continuous cycle of measurement of results and
reporting of results to decision makers.

1.2. ACCOUNTING FRAMEWORK IN THE REPUBLIC OF MOLDOVA

One of the core functions of the Ministry of Finance is the regulation of accounting in
the corporate sector. Thus, the Ministry of Finance is responsible for policy development in
this area, in order to establish a legal framework of single requirements of the accounting and
financial reporting regulation.
The legal accounting framework in Moldova:
1. The Law on accounting and financial reporting – is a document according to which all
entities registered in the Republic of Moldova, regardless of the field of activity, type of
ownership and legal form of organization, are obliged to prepare financial statements in
the manner provided by Law, accounting standards and other normative acts in force. This
Law sets out the basic normative framework, general principles, requirements, and the
regulatory mechanism in the area of accounting and financial reporting in the Republic of
Moldova.
2. National Accounting Standards (hereinafter called NAS) - normative acts developed on the
grounds of the Directive 2013/34/EU of the European Parliament and of the IFRS Board,
approved by the Ministry of Finance.

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3. International Financial Reporting Standards (hereinafter called IFRS) - standards and
interpretations issued by the International Accounting Standards Board, accepted for
application in the Republic of Moldova.
4. General Chart of Accounts - the Chart of Accounts represents the whole system of accounts,
within which each account is delimited by title and numerical symbol, enclosed in a class
and group, in relation with a certain criterion of classification.
With the independence of the Republic of Moldova, were created premises to promote
the reforms for the transition from the centralized economy to the market economy, including
in the field of accounting.
The National Accounting system in Moldova was implemented from January 1, 1998
with the technical support of the US Agency for International Development (USAID). The key
element of the regulatory framework of accounting in Moldova were the National Accounting
Standards (NAS), which corresponded to the provisions of the international standards, were
adapted to the economic reality in the country and accompanied by comments regarding their
application. Also, a new national accounting Law no. 113-XVI of April 27, 2007. It entered into
force on January 1, 2008. This was the first accounting reform that was implemented in the
independent state the Republic of Moldova.
In order to ensure the continuity of the reforms initiated in 20th century, the Plan for
the development of accounting and auditing in the corporate sector for the years 2009-2014
was approved by Government Decision No. 1507 of December 31, 2008. When drafting it, the
achievements in the field, the experience of the EU member countries and those in the process
of accession to the EU, and the new trends manifested in international accounting practice,
were taken into account. By implementing the accounting and audit development plan in the
corporate sector, the goal of creating favourable conditions for the harmonization of national
accounting with EU Directives, International Financial Reporting Standards (SIRF/IFRS) and
other accounting regulations was pursued. In order to implement the Plan, through the orders
of the Ministry of Finance no. 118 and 119 of August 6, 2013, the new SNC and the General
Plan of Accounting Accounts were approved, implemented starting January 1, 2014.
From January 1, 2019, the new Accounting Law entered into force and financial
reporting no. 287 of 15.12.2017 which establishes the basic normative framework, the general
principles and requirements and the regulatory mechanism in the field of accounting and
financial reporting in the Republic of Moldova.
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 From January 1, 2020, the new changes to the NAS, to the Chart of Accounts, as well as
the new forms of the financial statements came into force. All modifications have been
developed in accordance with the requirements of the EU Directive.

1.3. BASIC ACCOUNTING PRINCIPLES

Accounting is a commonly understood business language because it is based on
generally accepted accounting principles. These are general rules that govern the field of
accounting.
If a company distributes its financial statements to the public, it is required to follow
generally accepted accounting principles in the preparation of those statements. Both the
company's management and the independent accountants must certify that the financial
statements and the related notes to the financial statements have been prepared in accordance
with NAS or IFRS.
The table below lists the main accounting principles.
Basic Accounting Meaning of the
Principles accounting principles
1 2
Implies that the entity will continue normally its functioning for a
Going concern period of at least 12 months from the reporting date, without the
principle intent or need to liquidate or reduce significantly its activity.
Provides the recognition of accounting items as they occur,
Accrual accounting regardless of the moment of collection/payment in cash or
principle compensation in other forms. This principle specify that business
are required to record and report revenue at the time it is earned
and realized by the business, but not when the cash is received by
the business.

Assumes that the entity use the same accounting principles and
methods from year to year. Once an entity decides on one method
Consistency of reporting (for example, method of depreciation for fixed assets)
principle it must use that same method for all subsequent events. This
allows user of financial information to look at a set of financial
statements and assume that the same policies, methods and
estimation techniques have been used from year to year.
Prudence States that an entity must not overvalue its revenues, assets and
principle profits, besides this it must not undervalue its expenses, liabilities
and losses.

Intangibility Implies that the total balance at the beginning of the current
principle management period must correspond to the total balance at the
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 end of the previous management period.

States that all business transactions of an entity are separated

Entity assumption from the entity owner's personal transactions. The accountant
principle keeps all of the business transactions of an entity separate from
the business owner's personal transactions.
Provides separate accounting and presentation in the financial
Non-compensation statements of assets and liabilities, and of revenues and expenses.
principle In financial statements we cannot compensate the assets with
liabilities. Also, we are not allowed to compensate the revenues
with expenses.
Implies that the information presented in financial statements
Priority of substance must reflect rather the core and content of economic facts, than
over form principle their legal form. For example assets obtained on finance leases are
legally not owned by an entity, but under this principle, they are
treated the same as assets owned by the entity.
Evaluation at entry Provides that the accounting items presented in financial
cost principle statements are evaluated at acquisition or production cost.
Provides that it is not necessary to meet the requirements
Relative importance concerning recognition and evaluation of accounting items,
principle concerning presentation, publication and consolidation of
information related to them, when the effects of meeting the
respective requirements are insignificant.

1.4. FINANCIAL AND MANAGEMENT ACCOUNTING AND USERS OF ACCOUNTING

INFORMATION
The financial literature classifies accounting into two broad categories, Financial
Accounting and Management Accounting. Financial accounting is primarily concerned with
the preparation of financial statements whereas management accounting covers areas such
as interpretation of financial statements and cost accounting. Both these types of accounting
are examined below.
Financial accounting is a system of accounting related to overseeing the financial
operations of entities based on accounting standards and with a main purpose of preparing
financial statements. Financial accounting is concerned with the preparation of reports for
external stakeholders.
Financial accounting information is used by managers, shareholders, banks, creditors,
the Government, etc. to take decisions involving the entity and its operations. Shareholders
want information about what their investment is worth and whether they should buy or sell
shares, bankers and other creditors want to know whether the entity has an ability to pay back

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money lent, managers want to know how the entity is doing compared to other entities. This
type of information would be very difficult to extract if every entity used a different system for
recording their financial position. Financial accounting information is subject to a set of
framework regulations that dictate how the financial information should be reported and
presented in order to ensures uniformity and comparison between entities financial
statements. Financial accounting is charged with the primary responsibility of external
reporting.
Management accounting is a field of accounting that analyses and provides cost
information to the internal management for the purpose of planning, controlling and decision
making. Management accounting is concerned with the preparation of reports for internal
management purposes.
Management accounting basic purpose is to communicate the facts according to the
specific needs of decision-makers by presenting the information in a systematic and
meaningful manner. Management accounting, therefore, specifically helps in planning and
control.
It helps in setting standards and in case of variances between planned and actual
performances, it helps in deciding the corrective action. An important characteristic of
management accounting is that it is forward looking. Its basic focus is one future activity to be
performed and not what has already happened in the past. The reports generated by a
management accountant can be of any duration– short or long, depending on purpose.
Further, the reports can be prepared for the organisation as a whole as well as its segments.
Management Accounting is an integral part of management, which provides
information that is used by management to formulate strategies, plan, coordinate and control
the activity, make decisions, optimise the use of resources and safeguard assets. For example,
by reporting variances from planned costs, managerial accounting enables managers to
control costs and take corrective action.
Management Accounting Information is used for three main management functions:
planning, implementation and control. Managerial information is used to set budgets, analyse
different options on a cost basis, and modify plans as the need arises, and control and monitor
the work that is being done.
Financial and management accounting can be distinguished on a variety of basis. Table
1 summarises the main differences between management and financial accounting.
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 Table 1
Distinctions between financial and management accounting
Basis of Management Financial
distinction accounting accounting

1 2 3
Management accounting system Financial accounting system
Primary produces information that is used produces information that is
users within an entity, by managers used by external parties, such
and employees. as shareholders, banks and
creditors.
Management accounting Financial accounting
Unit information may be monetary or information is of a monetary
of measurement alternatively non-monetary. nature.
Management accounting Financial accounting presents
Time focus provides both an historical an essentially historical picture
record of the past and a future of past operation.
planning.
No strict rules govern the way in Financial accounting must
which management accounting operate within a framework
Framework operates. There are no legal determined by law and NAS or
regulations requirements for an entity to use IFRS.
managerial accounting.
Management accounting has no Financial accounts are
Form of specified format. There are no supposed to be produced in
statements specific statements that should accordance with a specified
be produced. Detailed reports on format by IFRS, NAS or law.
the parts of the entity Summary reports regarding
the whole entity

Financial statements are prepared for the purpose of providing useful information to a
large range of a rational decision-makers: shareholders, management, suppliers, government,
customers and the public.

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 The Users of Accounting Information

DECISION MAKERS
DECISION MAKERS

MANAGEMENT THOUSE
THOUSEWITH
WITHDIRECT
THOUSE WITH INDIRECT
MANAGEMENT DIRECT THOUSE WITH INDIRECT
Finance FINANCIAL FINANCIAL INTEREST
Finance FINANCIALINTEREST
INTEREST FINANCIAL INTEREST
Taxes
Operations
Operationsand
and Investors
Investors TaxesAuthorities
Authorities
Production Creditors Regulators
Production Creditors Regulators
Labor
Marketing
Marketing Banks
Banks LaborUnions
Unions
Human Customers
HumanResources Lenders Customers
Resources Lenders
Information
InformationSystems Shareholders
Systems Shareholders
Accounting
Accounting

Shareholders - use the balance sheet and profit and loss statement to decide if they are
going to increase or decrease their holding.
Management uses the same information for different purposes. For example, directors
use it for strategic purposes and middle management can use it to see if they are meeting their
financial targets.
Suppliers - along with other data suppliers will look at a entity's balance sheet and
profit and loss statement to see if and how much credit they are willing to give to present and
potential customers.
Government - use the information provided by a entity about its finances to levy tax on
the profits.
Customers - they will look at the entity's finances to make sure the entity is not in
trouble and that their supplies are not about to dry up.
Employees also have an interest in how well their employer is doing so use financial
accounting information for this purpose.
The public needs information regarding the impact of an entity’s activity on the local
economy and environment.

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 SELF-ASSESSMENT QUESTIONS
1. What are the basic objectives and functions of accounting?
2. Who are the main internal and external users of accounting information?
3. What accounting information will internal and external user groups be interested in?
4. What are the differences and similarities between financial accounting and
management accounting? Comment on them.
5. What are the basic accounting principles? Explain each accounting principle separately.
6. Which documents form the conceptual framework of accounting in the Republic of
Moldova?
7. Which entities are required to keep financial accounts in the Republic of Moldova?

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