Introduction to Accounting:

What is accounting?

Accounting is an information science that is used to collect and organize financial data for
organizations and individuals.

Accounting can also be considered as an information system that measures business activities,
processes that information into reports and financial statements and communicates the results to
decision makers.

 Information science – It has to do with collecting, processing and analyzing information.

 Financial data – accounting is about money. It is quantitative and measure money.
 Organizations and individuals – every firm needs to be able to organize the financial
information related to its business. Similarly, an individual manages their finances by paying
attention to how much comes in and goes out.

NB: Account is the “Language of the business”

Why do we need accounting?

Accounting helps with making use of the past to take action in the present and change the future.

Type of Reports & Financial Statements:

 Reports
- Chairman’s report – report by the chair of the company providing an insight into or
addressing the company’s financial activities during a given period.
- Treasurer's report – report of the treasurer setting forth expenditures made or incurred
from the previous period and the account balances current.
-
- Board Of Directors report – provides an insight into the company’s operational, financial
performance and prospects. Its aim is to provide a clear and accurate picture of the
company’s performance and options, which can help build trust and confidence.

 Financial Statements:
- Balance Sheet – provides details about what a company owns and owes on a certain
date. Also provides information about the company’s financial situation. It’ s called a
balance sheet because total assets + liabilities must = equity.

- Income Statements – provides information about how the company performs within a
particular period.

- Cash flows – how much money the company made under the period of consideration
and where did the money come from.
 - Notes to the Financial Statements – disclose the detailed assumptions made by
accountants when preparing a company’s: income statement, balance sheet, statement
of changes of financial position or statement of retained earnings.

NB: The benefits of financial statements are to meet the common information needs of a wide range
of users both internal and external.

Note that the objective of a Financial Reporting is to provide information about an Enterprise of its:

 Financial Position (Balance Sheet)

 Performance (Income Statement)
 Changes in Financial Position (Cash Flow Statement)

Qualitative Characteristics of Financial Statements:

- Comparability
- Decision Usefulness
- Understandability
- Relevance (Materiality, Timeliness, Predictive value and Feedback value)
- Reliability (Verifiability, Neutrality and Representational Faithfulness)

Users of Financial Information:

- Owners/Shareholders/Stockholders (existing and potential)

- Managers
- Employees and Trade Unions
- Gov’t and Tax Agencies
- Creditors
- Customers
- Competitors
- Community

There are several features of useful Accounting Information. However, being “accurate” covers each
one of them.

A – Accurate

C – Clear

C – Complete

U – User confidence

R – Relevant

A – Appropriate medium/channel

T – Time

E – Effective
Types of accounting:

 Financial accounting – It’s the part of accounting that deals primarily with the recording
function of data called bookkeeping and the drafting of the Financial Statements of
different types of organizations. It is performed by a Financial Accountant prepared for
external stakeholders (income statements, balance sheet and cash flow).

 Managerial/Management accounting – Is performed by the Management Accountants

who deal principally with the gathering of data from internal and external sources,
analyzing, processing, interpreting and communicating the resulting information. It’s
strategic information that is only available for insiders and focused on pricing, competition
and budgeting.

Forms of Business Organization:

 There are three (3) major forms of organizations.

- Proprietorships (Sole Traders) – it consists of a single owner who is personally liable for
debts of the business and also not a sperate Legal Entity. For accounting purposes, the
entity is separate from its owners.

- Partnerships – it consists of two or more partners or co-owners. Each partner can be

personally liable for the debts of the partnership. It’s also not a separate Legal Entity. For
accounting purposes, the Entity is separate from its Partners.

- Corporation – it may have one of many owners (Stockholders). They’re not personally
liable for debts of the business. It also consists of a separate Legal Entity (can sue or be
 sued). For accounting purposes, the Entity is separate from its owners. A board of
directors are appointed by the Stockholders to elect office and set policies.

Selecting the Appropriate Business Organization

 Selecting a business Organization can be determine by several factors:

- Size and nature of the business
- Level of control
- Level of structure
- Vulnerability of lawsuits
- Expected profits and losses.
- Whether re-investment of earnings is needed.

Income Statements

The main income statements items are:

 Revenue – the main type of revenue is the day-to-day sales of a business or organization.
Revenue can also be earned by renting real estate or selling goods that they don’t usually
sell. This is then considered as other revenue.
Net Sales + Other Revenue = Total Revenue

Balance Sheets

NB: Assets stand on the left, while liability stands on the right.

Asset Side:
Cash account - shows how much of the firm’s assets are cash or can easily be converted in cash (bank
deposits).

Account Receivable- money owed by customers that the firm has not yet received.

Inventory – is the account that shows the value of raw materials, work in progress goods and finished
goods.

Property, Plant and equipment (PPE): The value of this depreciates each year.

Liability Side:

Account Payable – payments owed to suppliers for goods received.

Financial Liability – external financing usually from banks which are used to finance its operations.

Ownership Claims (Paid in capital) – fund owed to the shareholders or investors once the business is
successful.

NB: Account Equation: Assets = Liability + Equity