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Introduction to Accounting Lecture Notes
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for those doing a business degree, with a module that introduces accounting to first years
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Introduction to AccountingLecture 1: Accounting & Financial Statements
Define accounting & explain the purpose of accounting
Accounting:
o Identification,
o Recording, and
o Communication
Of the economic events of an organization to interested users.
The purpose of accounting:
o Provide useful accounting information
o Users make informed decisions
Identify the users of accounting information and explain their respective
information needs
Internal Users:
o Marketing
o Management
o Finance
o Human Resources
External Users:
o Creditors
o Investors
Usefulness of Accounting Information
o Relevance
Influence user’s decision
Predict and or confirm
Material (significant)
o Faithful representation
Accounting information should represent what it is supposed to represent
Complete
Neutral
Error free
o Comparability
o Verifiability
o Timeliness
o Understand ability
Two Branches of Accounting
o Management Accounting
Management accounting provides information for managers of an
organisation who direct and control its operations.
o Financial Accounting
Financial accounting provides information
to shareholders, creditors and others who are outside the organisation.
,Identify the main financial statements
Statement of Profit and Loss (SPL)
o Revenues
o Expenses
o Measures financial performance
Statement of financial position (SOFP)
o Assets
o Liabilities
o Stakeholders Equity
o Measures financial position
Statement of Cash flows
o CF Out
o CF In
o CF Forecast
o Shows cash receipts & cash payments
Statement of financial position
o One of key financial statements
o Reports the assets, liabilities, and equity
o Snapshot of the company’s financial condition at a specific moment in time (usually
the month-end or year-end - BF1120 plc. as at September 30, 2017)
o Accounting equation is Assets= Liabilities + Equity (underlying framework for SOFP).
Assets=Liabilities+Equity
Assets
o Resources held by the company
Controlled
Provide future benefits or services
Benefit arise from past transactions/events
Measurable in monetary terms
o Assets: non-current and current
o Non-current assets + current assets = total assets
o Non-Current Assets
Fixed assets
Long term in nature
Useful for more than one year
Non-current may be tangible or intangible
Tangible: physical substance (land, building, plant, equipment, computer,
desk, chairs – property, plant & equipment (PPE))
Intangible: no physical substance(goodwill, trademark, copyright
, o Current Assets
Short term in nature
Expected to sold within the year
Held mainly for trading
Examples: inventory, accounts receivable/trade receivable (debtors), cash,
near cash like short term investments.
Non-current assets + current assets=total assets
Liabilities
o Obligations of the business/claims by outsiders on business
o Arise through past transactions/events
o Two types: current and non-current
o Normally settled with cash
o Non-Current Liabilities
Long term in nature
Once not classified as current
o Current Liabilities
Short term
Settlements due in the short term
Settled within the normal business cycle
Settled within a year or so
Cannot put off beyond a year
Equity
o Ownership claim on total assets.
o Share Capital and Retained Earnings (Reserves)
SOFP
o To improve understanding, companies group similar assets and similar liabilities
together
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