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Lecture notes of 69 pages for the course Introduction to Accounting and Finance at UOS
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MANAGEMENT 1046 - INTRODUCTION TOACCOUNTING AND FINANCE
THE ACCOUNTING FRAMEWORK
Accounting is the ‘language of business’, from the process of identification, recording
and communication.
Identification Select economic events (transactions)
Recording Record, classify and summarise
Communication Prepare accounting reports
Analyse and interpret for users
The accounting process includes the bookkeeping function.
Accounting is defined as the management of economic events in of three basic
activities that is identification, recording and communication. The modern
accountant’s role is making decisions and not simply doing the function of
bookkeeping.
TYPES OF ACCOUNTING
Management versus Financial Accounting
The Accounting system is usually accumulated with financial and managerial
accounting data. This can be broken down into either Managerial Accounting and
Financial Accounting.
Managerial Accounting is the interpretation of information for decision making and
control of an organisation’s operations. This is used by the internal users of the
company such as managers etc…
Financial Accounting is the publication of financial statements and other financial
reports. This is used by the external users of the company such as investors etc…
Financial Accounting Management Accounting
Focus Mainly external Internal only
Nature of General purpose Specific purpose
reports
, Level of detail Broad overview Quite detailed
Restrictions Accounting standards and No restrictions
other regulations
Reporting Mainly semi-annual or annual Whenever required
interval
Time horizon Mainly historical Both past and future
Range of Quantifiable in money terms, Can contain non-financial
information the focus on objective and information as there is less
verifiable data focus on objectivity and
verifiability
Who uses accounting data?
Internal users
Some examples of internal users for the accounting data can be:
Marketing department, for example what price for a Nokia cell phone will maximize
the company’s net income?
Management, for example which PepsiCo product line is the most profitable? Should
any product lines be eliminated?
Finance, is cash sufficient to pay dividends to SAP shareholders?
Human Resources, can we afford to give Toyota employees pay raises this year?
External users
Some examples of external users for the accounting data can be:
Investors, for example is Royal Dutch Shell earning satisfactory income? How does
Disney compare in size and profitability with Time Warner?
Creditors, for example will Singapore Airlines be able to pay its debts as they come
due?
,The larger the entity, the greater the interest from various groups of people. Users
need information in order to make decisions.
Owners Customers Competitors Managers Employees
Lenders Government Suppliers Investment Community
and tax analysts representative
authorities s
The accounting profession developed a conceptual framework to help bring
consistency to accounting concepts and practices. The conceptual framework helps
to answer the following questions:
Who are the users of financial statements?
What are the information needs of users?
What types of financial statements will best satisfy their needs?
What are the characteristics of financial statements which meet these needs?
There is the existence of accounting standards represented by:
International Accounting Standards Board (IASB)
- International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)
- Generally Accepted Accounting Principles (GAAP)
Main elements in Accounting
Assets is a resource controlled by the entity from which future economic benefits are
expected to flow to the entity.
Liability is an entity’s obligation to transfer economic benefits as a result of past
events.
Equity is the residual interest in the assets of an entity after deducting all its
liabilities.
Income is the increase in equity (other than those relating to contributions from
owners).
Expenses is the decrease in equity (other than those relating to contributions from
owners).
, Main Accounting concepts and conventions
Business entity is the business being separate from its owner(s).
Historical cost refers to the transactions that are recorded at the cost when they
occurred.
Going concern happens when the entity will continue in operation for the
foreseeable future.
Accruals refers to the revenue and costs that must be recognised as when they are
earned or incurred and not as money that is received or paid.
Consistency refers to the presentation and classification of items should stay the
same from one period to the next,
Materiality refers to the information that is material if its omission or misstatement
could influence the economic decisions of users.
COMPONENTS OF FINANCIAL STATEMENTS
The financial statements is composed of
Statement of financial position (Balance sheet)
Statement of profit and loss & other comprehensive income
Statement of changes in equity
Statement of cash flows
Accounting policies and explanatory notes
Objectives of financial statements
According to the IASB (International Accounting Standards Board), financial
statements is
“TO PROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, FINANCIAL
PERFORMANCE AND CASH FLOWS OF AN ENTITY THAT IS USEFUL TO A WIDE RANGE OF
USERS IN MAKING ECONOMIC DECISIONS ”
This is part of communication with the users of Accounting information, financial
statements aim to prescribe the basis for presentation of general purpose financial
statements in order to ensure comparability both with the entity’s own financial
statements of previous periods and with the financial statements of other entities.
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