1. Introduction to Accounting Topic 1 10/26/2015Topic 1: Introduction to accounting

2. Learning outcomes By the end of this topic you should be able to. 1.Explain the purpose of accounting 2. Identify users of accounting information 3. Describe the importance of accounting information to various users 4. Identify the various accounting measurement basis. 5. Explain the importance of professional ethics in accounting 6. Describe the accounting equation 7. Identify organisations that influence the accounting profession 8. Describe accounting concepts and conventions 10/26/2015 Topic 1: Introduction to accounting

3. Definition of accounting n Recording of financial transactions for decision making n Wood and Sangster (2005) defines accounting as a systematic recording of transactions having an impact in a business and availing the information to decision makers on a timely basis. n Through out the course you will learn;  The basics in accounting  Importance of accounting information, and  How to prepare financial statements  This is an introductory lesson 10/26/2015 Topic 1: Introduction to accounting

4. Purpose of accounting n Provide information on financial position of an enterprise n Information on performance over a period n Balance sheet shows financial position n Income statement, cash flow statement and statement of changes in equity show financial performance 10/26/2015 Topic 1: Introduction to accounting

5. Users of accounting information n Stock holders n Potential investors n Management n Employees n Potential investors n Employees 10/26/2015 Topic 1: Introduction to accounting

6. Stock holders n Interested in knowing profitability of an organisation n Use information to determine whether additional capital should be done n Use information to evaluate how management is carrying out their roles 10/26/2015 Topic 1: Introduction to accounting

7. Potential investors n Are interested in investing in the organisation n Use financial accounts to evaluate strength of an organisation n Compute intrinsic value of shares using financial accounts 10/26/2015 Topic 1: Introduction to accounting

8. Management n Require timely accounting information for decision making n Use financial information to make plans n Use accounting data to perform performance evaluation n In addition to financial accounts, they require detailed management accounts 10/26/2015 Topic 1: Introduction to accounting

9. Employees n Financial information provide an idea about their job security n Employees’ unions use information to negotiate better terms of service n Their performance evaluation is informed by financial results 10/26/2015 Topic 1: Introduction to accounting

10. Others n Students use the information for research and training n Regulatory agencies use the data in assessing financial health for a business such as capital markets n Tax authorities use financial accounts to assess tax liability 10/26/2015 Topic 1: Introduction to accounting

11. Accounting measurement n Attaching monetary value to transactions n Bases;  Transactional values: relates to cost of purchases as well as sales values  Fair value: value of present value of future cash flows  Fair value: Market price less selling costs 10/26/2015 Topic 1: Introduction to accounting

12. Accounting measurement cont’d  Historical costs: purchase price. Mainly used in accounting for non current assets  Replacement cost: cost of acquiring a similar asset with the same conditions  Net book value: historical cost less depreciation 10/26/2015 Topic 1: Introduction to accounting

13. Ethical considerations n Accounting information is of high value to decision makers. n Need to provide credible information n A number of corporate frauds have involved accountants n Need for one to behave professionally and observe code of conduct n One should be independent, objective, exercise due care, professionalism and integrity 10/26/2015 Topic 1: Introduction to accounting

14. Accounting equation Assets = Capital + Liabilities Economic resources (Assets) are generated from either owners capital and or debt financiers (liabilities) 10/26/2015 Topic 1: Introduction to accounting

15. Organisations that influence accounting practice n The profession is highly regulated n Professional bodies such as MICPA develop code of conduct n Accounting measurement guided by a reporting frame work n International accounting standard setters such as IASB guide accounting treatment 10/26/2015 Topic 1: Introduction to accounting

16. Accounting concepts and conventions n Five main concepts and conventions; 1.Matching 2.Monetary unit 3.Going concern 4.Time period 5.Separate entity 10/26/2015 Topic 1: Introduction to accounting

17. Monetary unit n Transactions can be converted into a unit of measure based on the operating currency n Monetary value attached to non cash items n Helps to determine value of an entity 10/26/2015 Topic 1: Introduction to accounting

18. Going concern n A reporting entity to continue operating into the future n No winding up of activities are foreseen n Helps to value assets at their net book values 10/26/2015 Topic 1: Introduction to accounting

19. Time value n The continuous life time of an entity can be separated into distinct reporting periods n Useful in assessing performance of an organisation over time n Position of an organisation can be determined at a certain point in time 10/26/2015 Topic 1: Introduction to accounting

20. Separate entity n The business is distinct from owners n Owners transact with the business as third parties n Helps to assess the value of an organisation independent of owners n Economic value with owners are determined n Contribution of the entity in enhancing owners’ wealth is evaluated 10/26/2015 Topic 1: Introduction to accounting

21. Matching n Resources generated are compared with those used up in the process n Excess (profits) or short falls (loss) on net realization used to assess performance n Organisations generating resources in excess of consumption are good performers 10/26/2015 Topic 1: Introduction to accounting

22. Matching cont’d n Resources used in generation of future profits are capitalised n Expenses are charged on the time period for which they were used to generate revenues n Revenues matched with expenses 10/26/2015 Topic 1: Introduction to accounting

23. Conclusion n Accounting information is critical in decision making for various users n Accountants should adhere to professional ethics n Watchdog organisations enhance credibility of financial information n Reporting framework developed to guide accountants 10/26/2015 Topic 1: Introduction to accounting

24. Further reading n Rice, A (2002). Accounts demystified: How to understand financial accounting. Prentice Hall n Wood, F, and Sangster, A. (2005) Business Accounting 1 (10 th ed.). Prentice Hall 10/26/2015 Topic 1: Introduction to accounting

25. Questions Quiz 10/26/2015 Topic 1: Introduction to accounting