UKMM1043 BASIC ECONOMICS,

ACCOUNTING AND MANAGEMENT

Lecture 3
Introduction to
Financial Accounting
and
Cost & Management Accounting

CONTENTS
Financial accounting vs. Management accounting
External and internal users
Annual report (SOCI, SOFP, SOCIE, SOCF &
NFS)
Basic Accounting Equation
Illustration

Common Forms of Business

Organizations
Sole proprietorship

Partnership
Limited liability company

How to know whether the business is

performing well?
How to know the position of the company
comparing to its competitors?

Accounting
Accounting is a process of identifying,
measuring and communicating economic
information to permit informed judgements
and decisions by users of the information.
Measuring:
Recording;
Estimating;
Organising; and
Summarising

Who are the users?

Users of accounting information:

External users outside the organization

(financial accounting).
Internal users within the organization
(management accounting).

External users

Investors to make decisions whether to buy, hold, or

sell their share in the company.
Tax authority check for companys tax compliance.
Security Commission (SC) to make sure that
company is operating within the prescribed rules.
Customers observe whether company continues to
maintain product quality and warranty and then decide
whether to continue supporting its products.
Suppliers should they allow the company to trade on
credit terms.

Internal users
E.g., marketing managers, production supervisors,
finance directors and company officers.
They need detailed information like financial
comparison of operating alternatives, projection of
income from new sales, and forecasts of cash needs
for the coming year on a timely basis in running
the business and make decisions.

Financial accounting provides

information to external parties to help
them make better decisions involving
transactions with the organisation.
Managerial accounting provides
information to people within the
organisation for running day-to-day
operations, planning for future
operations and improve efficiency and
effectiveness of existing operations.

COMPARISON OF FINANCIAL AND

MANAGEMENT ACCOUNTING
Financial Accounting Management Accounting
1. Users
2. Time dimension

External

Internal

Historical perspective

More emphasis on
the future

3. Report
frequency

Published annually &

as directed

Not specific but frequently

for planning and control

4. Precision versus
timeliness

Emphasis on precision/
accuracy but less detail

Emphasis on relevance
and in detail

5. Focus

Primary focus is on
the whole organization

Focuses on segments
of an organization

6. Accounting
standards

Must follow accounting

standards and formats

Need not follow accounting

standards or formats

Mandatory for
external reports

Not mandatory

7. Legal
requirements

FINANCIAL STATEMENTS
Accounting reports are called Financial Statements.
It provides summarised information to the
stakeholders.

A companys published financial statements is also

known as Annual Report.
An annual report comprises of:

Statement of Comprehensive Income (Income statement)

Statement of Financial Position (Balance sheet)
Statement of Changes in Equity
Statement of Cash flows
Notes to the Financial Statements

FINANCIAL STATEMENTS
SOCI is a summary of the revenue and expenses for a
specific period of time, such as a year or a month.
SOFP is a list of the assets, liabilities and owners
equity as of a specific date.
Statement of Changes in Equity is a summary of the
changes in the owners equity that have occurred during
a specific period of time.
Statement of Cash Flows is a summary of cash
receipts and cash payments for a specific period of time.
Notes to Financial Statements shows the breakdown
of figures in the income statement and balance sheet.

The Accounting Equation

Assets = Liabilities + Owners Equity
The resources
owned by a
business

The rights of
the payables,
which
represent
debts of the
business

The rights
of the
owners

EXAMPLES OF ASSETS

Classified into non-current assets and current assets.

Non-current assets are assets that will be used for more than one
year e.g. fixed assets, intangible assets, and long-term investments.
Fixed assets include property, machinery, cars, etc
Intangible assets have no physical existence e.g. trademarks,
goodwill, copyrights and patents.
Current assets are assets that can be converted into cash easily or
will be consumed within one year e.g. receivables, inventory, cash,
etc.

14

LIABILITIES
Existing debts and obligation
Claims against assets
E.g.: Borrow money from bank, buy flour on
credits from the suppliers
Creditors, Lenders

15

EXAMPLES OF LIABILITIES
Can be classified into long-term and current liabilities.
Non-current liabilities are debts which will be settled in
more than one year e.g. bank loans, mortgages, etc
Current liabilities are debts which have to be settled
within one year e.g. bank overdraft, trade payables,
accrued expenses etc

16

OWNERS EQUITY
Owners

equity or capital is the investment made

by the owner.
It represents the owners interest in the business.
It is actually the net worth of the business (i.e.
assets less liabilities).
It is also the funds invested by the owner plus any
profits retained for use in the business less any
share of profits paid out of the business to the
owner and drawings.
17

OWNERS EQUITY AS A
BUILDING BLOCK
Owners Equity = total assets minus total
liabilities. (A - L = O.E.)

Owners Equity represents the

ownership claim to total assets.
Subdivisions of Owners Equity:

1 Capital or Investments by Owner (+)

2 Drawing (-)
3 Revenues (+)
4 Expenses (-)

18

INVESTMENTS BY OWNERS

Investments / Capital
are

the assets the owner puts in

the business
increase owners equity

19

DRAWINGS

Drawings

20

are withdrawals of cash or other assets by

the owner for personal use
decrease owners equity

REVENUES
Revenues

21

gross increases in owners equity from

business activities entered into for the
purpose of earning income

usually result in an increase in an asset

REVENUES
Revenue is earned when a business sells goods
and/or services to its customers, and the sales
result in an inflow of assets such as cash or
debtors.

Examples of revenue include:

- sales revenue
- interest income
- commissions earned
- rental income
22

EXPENSES
Expenses

23

decreases in owners equity that result from

operating the business

cost of assets consumed or services used in the

process of earning revenue

examples: utility expense, rent expense, supplies

expense, and tax expense

INCREASES AND
DECREASES IN OWNERS
EQUITY
INCREASES

Investments
by Owner

Revenues

24

DECREASES

Owners
Equity

Withdrawals
by Owner

Expenses

ILLUSTRATION: ACCOUNTING EQUATION

Refer to the illustration given

End of lecture