FINANCIAL ACCOUNTING 1

1. 2. 3. 4. 5. 6. 7.

Definition, history and development of accounting Functions, objectives and uses of financial statements Main user groups of financial statements Types and various forms of business Differences between book-keeping and accounting The role of accounting profession in business Employment opportunities

1.

Definition of Accounting: Frank Wood & Alan Sangster

Accounting can be defined as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

Andrew Leong & Wong Sei Van

Accounting can be defined as the art of recording, classifying and summarizing of business events in monetary terms and interpreting the results so obtained.

The accounting information should be available for users to make decision.

It is very important for the users to get correct and timely information so that they can make useful decision.

 The

definition involves 4 stages:

Stage 1 recording

Stage 2 classifying

Stage 3 summarising

Stage 4 interpreting

 The

definition involves 4 stages:

Stage 1 recording

Stage 2 classifying

Stage 3 summarising

Stage 4 interpreting

Source documents

Journalisation

Business Transaction

Posting

Final Accounts

Trial Balance

2.

History and development of accounting

Started 7000 years to the early civilizations of Egypt, Babylon, Greece & Rome. The greatest interest in book-keeping-during Rennaisance period In 1494, the first published works on double entry bookkeeping was produced by Luca Pacioli. In 17th century, refine versions of Paciolis works were produced in England & Holland to formulate rules for double entry book-keeping & preparation of financial statements. In 19th century, during the Industrial Revolution, businesses were expended, then led to the cost accounting development and the need to protect investors that gave rise to auditing. Nowadays, the existing laws were refined and new laws were introduced to regulate the conduct of business These new laws required the detailed financial statements to be periodically presented to shareholders.

1.

Functions of FS
To record & control the business transactions To maintain accuracy in recording To meet the requirements of the law To present final accounts to the owners of the business To facilitate the efficient allocation of resources

2.

Objectives of FS
The primary objective is to provide information for decision making. To provide information about entitys financial performance & financial position To provide information to evaluate the stewardship of the entitys management

3.

Uses of FS
FS are very helpful in evaluating the performance of a business to ensure the smooth running of any organisations.

Partners-internal users Managers-internal user

planning, organising & controlling the organisation. profits earned financial stability & growth of the business Solvency Present & future earning capacity Solvency Strength Present & future earning capacity

Owner-internal user The Bank-external user

A prospective buyer-external user

Creditors-external users Investors-external users Employees-internal users

Ability to progress & expend Taxing purposes, price controls, plans for expansion of indusry Reduction of the price

Government-external users The Public-external users

1.

Sole Proprietorship

A business with single/ sole owner Small retail establishment & individual professional business, i.e. accountants, engineers, doctors & lawyers.

2.

Partnership

A business with 2 / more individuals as a co-owners. The r/ship which subsists between persons carrying on business in common with a view of profits.

3.

Companies

An organisation with many owners called shareholders/ stock holders.

Sole proprietorship Legal status

-no legal formalities -no separate legal existence

Partnership
-created by verbal /written agreement known as Partnership Agreement. -no separate legal existence -from the partners based on agreed portion -governed by Partnership Act 1961 & administered by Registrar of Businesses

Company
-incorporated under the Companies Act 1965. -separate legal existence. (a company & owner are a different person) -from public/ shareholders by issuing shares -governed by Memorandum of Association & Articles of Association under the Companies Act 1965. Administered by Registrar of Companies.

Source of capital Act applied

-from the owner himself -governed & administered by Registration of Business Act 1956

Profit sharing

-the owner receives & enjoy any profits made & suffer any losses incurred

-partners receives profit based on profit sharing ratio stated in Partnership Agreement. If there is no method of sharing profit in PA, Section 26 of Partnership Act 1961 allows the profit & loss be shared equally.

-profit earned by the company is distributed to shareholders in form of dividend. (cash / shares)

Book-keeping is a part accounting. Book-keeping refers to the mechanical aspects of accounting.

Accounting

Interpreting

Recording, Classifying & Summarising

Book-keeping

Knowledge of accounting is very important for all fields. Whatever field a businessman is in, he will have to make decisions & a wise decision will be to rely o accounting data. Even for profession that is not related to accounting like doctors, lawyers etc knowledge of accounting is very important in making business decisions such as decision to open a new branch, to increase product price or shut down an operation. Accounting is helpful in the evaluation of performance & indicates the financing implications of choosing one plan or project versus other.

Public Accountant -Offer services to general public for a fee.

-Auditing, tax service, accounting service & etc -services offered by those Who have license to practise

Private Accountant
-employed by an organisation. -financial accountants, Management accountant, cost Accountants & internal auditors

Accountant

Government Accountant Educators -employed by a federal agency or Local authority

-lecturers, consultants, engage in Research & publication, teachers.