FINANCE

Chapter 1: Introduction to
Accounting

LEARNING OUTCOME
When you have completed this chapter, you
should be able to:
Discuss on the needs of the characteristics
of accounting information for users.
Identify users of accounting information.
Distinguish between bookkeeping and
accounting.
Identify 3 types of business ownerships.
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WHAT ARE ACCOUNTING AND

FINANCE?
is concerned with collecting,
analysing and communicating financial
information.
This information is useful for accounting
information users to make decision and
plan for business.
Accounting is simply to prepare financial
report on a regular basis
Accounting

WHAT ARE ACCOUNTING AND

FINANCE? (CONT)
Finance

is concerned with the ways in

which funds for a business are raised and
invested.
An understanding in finance will help the
company in evaluating the risks and
returns of an investment.
Accounting reports are major source of
information for financing and investing
decision making.
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THE USERS OF ACCOUNTING

INFORMATION
Employees

Customer
s

Competitor
s

Governme
nts

Owners
BUSINES
S
Managem
ent

Communit
y

Lenders

Investme
nt
analysts

Suppliers

DISTINGUISHING BETWEEN
BOOKKEEPING AND ACCOUNTING
Bookkeeping
Bookkeeping usually involves only the recording of
economic events (transactions).
It is only one part of the accounting process.
Accounting
Accounting may be further divided into financial
and management accounting.
Financial accounting is the field of accounting that
provides general financial information.
Management accounting provides financial
information to managers for decision making.

ANALYSIS AND INTERPRETATION

A

vital element in communicating

economic events is the accountants ability
to analyse and interpret the reported
information.
Analysis involves the use of ratios,
percentages, graphs and charts to
highlight significant financial trends and
relationships.
Interpretation involves explaining the
uses, meaning, and limitations of reported
data.

ACCOUNTING AS SERVICE
Accountants

provide financial information to

their clients, who are financial information
users indentified previously.
To meet the users needs, the accounting
information should possess certain key
qualities, or characteristics:
Relevance

Reliability

Comparability

Understandability

ACCOUNTING AS SERVICE (CONT)

Relevance

Accounting

information must have the ability

to influence decisions.
The information may be relevant to the
prediction of future events or relevant in
helping to confirm past events.
The role of accounting in confirming past
events is important because users often wish
to check the accuracy of earlier prediction that
they have made.
To influence decision, financial information
must be timely.

ACCOUNTING AS SERVICE (CONT)

Reliability
Accounting information should be free from error
and bias.
The accounting information need to be highly
reliable in order to make it relevance for users to
make decision.
Comparability
Help users to identify changes in the business
over time.
It also help to evaluate the performance of the
business in relation to similar business.

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ACCOUNTING AS SERVICE (CONT)

Understandability
Accounting

report should be expressed as

clearly as possible and should be
understood by those at whom the
information is aimed.

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ACCOUNTING AS AN INFORMATION
SYSTEM
Information
identification

Information
recording

Information
reporting

Information
analysis
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THE CHANGING FACE OF

ACCOUNTING
Changing

in the economic environment

have led to changes in the nature and
scope of accounting.
Financial accounting has improved its
framework of rules and there has been
greater international harmonisation of
accounting rules.
Management accounting has become more
outward-looking, and new methods for
managing costs have emerged.

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WHAT IS THE FINANCIAL

OBJECTIVE OF A BUSINESS?
The

key financial objective is to enhance

the wealth of the owners. To achieve this
objective, the needs of other groups
connected with the business, such as
employees, cannot be ignored.
When setting financial objectives, the
right balance must be struck between risk
and return.
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ACCOUNTING ASSUMPTIONS
Monetary
This

Unit Assumption

assumption requires that only transaction

data that can be expressed in terms of money
be included in the accounting records.
This assumption enables accounting to
quantify economic events.
An important part of the monetary unit
assumption is the added assumption that the
unit of measure remains sufficiently constant
overtime.
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ACCOUNTING ASSUMPTIONS
(CONT)
Business
A

Entity Assumption

business entity can be any organisation or

unit in society.
It may be a business enterprise, a
governmental unit and a non-for-profit
organisation .
This assumption requires that the activities of
the entity be kept separate and distinct from
the activities of its owner and all other
business entities.
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TYPE OF BUSINESS
Sole
A

proprietorship

business owned by one person

Usually only a relatively small amount of
money is required to start in business as
proprietorship.
The owner (proprietor) receives all profits,
suffer all losses, and is personally liable for
all debts of the business.
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TYPE OF BUSINESS (CONT)

Partnership
A

business owned by two or more persons

associated as partners.
A partnership agreement set forth terms such
as initial investment, duties of partners,
division of net income, and settlement to be
made upon death or withdrawal of a partner.
Each partner generally has unlimited liability
for the debt of the partnership.
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TYPE OF BUSINESS (CONT)

Corporation
A

(Limited company)

business organized as separate legal entity

under law and having ownership divided into
transferable shares.
The owner (shareholders) enjoy limited
liability which means they are not personally
liable for the debt of company.
Limited company also enjoy unlimited life due
to transferable of shares / ownerships.
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FINANCIAL STATEMENTS
income statement presents the
revenue and expenses and resulting net
income or net loss for a specific period of
time.
A balance sheet reports the assets,
liabilities and owners equity at a specific
date.
A statement of cash flows summarizes
information about the cash inflow (receipts)
and outflows (payments) for a specific
period of time.
An

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NEXT LECTURE

Accounting Principles And

Conventions

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