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Introduction to Accounting

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LECTURE 1:
INTRODUCTION
History and development of
accounting record
Ancient accounting record:
Using system called “stewardship”. The
document facilitate the owner to control
and identify their asset, which is under the
custody of the steward
Renaissance in Italy:
Accounting technique using double entry
book-keeping was introduced. A system to
ensure that financial information was
recorded efficiently and accurately.
Industrial Age:
In 19th century the emergence of large
corporations, separation of the owners
from the managers, makes the businesses
reports became more complex. Needs to
prepare financial statements to the
shareholders.
Post Industrial Age:
Accounting is a need for decision making
– information element.
What is accounting?
Accounting is an information system
that provides quantitative, financial
information to stakeholders about the
economic activities and condition of a
businessso that they can make
business/economic
decisions.
The different between accounting and
bookkeeping:
Accounting:
“a process of identifying, recording, classifying and
summarizing in a significant manner and in terms
of money, transactions and events which are, in
part at least, of a financial character, and
interpreting the result thereof” (AICPA, 1961)
Bookkeeping:
“ only involves activities of collecting and recording
financial data”
Accounting: Definition
The process of
identifying, measuring, recording
and communicating economic
information to permit informed
judgment and decisions by users of
the information.

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introductionofaccounting-090928050915-phpapp01.pptx

  • 2. History and development of accounting record Ancient accounting record: Using system called “stewardship”. The document facilitate the owner to control and identify their asset, which is under the custody of the steward Renaissance in Italy: Accounting technique using double entry book-keeping was introduced. A system to ensure that financial information was recorded efficiently and accurately.
  • 3. Industrial Age: In 19th century the emergence of large corporations, separation of the owners from the managers, makes the businesses reports became more complex. Needs to prepare financial statements to the shareholders. Post Industrial Age: Accounting is a need for decision making – information element.
  • 4. What is accounting? Accounting is an information system that provides quantitative, financial information to stakeholders about the economic activities and condition of a businessso that they can make business/economic decisions.
  • 5. The different between accounting and bookkeeping: Accounting: “a process of identifying, recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof” (AICPA, 1961) Bookkeeping: “ only involves activities of collecting and recording financial data”
  • 6. Accounting: Definition The process of identifying, measuring, recording and communicating economic information to permit informed judgment and decisions by users of the information.
  • 8. Identifying: Identify those events that are considered as an evidence of economic activity relevant to the business Recording: Keeping of a chronological diary of measured events in an orderly and systematic manner Communicating: Communicate through the preparation and distribution of accounting reports to the interested parties.
  • 9. USERS OF FINANCIAL INFORMATION Internal Users Managers who plan, organise and run the business e.g. production supervisors, marketing managers, and directors Owners of the business
  • 10. USERS OF FINANCIAL INFORMATION continued External Users Resource providers e.g. investors, employees, creditors Recipients of goods and services e.g. customers, beneficiaries Reviewers e.g. regulatory agencies, media, governments, trade unions, special interest groups
  • 11. FINANCIAL STATEMENTS Income Statement Reports revenues less expenses for a particular period of time Balance Sheet Reports assets and claims to those assets at a particular point in time
  • 12. FINANCIAL STATEMENTS continued Statement of Changes in Equity Reports amount of profit for the period and the changes in equity Cash Flow Statement Reports information regarding cash receipts and cash payments for a particular period of time
  • 13. Definition: FRS 101 (MASB 1) • Financial statement is a structured financial representation of the financial position of an enterprise and the transaction undertaken by an enterprise Introduction to Financial Statements
  • 14. Objectives and purposes of Financial Statement 1. Provide information about the financial position, performance and cash flow of an enterprise 2. Show the results of management’s stewardship of the resources entrusted to it 3. Assists users in predicting the enterprise’s future cash flow and the timing and certainty of the generation of cash and cash equivalents.
  • 15. Components of FS 1. Balance Sheet 2. Income Statement 3. A statement showing: • All changes in equity • Changes in equity other than those arising from capital transaction with owners and distribution with owners 4. Cash Flow Statement, and 5. Accounting policies and explanatory notes
  • 16. Accounting policies and explanatory notes Important additional notes to define statement prepared e.g accounting policies Any additional information that is not shown in the financial statement will effect the fairly presentation
  • 17. Income Statement $10 600 Wong PTY LTD Income Statement for the year ended 31 October 2008 Service revenues Expenses $3 200 1 500 900 50 50 40 5 740 4 860 2 000 Salaries expense Supplies expense Rent expense Insurance expense Interest expense Depreciation expense Profit before tax Tax expense Profit after tax $ 2 860
  • 18. Statement of Changes in Equity WONG PTY LTD Statement of Changes in Equity (extract) as at 31 October 2008 Profit $ 2 860 Retained earnings 1/10/08 0 Dividends (500) Retained earnings 31/10/08 $ 2 360
  • 19. WONG PTY LTD Balance Sheet as at 31 October 2008 Assets Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Total assets $15 200 200 1 000 550 4 960 $21 910 Liabilities and equity $ 2 500 50 800 1 200 5 000 $ 9 550 10 000 2 360 Liabilities Accounts payable Interest payable Revenue received in advance Salaries payable Bank loan Total liabilities Equity Share capital Retained earnings 31/10/08 Total equity 12 360 $21 910
  • 20. Cash Flow Statement WONG PTY LTD Cash Flow Statement for the month ended 31 October 2008 Cash flows from operating activities Cash receipts from operating activities $11 200 Cash payments from operating activities Net cash provided by operating activities (5 500) $ 5 700 Cash flows from investing activities Purchased office equipment (5 000) Net cash used by investing activities (5 000) Cash flows from financing activities Issue of shares 10 000 Proceeds from bank loan 5 000 Payment of dividend Net cash provided by financing activities (5 000) 14 500 Net increase in cash Cash at beginning of period 15 200 -- Cash at end of period $15 200
  • 21. Accounting Roles: Language of Business Decision making tool Create accountability and control As an Information system
  • 22. DECISION TOOLKIT Are the business operations profitable? Does the business rely mainly on debt or equity to finance its assets? Does the business generate sufficient cash from operations to fund its investing activities? Is the company using its assets effectively?
  • 23. DECISION TOOLKIT continued Is the company maintaining an adequate margin between sales and expenses? Can the company meet its short-term obligations? Can the company meet its long-term obligations?