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BY
H O ONDIGO
UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
MAY 2013
DAC 501 : FINANCIAL
ACCOUNTING
TOPIC ONE: INTRODUCTION TO
ACCOUNTING
Content:
The nature and scope of accounting.
The objectives of accounting.
Accounting as an information system.
Users of financial statements and reports
and their information needs.
The fields (specializations) of accounting.
Careers in Financial Accounting
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Definitions of Accounting
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“The American Institute of Certified
Public Accountants (AICPA),1961,
defines accounting as ‘the art of
recording, classifying and summarizing
in a significant manner and in terms of
money, transactions and events, which
are, in part of at least of a financial
character, and interpreting the results
thereof’ ”
Definitions of Accounting cont…
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The Accounting Standards Board ,ASB
(1991) on the other hand has defines
accounting as “the provision of
information about the financial
position, performance and financial
adaptability of an enterprise that is
useful to a wide range of potential users
in making economic decisions”.
Definitions of Accounting cont..
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Prof N.D Nzomo (1992) defines
accounting as ‘the art and science of
recording transactions, processing the
recorded transactions into a
comprehensible form and
communicating the information to
interested parties.’
Definitions of Accounting cont…
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The American Accounting (AAA)
Association (1966) defines
accounting as the process of
identifying, measuring and
communicating economic
information to permit informed
judgments by users of information.
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Consensus Definition of Accounting
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“Accounting is a service activity. Its
function is to provide quantitative
information, primarily financial in
nature, about economic entities that
is intended to be useful in making
economic decisions—in making
reasoned choices among alternative
courses of action.”
Key Features of Accounting Definition
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Provides a vital service in today’s business
environment.
Is concerned primarily with quantitative
financial information that is used in
conjunction with qualitative evaluations in
making judgments.
Information is used in making decisions
about how to allocate scarce resources.
Information is intended to be useful in
making economic decisions about the
future.
Accounting as an Information system
Accounting as a social science lends itself
easily to its analysis as an information
system. It has the attributes of a system;
It has a basic goal, which is to provide
information,
It has clear and well defined elements in
the form of people and equipment, and
It has the typical activities of a system,
namely; input, process and output.
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Accounting as an Information system c0nt…
The first boundary is the filtering process by
which the accountant selects data.
The second boundary is established by specific
information needed of its users.
The output requirements determine the type of
data selected as the input.
The output of the system is the financial
statements and reports.
The task of the accountant is therefore to
transform raw data into information; a form that
has meaning and is able to influence decisions.
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DIAGRAMATIC PRESENTATION
Boundary I Boundary II
INPUT PROCESSES OUTPUT USER
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CONTROL
Users of Accounting Information1-
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Stakeholders are all parties
interested in the financial health of a
company.
Internal users make decisions that
directly affect the internal operations
of the enterprise.
External users make decisions
concerning their relationship to the
enterprise.
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Specific Users of Accounting information
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1. Investors (both existing
stockholders and potential investors)
need information concerning the safety
and profitability of their investment.
Profitability and financial soundness
would, therefore, be matters of prime
importance to them
Specific Users of Accounting information cont..
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2. Creditors (Lenders, suppliers)
They need information about the profitability and
stability of the company to decide whether to lend
money to the company and, if so, what interest rate(s) to
charge.
They are interested in information that enables them to
determine whether the amounts owing to them will be
paid when due.
They will be concerned about the liquid assets of an
enterprise relative to the amount of liability falling due
in the near future, and about the owner’s investment
relative to outside funding.
To the lenders, suppliers and other creditors, owner’s
investment serves as a protecting buffer between
lenders, suppliers and other creditors and any losses
which may befall the enterprise.
Specific Users of Accounting information cont..
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3. Employees and their representatives.
Employees and their representative groups
are interested about the profitability and
stability of their employers.
They are also interested in information
which enables them to assess the ability of
enterprises to provide remuneration,
retirement benefits and employment
opportunities.
Specific Users of Accounting information cont..
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4. Management.
Management requires accounting information
to assist them in discharging their managerial
function.
The management process may be analyzed into
three major functions – planning, organizing
and controlling the activities of the enterprise.
These various management functions have one
thing in common: they are all concerned with
making decisions.
Specific Users of Accounting information cont..
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5. Governments and their agencies.
Governments and other regulatory agencies
are interested in the allocation of resources
and therefore the activities of enterprises.
They also require information in order to
regulate the activities of enterprises,
determine taxation policies and as a basis for
national income and similar statistics.
These will include employment, provision of
goods and services and the contribution of
enterprises to socio– economic development.
Specific Users of Accounting information cont..
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6. Customers.
Customers have an interest in information
of an enterprise indicating the
continuance of an enterprise especially
when they have a long-term involvement
with, or are dependent on the entity.
Customers would also be concerned about the
fairness of pricing policies, differential costs
between one product and another produced by
the same firm at a different price.
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Specific Users of Accounting information cont..
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7. Competitors.
Enterprises compare their performance
with those of other enterprises.
They assess their position against their
competitors.
Financial statements enable them to
know profit – margins, value of assets,
and resource utilization among other
items of their competitors.
Specific Users of Accounting information cont..
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8. Public.
The general public requires information on
the activities of enterprises in light of
social benefits and costs that accrue to the
community.
9. Others
Academicians, Researchers, New Investors
(entrepreneurs), Financial Analysts etc ..
To obtain input data for analysis and
decision making
Specializations of Accounting
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To meet the varied needs of users of accounting information accounting has developed
specializations and sub-specializations.
These include the following specialized fields each with its own area of expertise,
responsibility as well as educational requirements;
1.Financial Accounting.6. Human Resources Accounting
2.Managerial Accounting.7. Social Accounting
3.Tax Accounting. 8. Environmental Accounting
4. Fund Accounting 9. Forensic Accounting
5. Auditing 10.Behavoiral Accounting
Two requirements that are shared by all these fields are a sound
mathematical background and an understanding of business and
economic environment.
Specializations of Accounting cont…
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1. Financial accounting focuses on the development
and communication of financial information for
external users.
This is the process of recording the financial activities of a
business and reporting summarized information to individuals or
groups who are not involved in the day-to day operations of an
organization.
These individuals or groups include the owner(s), creditors,
governmental agencies, or prospective investors. The information
is communicated primarily through general purpose financial
statements.
Financial statements describe the condition of the organization
and the events that happened during a period. Since the outside
parties do not have direct access to business records, and must
rely on the authenticity of reports, there have been some standard
practices established to be followed by all accounting entities
reporting to the outside parties
Specializations of Accounting cont…
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2. Management accounting is
concerned primarily with financial
reporting for internal users, especially
management.
Management accounting is concerned with
the provisions and use of accounting
information to managers within an
organizations, to provide them with the basis to
make informed business decisions that will
allow them to be better equipped in their
management and control functions.
Financial Vs. Management Accounting
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In contrast to Financial Accounting
information, Management Accounting
information is:
usually confidential and used by management,
instead of publicly reported;
forward-looking, instead of historical;
Pragmatically computed using extensive
management information system and internal
controls, instead of complying with accounting
standards.
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Specializations of Accounting cont…
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3. Tax Accounting
This specialization deals with the process of
establishing tax liability of an accounting entity,
preparing and submitting tax returns, reviewing
returns with income tax auditors and planning for the
minimization of tax liabilities and payments.
A tax accountant is simply an individual who
assists a taxpayer in preparing a tax return (Hussey,
1999).
For businesses, the accounting system must also
provide data for use in the completion of the
company's tax returns. This function is the concern of
the tax accountant
Specializations of Accounting cont…
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4. Auditing
Auditing is process of thoroughly examining the financial
records of an enterprise and the facts on which they are
based.
After an adequate investigation, the external auditor will
give a statement of opinion as to whether the accounting
statements or reports reflect a true and fair view of the
results of operations, financial position and financial
adaptability of an accounting entity. It extends to ascertain
that the business entity maintains and keeps proper books
of accounts.
Internal auditors are employee of management who
constantly check the records prepared in, and the operating
procedures of, each department or branch of the corporation
and make recommendations for improvements.
Specializations of Accounting cont…
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5. Fund Accounting.
This specialization deals with accounting for non-profit
making organizations.
These organizations include charitable organizations,
philanthropic foundations, religious groups, governmental
agencies and schools.
The organizations set up different funds for their various
activities. Each fund consists of assets, liabilities, and a
fund balance and constitutes a separate accounting entity
created and maintained for a specific purpose.
The inflow and outflow of each fund must be accounted for
in such a way that they can be compared with the approved
or stipulated resource flows for the fund.
Specializations of Accounting cont…
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6. Human Resources Accounting
"Human Capital/Resource" this is an accounting practice that
treats people as machines with a monetary value (e.g. dollar)
attached to them as individuals, and not to their labor.
They involve accounting methods that recognizes a variety of
human resources and shows them on a company's financial
statements .
Under human resource accounting, a value is placed on people
based on such factors as experience, education, and psychological
traits, and, most importantly, future earning power (benefit) to
the company.
The idea has been well received by human-resource-oriented
firms, such as those engaged in accounting, law, and consulting.
Practical application is limited, however, primarily because of
difficulty and the lack of uniform, consistent methods of
quantifying the values of human resources.
Specializations of Accounting cont…
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7. Social Accounting
This is the process of communicating the social and
environmental effects of organizations’ economic
actions to particular interest groups within society and
to society at large.
Social accounting emphasizes the notion of corporate
accountability.
It is "an approach to reporting a firm’s activities which
stresses the need for the identification of socially
relevant behavior, the determination of those to whom
the company is accountable for its social performance
and the development of appropriate measures and
reporting techniques."
Specializations of Accounting cont…
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8. Environmental/Green Accounting
Environmental accounting is a subset of social
accounting, focuses on the cost structure and
environmental performance of a company.
It principally describes the preparation,
presentation, and communication of information
related to an organization’s interaction with the
natural environment.
Although environmental accounting is most
commonly undertaken as voluntary self-reporting by
companies, third-party reports by government
agencies, NGOs and other bodies posit to pressure
for environmental accountability
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Specializations of Accounting cont…
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9. Forensic Accounting
The integration of accounting, auditing and investigative
skills yields the specialty known as Forensic Accounting.
Forensic Accountants, utilize accounting, auditing and
investigative skills when conducting an
investigation. They are able to respond immediately and
to communicate financial information clearly and
concisely in a courtroom setting.
They are usually hired in engagements relating to civil
disputes may fall into several categories: calculating and
quantifying losses and economic damages, whether
suffered through tort or breach of contract; disagreements
relating to company acquisitions—perhaps earn outs or
breaches of warranties; and business valuation.
Forensic Accounting cont…
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Forensic accountants utilize an understanding of
business information and financial reporting systems,
accounting and auditing standards and procedures,
evidence gathering and investigative techniques, and
litigation processes and procedures to perform their
work.
Forensic accountants are also increasingly playing
more proactive risk reduction roles by designing and
performing extended procedures as part of the
statutory audit, acting as advisers to audit committees,
fraud deterrence engagements, and assisting in
investment analyst research.
Specializations of Accounting cont…
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10. Behavioural Accounting
This is an approach to accounting that stresses
psychological considerations in decision making;
For example, a budget should be participative so
departmental managers who are involved with it will
internalize the goals. Also profit centres engage a manager's
ego because the financial results of the entity are a direct
reflection of the manager's performance.
It rests on the theory that the management accounting
function is essentially behavioural. The theory states
that the nature and scope of accounting systems is
materially influenced by the view of human behaviour
that is held by the accountants who design and operate
these systems.
Budgeting is a simple application of behavioural
accounting.
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Pubic accountants do not work for a
single business enterprise. Rather,
they provide a variety of services for
many different individuals and
business clients.
Careers in Financial Accounting
1. Public Accounting
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A large business enterprise employs
financial accountants who are
primarily concerned with external
financial reporting, management
accountants who are primarily
concerned with internal financial
reporting, and tax accountants.
Careers in Financial Accounting cont
2. Corporate Accounting
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Careers in Financial Accounting cont
Many students take accounting in
preparation for becoming a user of
financial statements. Credit analysts,
investment bankers, brokers, and
business consultants need a strong
working knowledge of accounting as
well as strong skills in information
technology.
3. Analyst, Banker, Consultant- Users
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Careers in Financial Accounting cont
Students take accounting
courses in preparation for
appointment as professors,
lecturers and tutors in
Accountancy in Universities,
tertiary colleges and high
schools
4. Accounting Educators
THE END
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THANK YOU