INTRODUCTION TO FINANCIAL

ACCOUNTING

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What is Accounting
An information system

Involves identification, measurement, recording,

summarization and communication of
information about an identifiable economic
entity.

Provide information useful for decision making

Accounting is not book-keeping

Book-keeping is a stage of the accounting

process
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Importance of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
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Generally Accepted Accounting Principles
Financial
Financial accounting
accountingpractice
practiceisisgoverned
governedby
by
concepts
conceptsand
andrules
rulesknown
knownas as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles(GAAP).
(GAAP).

Relevant
Relevant Affects
Affectsthethedecision
decisionof
of
Information
Information its
itsusers.
users.

Reliable
Reliable Information
Information Is
Istrusted
trustedby
by
users.
users.

Comparable
Comparable Is
Ishelpful
helpfulin
incontrasting
contrasting
Information
Information organizations.
organizations.
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Accounting as an Information System

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Users of Accounting information
Investors, Owners and prospective investors
Suppliers, creditors and lenders
Management
Government and regulatory agencies
Employees and unions
Customers
Competitors
Financial and investment analysts
Public

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 Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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Questions Asked by Internal Users
Is cash sufficient to pay bills?
What is the cost of manufacturing each
unit of product?
Can we afford to give employee pay
raises this year?
What product line is most profitable?

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Questions Asked by External Users
Is the company earning satisfactory
income?
How does the company compare in
size and profitability with competitors?
Will the company be able to pay its
debts when they become due?

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Business Goals & Activities

Business:
An economic unit that aims to provide
goods and services to customers at
prices that will provide an adequate
return to its owners

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Business Goals

Profitability
The ability to earn enough income to attract
and hold investment capital

Liquidity
Having enough cash available to pay debts
when they are due

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Remember...

Remaining
Liquid and Solvent
is as important as
making a profit
because...

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A Company Can Survive a Long
Time Without Profits...

but It Can’t
Survive
Very Long
Without

CASH!
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Forms of Business Organizations

Sole Proprietorship - owned by one

person
Partnership - owned by more than
one person
Corporation - organized as a
separate legal entity and owned by
stockholders 14
3 Types of Business Activity

Financing
Investing
Operating

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Business Transaction
An economic event that has a direct or
indirect impact on the financial position
of the company.
Not all economic events are recorded.
Accounting records only events that
 (1) have an immediate impact on the financial
position and
 (2) can be measured reliably
These events are called business
transactions

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Accounting Concepts & Conventions

Business Entity Concept

 The company is separate and distinct from
its owners
 Only accounting records of the company
activities are recorded and kept
 Personal activities of owners or other
stakeholders are not recorded or reported
in the company’s financial statements.

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Accounting Concepts & Conventions

Money Measurement Concept

Only transactions that can be measured in
monetary values are recorded.

Historical Cost Concept

All transactions are recorded using historical
Cost.

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Accounting Concepts & Conventions

Accrual Concept
Transactions are recorded when they occur
not when cash changes hand.

Realization Concept
Transactions are recorded when they are
Realized.

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Accounting Concepts & Conventions

Matching Concept
Revenues are matched against expenses
incurred to generate them irrespective of
whether revenues or expenses have been
received or paid.

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Accounting Concepts & Conventions

Periodicity Concept
The life of the entity can be broken
down into time periods so that financial
statements can be prepared for a block of
time periods.

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Accounting Concepts & Conventions
Dual Aspect Concept
 When recording transactions, all
transactions should be classified twice.
 Economic transactions have a dual effect
on the accounting equation (financial
statement items).
 Dual aspect is the basis of the double entry
system of recording transactions.

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Financial Statements
Income Statement - reports the results of
operations for a specific period of time.
Retained Earnings Statement - reports the
changes in retained earnings for a specific
period of time.
Balance Sheet - reports the company’s
financial position at a specific date.
Statement of Cash Flows - reports the cash
receipts and payments for a specific period
of time. 23
Elements of an

Financial Statements
 Income Statement
 Statement of Retained Earnings
 Balance Sheet
 Statement of Cash Flows
Management Discussion and Analysis
Notes to Financial Statements
Auditor's Report
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 Opportunities in Accounting
Financial
Financial Managerial
Managerial Taxation
Taxation
•Preparation
•Preparation •General
•Generalaccounting
accounting •Preparation
•Preparation
•Analysis
•Analysis •Cost
•Costaccounting
accounting •Planning
•Planning
•Auditing
•Auditing •Budgeting
•Budgeting •Regulatory
•Regulatory
•Regulatory
•Regulatory •Internal
•Internalauditing
auditing •Investigations
•Investigations
•Consulting
•Consulting •Consulting
•Consulting •Consulting
•Consulting
•Planning
•Planning •Controller
•Controller •Enforcement
•Enforcement
•Criminal
•Criminal •Treasurer
•Treasurer •Legal
•Legalservices
services
investigation
investigation •Strategy
•Strategy •Estate
•Estateplanning
planning
•Lenders
•Lenders •Investigators
•Investigators
•Consultants
•Consultants •Market
•Marketresearchers
researchers
•Analysts •Systems
•Systemsdesigners
Accounting-
Accounting- •Analysts
•Traders •Merger
designers
•Traders •Mergerservices
services
related
related •Directors
•Directors •Business
•Businessvaluation
valuation
•Underwriters
•Underwriters •Human services
•Human services
•Planners
•Planners •Litigation
•Litigationsupport
support
•Appraisers
•Appraisers •Entrepreneurs
•Entrepreneurs
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Practice Questions – Q1. MCQ
1. The two primary qualities that make
accounting information useful for decision
making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. reliability and comparability.

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Q1 (Cont.)
2. Accounting information is considered to be
relevant when it
a. can be depended on to represent the
economic conditions and events that it
is intended to represent.
b. is capable of making a difference in a
decision.
c. is understandable by reasonably
informed users of accounting
information.
d. is verifiable and neutral.

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Q1 (Cont.)
3. The quality of information that gives
assurance that it is reasonably free of error
and bias and is a faithful representation is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.

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