Introduction to
Accounting
What is Accounting?
It is a process.
It is an information system.
It is a language of businesses.
It a cycle.
What is Accounting?
It is a process.
Identification
Measurement
Recording
Summarizing
Classifying
Communicating
Users of Accounting Information
Performance Measurement
Variables
•
•
•
•
Liquidity
Profitability
Solvency
Efficiency
Need for Accounting Standards
• An accounting standard is a common set of
principles, standards, and procedures that define
the basis of financial accounting policies and
practices.
• It creates comparable information.
• It helps to prepare easily understandable report.
IFRSs
• International Financial Reporting Standards
• Ethiopia issued a financial reporting law on
December 5, 2014 which requires the use of IFRS by
commercial businesses operating in Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
1.
2.
Adoption: Complete adherence to the IFRS.
(Highly encouraged by IASB)
Adaptation: Customizing the standard to specific
need of the country.
Financial Statements
Types of Financial
Statements
Special
Purpose Report
General
Purpose Report
Fundamental qualitative
characteristics
1. Relevance : financial information is capable of
making a difference in decision making.
• predictive value : can be used as an input in the
process to predict future outcomes,
• confirmatory value : if it provides feedback
about previous evaluations.
• materiality, entity-specific : if omitting it or
misstating it could influence the decisions of users.
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Fundamental qualitative
characteristics
2. Faithful representation
• Completeness : all information needed to
understand the phenomena.
• Neutrality : without bias
• free from error : no errors or omissions
Enhancing Qualities
• Comparability
• Verifiability
• Timeliness
• Understand ability
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The Accounting Equation
Assets
They are resources
Controlled by the entity as result of past event
With expected future benefit
Types of Assets
1.
2.
3.
4.
5.
6.
7.
8.
Cash and cash equivalents
Inventories
Property, plant and equipments
Investment properties
Non current asset held for sales
Financial Assets
Biological Assets
Mineral resources
Liabilities
They are present obligations
Arise from past event
With expected future out flow of economic
benefit
Types of Liabilities
1.
2.
3.
4.
5.
6.
7.
8.
Accounts payables
Notes payables
Salary payables
Tax payables
Unearned revenues
Lease payables
Bonds payable
Interest payable
Equities
It is the right of the owners up on the assets of
the entity
It may be Invested capital
Common stock
Preferred stock
It may be accumulated profit (retained earning)
Items that Affect Equity
Equity
Increase
Issued shares
Revenue
Other incomes
Gains
Decrease
Treasury shares
Expenses
Losses
Withdrawal
dividends
Case 1
• Indicate whether each of the following items
below is an asset, liability, revenue, expense,
gain or loss account
a) Office furniture
b) Income from services
c) Salaries paid to workers
d) Supplies on hand
e) Salary payable to workers
f) Cash
g) Income from sale of a used truck
h) Goods damaged by fire in the store