Financial Accounting IIT 232-3 Department of Computer Science and Informatics Faculty of Applied Sciences Lecturer K Charith BBA Finance (Peradeniya), CIMA Passed Finalist UK, MBA Finance (Colombo), CTHE Course content 1. Introduction to Accounting 2. Accounting equation 3. Original Entry Books 4. Recording transactions using double entries 5. Regulatory framework for financial reporting 6. Preparation of financial statements of sole traders 7. Bank reconciliation statement 8. Manufacturing account 9. Introduction to accounting for limited liability companies Evaluation criteria • Continuous assessment 40% - In-class assignments • End semester examination 80% attendance is a must 60% charithk@uwu.ac.lk 0715-164198 Lecture 01 Introduction to Accounting What is accounting? Book-keeping Accounting Accountancy What is accounting? Interpretation Communication Summarization Classification Record Measurement Identification Observation of economic activities What is accounting? • Accounting is the language of business. • Planning and implementation responsibility of an accountant. of bookkeeping is also a • Accounting theory and practice is accountancy. Philosophical focus is more. • The principles of accountancy are applied to business entities in three divisions, namely accounting, book-keeping, and auditing. What is accounting? Accounting has two main features: measurement and management. • Measurement: This concerns the collection of past data about a company. e.g. calculating the net profit of a business for the previous financial year. • Management: This is the process of using the past data to make decisions about the current and future plans of a business. E.g. Having made a large net profit, the management will be able to use this profit to invest in expanding the business. Therefore, an important part of accounting is being able to correctly interpret the measurements in such a way good management decisions can be made. What is accounting? Accounting may be defined as: • the classification and recording of monetary transactions; • the presentation and interpretation of the results of those transactions in order to assess performance over a period and the financial position at a given date; • the monetary projection of future activities arising from the alternative planned courses of action. Note the three aspects considered in this definition: recording, reporting and forecasting. 1. Record: Should be able to classify and store data in a useful way. The monetary transactions entered into by a business need to be controlled and monitored, and for this a permanent record is essential. 2. Report: At appropriate intervals, the individual transactions must be summarized in order to give an overall picture. 3. Forecast: Should be able to make business decisions based on the financial information. What is accounting? Definitions Purpose of accounting Therefore, the main objective of an accountant is to provide a business (stakeholders including those of management, investors, shareholders, etc.) with relevant information about the financial activity of that business. Furthermore, 1. Monitoring and controlling of economic activities 2. Resource allocation 3. Appraisal of economic activities 4. Fulfillment of legal requirements Purpose of accounting In order to achieve this, it is vital that the information be, 1. Consistent and comparable- Consistency is very important because it allows for comparisons between businesses, as well as different time periods for the same business. This has lead to a lot of standardisation with respect to general practices of accounting. 2. Reliable – but has to be concise, completeness 3. Timeliness 4. Easy to understand/ easy to use 5. Produced at optimal cost 6. Relevant Investors Who uses financial statements? Who: Existing and potential shareholders. Why: Investors (or shareholders) use financial statements to look at the overall performance and position of the company. As owners of shares of the company and the high risk they bear, they should be interested in seeing how much of that profit is coming their way. Investors may also take an interest in the social or economic policies of the company. Lenders Who: Existing and potential lenders. Why: Lenders will want to know that the business they are lending money to will be able to pay them their money back in the long term. Who uses financial statements? Employees Who: Past, present and prospective employees of the company. Why: Employees are primarily concerned with their employer's ability to pay their wages and pension, but may also be concerned with their future job prospects and security at the company. Analysts/Advisers Who: Specialists who generally work on behalf of investors or employees. Why: This will depend on the needs of the clients. However, analysts/advisers usually have more technical knowledge than their client, and so this group essentially acts as the 'middle man' between another group and the business. Who uses financial statements? Business Contacts Who: Customers and suppliers of a business. Why: Customers will want to ensure that a product or service can be provided in the future. Government and other law enforcement agencies Who: Primarily taxation authorities, and also any other law enforcement agencies government body that needs information for their purposes. For example, taking information about all national business to evaluate the economy. Why: Companies have a legal obligation to provide financial information so that the government can tax the businesses appropriately. Who uses financial statements? Public/pressure groups Who: Tax-payers, consumers and other special interest groups. Why: This group is generally more interested in the policies of the business. For example, certain public groups have shown increasing interest in promoting fair trade between large corporations and local/developing suppliers. Who uses financial statements? Internal parties Who: The management, which is divisible into 3 sub-groups: • Strategic: Top level of management (members of the board). • Tactical: Middle management (departmental heads). • Operational: Lower management (supervisors/team leaders). Why: • Strategic: Top level management deal with long-term plans for the business. • Tactical: Middle management deal with short-term plans, such as meeting scheduled targets and deadlines. • Operational: Lower management deal with day-to-day activity and running of the company. Internal and External Internal Information External Information Internal information is produced regularly External information differs to internal information in that it is primarily produced for groups outside of the Primarily used to measure the company's performance company. against its targets. External information strictly follows a set of rules and Information is designed to aid management in making legislation that creates an accounting standard across decisions about the company. all business. Since managers are not necessarily trained Given that this information is publicly accessible, it accountants, Internal information tends to be a mixture tends to be less detailed (with regard to the specifics of of financial and non-financial information. the company), so that their competitors don't use this information their advantage. It would not be very smart for Coca-Cola to publish information about the specifics of their production. Branches of Accounting Different branches of accounting came into existence in keeping with different types of accounting information needed by a different class of people such as owners, shareholders, management, suppliers, creditors, taxation authorities and various government agencies, etc. 1. Financial accounting 2. Management accounting 3. Cost accounting Branches of Accounting Financial accounting is the practice of providing financial information to an external source, according to legal requirements. For this reason, financial accounting is done in accordance with standard rules of accounting, so that the information provided is consistent and comparable across multiple industries. e.g. all PLC are bound to provide annual reports, all financial institutions are bound furnish quarterly reports to SEC. Management accounting is concerned with providing information to internal use. That is, management accounting deals with providing management with information about the business. Therefore, this means that it is not necessary for it to adhere to the same general standards. Branches of Accounting Cost accounting Cost accounting deals with evaluating the cost of a product or service offered. It calculates the cost by considering all factors that contribute to the production of the output, both manufacturing and administrative factors. The objective of cost accounting is to help the management in fixing the prices and controlling the cost of production. Accounting as a information system • An alternative explanation is that accounting is part of the management information system (MIS) of an organisation. In this context, the accounting element is referred to as an accounting information system (AIS). • Accounting can thus be said to be a method of providing information to management (and other users) relating to the activities of an organisation. In order to do this it relies on the accurate collection of data from sources both internal and external to the organisation. Financial statements A complete set of Financial statements comprises: ✓ A statement of financial position as at the end of the period; ✓ A statement of comprehensive income for the period; ✓ A statement of changes in equity for the period; ✓ A statement of cash flows for the period; and ✓ Notes, comprising a summary of significant accounting policies and other explanatory information. The building blocks of Accounting Ethics in Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. Financial scandals examples Enron, Wolrdcom, HealthSouth, AIG Effective financial reporting depends on sound ethical behavior. Additional reading 01 Homework 01 Write an article on ‘types of organizations’ with a particular regard to; - the ownership - objectives, and - accounting framework Homework 02 Describe the limitations of published accounts figures for analysis and decision making. Thank you
