Introduction
What is accounting?
• The language of business.
• A means to communicate financial information.
• A way to convey information about a business to
users.
Introduction to Accounting
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Definition
“An art of recording, classifying, summarizing, and
interpreting the results”,
• Accountant
The person in charge of accounting, and this individual is
typically required to follow a set of rules and regulations.
Benefit
• Accounting allows a company to analyze the
financial performance of the business by looking
at net profit.
History
• According to accounting historian John R. Alexander,
accounting has been around for thousands of years.
• Records of commerce were found as far back as 3500 BC in
Mesopotamia.
• Similar styles of accounting were also seen in Ancient Egypt,
China, Greece and Rome.
• Even in middle age (period from 5th to 15th century) there
were "standards" and records of accounting activities.
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Luca Pacioli the father of accounting
• Born during 1445, Scholar of Mathematics,
• First person to describe double-entry accounting, also
known as the Venetian method
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Pacioli’s work on Mathematics, consisting a
section on accounting
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Accounting Tokens
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Accounting Tokens
• The people of that time relied on simple
accounting methods to record the growth of crops.
• Because there is a natural season to farming, it is
easy to count and determine if a surplus had been
gained after the crops had been harvested
• Complex accounting tokens made of clay, from
Susa, Uruk period, Cira 3500 BC.
Department of Oriental Antiquities
Accounting has two main divisions:
1. Financial accounting
2. Management accounting
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1. Financial accounting
– Primarily prepared for users external to the company.
• It includes:
Revenues, earnings, assets, etc.
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USERS
Who uses accounting information?
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Owners
Managers
Investors (Analysts on their behalf)
Creditors
Government (tax assessment)
Customers
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2. Management accounting
– Primarily for internal purposes
• It includes:
Costing, budgeting, net present value, etc.
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Cash in business through several ways
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Investment by owners
Investment by creditors (loans)
Investment in other entities
Payments from customers (Sells)
Repayment of amounts loaned to other entities
Return on investments (interest and dividend)
Proceeds from selling assets.
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Two types of investment in a company
• Equity Investment
Through the issuance of shares
• Debt Investment
Through the loan
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Some Fundamental concepts
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Business Entity concept
Unit of Measure
Going Concern
Periodic Reporting
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Business Entity concept
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There are three basic structures that a company can
have:
1. Sole proprietorship
2. Partnership
3. Corporation
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Business Entity concept
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It is essential to know that for which entity we
are preparing the accounting records.
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Going concern
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We call the business as going concern
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Because it is assumed that an entity will:
- Complete its current plans,
- Use its existing assets,
- Meet its obligations in the normal course of business.
NOTE: This concept is necessary for many of the
fundamental recording and reporting decisions that are
made in accounting.
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Unit of measure
It is used to:
• Present useful information
• To express things
E.g.: The unit of measure in Pakistan is Pakistani Rs.
We can not tell the users that an entity has:
– 30 cars,
– a building,
– some land,
– 5 machines,
– some equipment, and
– Sold 35000 items in the year.
• The unit of measure concept allows us to express all of these
things in Rupees.
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Periodic reporting
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We provide financial information about an entity for
some periods of time.
• Users want the information at different points in the
entity’s life.
• Most common reporting period is annual.
(All companies are required to file annual financial
statements for tax purpose)
• Other common reporting periods are monthly or quarterly
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