specialized in finance, b.com – specialized in accounting ... · introduction accounting...

Ibrahim Sameer (MBA - Specialized in Finance, B.Com – Specialized in Accounting & Marketing)

Introduction Accounting information is one of the important field

which we regularly used in our business field as well as

in our daily life as well.

Accounting field broadly categorize into two that is

Financial & Management Accounting.

Introduction Father of accounting is Luca Pacioli.

Definition of Accounting “Book- keeping is the art of recording business

transactions in a systematic manner”. A.H.

Rosenkamph.

Definition of Accounting “Book- keeping is the science and art of correctly

recording in books of account all those business

transactions that result in the transfer of money or

money’s worth”. R.N.Carter

Definition of Accounting “The system of recording and summarizing business

and financial transactions and analyzing, verifying,

and reporting the results; also : the principles and

procedures of accounting.”

Definition of Accounting “Accounting is described as a system or a process that

provides reports on an entity’s economic transactions

to users.”

Definition of Accounting So in simple accounting can be defined as a process of

collecting, identifying, measuring, recording,

summarizing and communicating the results of

business or economic transactions to users in order for

them to make informed or better decisions.

Components of Accounting

Recording Summarising

Analysing Interpreting

Components of Accounting

Components of Accounting Recording – written records of journalising and

posting business transactions.

Summarising – preparing the financial statements.

Analysing – examining the results to determine the

financial position and performance; and

Interpreting – using the financial statements to make

judgments and decisions.

Accounting System

Users of Accounting Information Internal Users

External Users

Internal Users Internal users are part of the business entity and they

make decisions for the organisation.

For examples, Directors of companies, in deciding the

amount of dividend to pay to shareholders or bonus to

employees who need to know the company profit.

Internal Users Management accounting is the area of accounting that

provides information for internal usage. These among

others include areas of costing, budgeting and payroll.

On the other hand, Financial accounting provides the

financial statements to be used by mainly external

users and to some extent the internal users.

External Users External users are those outside of the organisation

and they make decisions about the organisation.

Investors

Creditors

Government Agencies

External Users Investors

Before buying a company’s shares, they will want to

know the company’s profitability and the amount of

dividends paid out to shareholders. Shareholders

holding shares in a company might want to decide

whether to buy more shares or dispose the shares they

have.

External Users Creditors

Suppliers and bankers who want to know if they

should extend credit to the business, how much to

extend, and for how long. They will assess the ability of

the business to repay the loan.

External Users Government Agencies

For example, Lembaga Hasil Dalam Negeri (LHDN),

needs to know the income of a business entity in order

to determine the amount of tax to be collected by

them.

Branches of Accounting

Financial Vs. Management Accounting

Qualitative Characteristics of Accounting Information

Relevant

Comparable

Consistent Material

Reliable

Timely

Relevant The relevance principle stipulates that all relevant

information should be included in the financial

statements. Information is considered relevant if it

can assist users in making decisions.

Eg: Buying shares from a company who make a profit

of MVR6 million this year, before buying you have to

see their past records.

Reliability Reliable information is information that can be

trusted by users. Information must be objective, free

from bias and significant errors. Only reliable

information will enable users to make better decisions.

Eg: Companies need to prepare their financial

statement according to the standards and need to

audit their financial statements.

Comparability Comparability refers to the quality of the

information that enables users to make comparison

in evaluating similarities or differences between

companies, industries or over time.

It is a requirement that a company must provide the

previous year’s information to enable comparison to

be made by users.

Comparability Eg: company make a profit of MVR 100 million this

year. Just by seeing that can you invest. But if you see

that previous year they made a profit of MVR 200

million. Than it mean their profit has gone down. Are

you going to invest or not?

Consistency Consistency refers to the requirement that companies

are required to maintain consistency in the treatment

of various items for all accounting periods. In other

words, companies should not change the accounting

procedures or methods used each year.

Consistency A company may change accounting methods they use.

However, a full disclosure is required in the notes to

financial statements to explain why the changes are

made and the effects of the changes to the financial

statements.

Eg: Depreciation methods

Materiality Materiality is another important concept which

states that an entity must account for items that are

significant to the entity’s financial statements. In

other words, an amount can be ignored if the effect on

the financial statements is unimportant to users’

business decisions.

Materiality For example, a separate account for postage expenses

for a grocery store is not required to be kept, as the

amount is small and not significant for the grocery

store. It is sufficient to lump this expense with other

expenses under a miscellaneous expense account.

However, for a courier company, postage expenses

are material and must be disclosed separately.

Understandability The understandability principle requires information

to be presented in a format that can be easily

understood. The information reported should be

understood by users whom are generally assumed to

have reasonable knowledge of business and economic

activities.

Timeliness Relevant and reliable information will be useless if you

do not get the information on time. Hence, it is

extremely important to prepare the financial

statements on time.

Financial Statement The final output of an accounting system is the

financial statements. The main function of financial

statements is to provide information of the business

financial position and financial performance to users.

Financial Statement This information is normally obtained from the

income statement, balance sheet, statement of

changes in owner’s equity and cash flow statement.

The information provided will give a picture of how

the resources are used by the business entity.

Purpose of Financial Statement The objective of preparing financial statement is to

provide useful information with regards to the

financial position, performance and cash flow of a

business to all types of users in order for them to make

an economic decision. The result of the financial

statements shows how the manager of a business

entity manages resources contributed by owners.

Components of Financial Statement

Income Statement

Balance Sheet

Statement of Changes in OwnerÊs Equity

Cash Flow Statement

Income Statement Income statement reports the financial performance of

an entity. It contains information on revenues and

expenses including the profit and loss of the business

entity. It is also known as revenue statements or profit

and loss statement.

Balance Sheet Balance Sheet reports the financial position of a

business entity. It contains information on the entity’s

assets, liability and owner’s equity.

Balance Sheet Assets are categorised into two:

Current assets are those assets that are expected to

provide benefits for twelve months or less from the

reporting date. Examples are cash, account receivables,

inventories, prepaid expenses and short-term

investments.

Balance Sheet Non current assets are those assets that will provide

benefits for a period longer than twelve months from

the reporting date, which include land and building,

motor vehicles, furniture and fittings, equipment and

long term investments.

Balance Sheet Liabilities are also categorised into two:

Current liabilities are liabilities that are due within

twelve months from the reporting date. Examples are

account payables and short term loans.

Non current liabilities are expected to be settled in a

period longer than twelve months from the reporting

date, such as long term bank loan.

Statement of Changes in Owner’s Equity

Statement of changes in owner’s equity reports how

the owner’s equity has changed over the reporting

period. It reports how opening capital has increased

through net income, and how it decreased through net

losses and drawings.

Statement of Changes in Owner’s Equity

Cash flow Statement Cash flow statements show the in-flow and out-flow of

cash of an organisation according to three main

activities which are operating, investing and financing.

Q & A