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Principles of Accounting-501Mohammad Nurul Motofa (BIBM, MBM, 161248, nurulbibm@yahoo.com, Cell: 01916898182)

Lecuture-01 (05.01.2010)

What is accounting?

An information system that identify, record and presenting business transactions and

communicating it to the interested parties (internal and external users).

From the definition we find three elements of accounting-

1. Identifyingthe transactions.

2. Recordingtransactions.

3. Communicatingwith interested parties.

Types of Accounting on the basis of users.

On the basis of users accounting can be divided into two types-

1. Managerial Accounting.

(Internal parties-eg. payroll accounting, cost accounting)

2. Financial accounting

(External parties-share holders, creditors, auditor, govt.)

Mainly four types of statements prepared in financial accounting

(a) Income statement.

(Show the income after certain point of time deducting the revenues and expenses)

(b) Balance Sheet.

(Balancing the assets and liabilitys + owners equitys after a certain period)

(c) Owners equity statement.

(Showing the owners equity)

(d) Cash flow statement.

(Expressing the inflow and outflow of cash after a certain period).

On the basis of recording accounting can be divided into two types-

1. Single entry accounting system. (only one sided, income or expenses)

2. Double entry accounting system. (Debit & Credit, having dual impact of each

transactions)

Difference between event and transactions.

Event: Events are economic and non-economic proceedings, which may have or not

impact on the firms profits or loss.

For example, Mr. Kabir Ahamed owner of Global Chemical Industries Ltd. buy a computer

for his son costing Tk. 45,000.

Transactions: Transactions are economic events which have direct impact to the firms

profit or loss. It should have to record.

For example, Mr. Kabir Ahamed owner of Global Chemical Industries Ltd. buy a computer

for his son costing Tk. 45,000 taken from his firms capital.

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***Every transaction must be an event, but all events may not be a transaction.

Accounting Cycle.

Recording Process of Accounting Information.

Assets and Liabilities:

Assets Liabilities

Debit for Credit for Debit for Credit for

Increase Decrease Decrease Increase

Balance Balance

Owners Equity/capital and owners drawings:

Owners Capital/ Equity Owners Drawings

Debit for Credit for Debit for Credit forDecrease Increase Increase Decrease

Balance Balance

Revenues & Expenses:

Revenues Expenses

Debit for Credit for Debit for Credit for

Decrease Increase Increase decrease

Balance Balance

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Lecuture-02 (10.01.2010)

Concepts in Accounting.

Two basic concepts of accounting-

Materiality concept: The materiality conceptproposes paying attention to important

events and ignoring insignificant accountingitems. For example, 10 ball pens purched for a

large bank, the depreciation of such pen having an insignificant impact on the firms net

profit and loss, rather than its recording cost. So it should have to omit.

Conservatism concept:

Accountants are conservative in recording transactions. This principle has probably

contributed most to the stereotypical image of the professional accountant. They always tend

to take the pessimistic view in recording transactions because they are obligated to protect the

reader of financial statements from concluding that the financial status of a company isbrighter than it really is.

For example, in case of LIFO and FIFO, which minimize the maximum amount of risk,

inventory should be evaluated in this method.

Qualitative characteristics of Accounting Information.Accounting information should have the following qualitative characteristics-

Relevance:

To make a difference in the decision process, information must possess pSredictive valueand/orfeedback value. This implies that, to be useful, accounting information must assist a

user to form, confirm or maybe revise a view - usually in the context of making a decision

(e.g. should I invest, should I lend money to this business? Should I work for this business?)

1. Timeliness- Information is timely when it is available to users early enough to allow

its use in the decision process.

2. Predictive Value-Confirmation of investors expectations about future cash

generating ability.

Reliability:

Reliability is the extent to which information is verifiable, representationally faithful, and

neutral. This implies that the accounting information that is presented is truthful, accurate,complete (nothing significant missed out) and capable of being verified (e.g. by a potential

investor).

Comparability:

This implies the ability for users to be able to compare similar companies in the same

industry group and to make comparisons of performance over time. Much of the work that

goes into setting accounting standards is based around the need for comparability.

Consistancy:

This implies consistent treatment of similar items and application of accounting policies.

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