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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