Accounting Framework and Users

Accounting Framework

• Financial accounting is about recording transactions, summarizing them into reports, and providing accurate financial information to stakeholders.
• An example of financial accounting in practice: At Chad Poultry Farm, buying chicken feed is recorded as an expense, and a monthly report details total expenses and sales.

Users of Financial Accounting

• Owners/Shareholders invest money and want to know if the business is making a profit and the return on investment.
• Managers need information to plan, control, make decisions, budget, and assess performance.
• Employees look for job security and potential bonuses or salary increases.
• Lenders assessing if the company can repay loans and is financially stable.
• Suppliers need to know if they will be paid on time.
• Customers wanting assurance the business will continue to supply products and maintain quality service.
• Government agencies need to administer taxes and compliance with regulations.
• Investors need to assess the investment's risk level.
• The public and community want assurance the business is creating jobs and is not harming the environment.

Accounting Concepts and Principles

• Business Entity Concept: The business is separate from the owner.
• Example: Keep farm income separate from your personal income.
• Money Measurement Concept: Only record things that can be measured in money.
• Example: Record the cost of chicken feed, not the number of visitors to the farm.
• Going Concern Concept: The business is expected to continue running in the future.
• Example: Record long-term assets like incubators assuming the farm won't close soon.
• Accrual Concept: Record income and expenses when they happen, not when money is received or paid.
• Example: Record egg sales when delivered, even if the customer pays next week.
• Consistency Concept: Use the same accounting method every period.
• Example: If you use FIFO to value feed stock, don't change to LIFO next month.
• Matching Principle: Match income with related expenses in the same period.
• Example: Match egg sales in April with April's feed cost.
• Prudence Concept: Avoid overstating income or assets; always take care.
• Example: If a customer may not pay, record it as a possible loss.
• Materiality Concept: Record all important (material) items that can affect decisions.
• Example: Record a lost chicken if it affects profit, ignore it if it's a very small amount. Historical Cost Principle: Record assets at their original purchase price, not current market value.
• Example: Record your incubator at the price you bought it, not current value.

Scope and Limitations of Financial Accounting

• Financial accounting involves preparing income statements, balance sheets, and cash flow statements.
• Financial accounting involves recording all business transactions and reporting to external users like shareholders, banks, and the government.
• Financial accounting focuses mainly on past financial activities and not future planning.
• Financial accounting limitations:
  • Historical Cost: Records assets at original cost, even if the current value has changed.
  • Example: Land bought for RWF 2M ten years ago is still recorded at RWF 2M even if today it's worth RWF 10M.
  • Ignores Non-Financial Aspects: Fails to record things like employee happiness or market reputation.
    • Example: Your workers might be unhappy, but accounting won't show that.
  • Estimates: It Involves reliance on some figures, such as those about depreciation or bad debts, with some speculation.
    • Example: You may estimate a machine will last 5 years, but maybe it lasts 3 years.
  • Not future-focused: Primarily reports on what has already occurred.
    • Example: It cannot predict tomorrow's profits.

Accounting Profession

• Accountants are responsible for recording, managing, and accurately reporting financial data.
• The accounting profession follows rules, ethics, and standards such as IFRS and IPSAS.
• Accountants ensure that businesses and governments present a true and fair financial picture.
• The role of an accountant involves more than recording transactions.

Role of the Accountant

• Accountants record Transactions: Keeping accurate daily records.
  • Recording every sale of eggs and purchase of chicken feed.
• Accountants prepare Financial Statements: Preparing income statements.
  • Making a full report every quarter. Accountants ensure Compliance by following accounting rules (IFRS, IAS), and laws.
  • Following IFRS when reporting loan information.
• Accountants give Financial Advice by helping management make good business decisions.
  • Advising when to expand your chicken houses based on profits.
• Accountants maintain Professional Ethics by being honest, fair, and independent.
  • Not changing numbers even if pressured to show higher profits.

Ethics and Independence

• Ethics involves doing the right thing, even when no one is watching.
• Ethics are crucial in accounting because financial reports affect the public.
• Main Ethical Principles:
  • Integrity: Always be honest. Report real profits, even if they are low.
  • Objectivity: Be neutral, don't take sides, and don't favor.
  • Professional Competence: Work properly and keep learning.
    • Take courses on new accounting rules like IFRS updates.
  • Confidentiality: Keep business information secret.
    • Don't share your client's financial reports with outsiders.
  • Professional Behavior: Follow laws, standards, and avoid actions that harm the profession.
    • Submit tax returns on time and correctly.
• Independence means being free from influence or pressure to make fair financial reports. -Independence of mind: thinking and judging without any outside pressure. -Independence in appearance: appearing independent to managers and owners.
• Accountants must not have loans with clients, own shares in the audited company, or derive over 10% of their income from one client.
• If there is a conflict of interest, the accountant must decline the job.
• Accountants must separate duties to be independent and trusted.