Accounting Information System

Introduction to Financial Accounting Principles

• Accounting is a bookkeeping method which generates a financial record of all business transactions.
• An accounting system produces a summary of income, expenses, assets, and liabilities and generates financial information in the format of financial statements.
• Today's accounting information systems are typically computer-based with special accounting software but the principles of debits, credits, and double-entry are still relevant.

What is Accounting?

• Accounting is a process of identifying, recording, and communicating economic events of an entity to interested users.
• Identifying involves selecting relevant economic activities or transactions.
• Recording involves keeping a chronological diary of measured events in an orderly and systematic fashion.
• Communication involves preparing and distributing accounting reports, such as financial statements.

The Nature of Accounting

• Accounting is a means of communication used to convey specialized information about an entity's finances
• It uses words and figures (concepts, principles, and procedures) to convey financial information
• Understanding accounting knowledge results in an understanding of the message contained in financial statements.
• Accounting is considered a "language" to convey financial information to interested parties.

Business Ownership and Users of Financial Statements

• The four main forms of business ownership are sole traders, partnerships, close corporations, and companies.
• Many users analyze financial information for various decision-making purposes.
• Common users include investors, creditors, employees, government, and management.

Users of Financial Information

• Internal users include management or employees.

• External users include investors, creditors, or government

The Fields of Accounting

• Financial accounting provides financial information mainly to external parties.
• Management accounting provides financial information to people within the entity.
• Financial Accounting involves recording transactions and preparing financial statements according to International Financial Reporting Standards (IFRS).
• Management Accounting provides financial information for specific purposes, aiding managers in decision-making to achieve the entity's objectives.

Internal Controls

• Internal controls ensure the integrity of financial information, promote accountability, and prevent fraud.
• An attorney's practice depends on a good system of internal control for its continued existence.

Built-in Control Measures

• Numbered source documents
• Dates on source documents
• Control accounts for clients and trust creditors
• Separate bank accounts for business and trust funds
• Petty cash management using the imprest system
• Accurate analysis of all income and expenses
• Monthly trial balance to ensure balanced accounts
• Reconciliation of bank accounts and business creditors with statements
• A non-current asset register.

Internal Control Systems/Procedures

• Separation of duties, access controls, physical audits, standardized documentation, trial balances, periodic reconciliations, and approval authority help maintain financial integrity.
• Efficient cash banking, electronic fund transfers (EFTs) for payments, proper authorization and demarcation, and separation of duties limit risk.
• An internal checking system, register maintenance for receipt/invoice books, review of receipts against deposits, initialling of changes, and regulated cash banking are vital.
• Only authorized signatories should sign on behalf of the entity, and cash issuance should be prohibited.

Financial Frameworks

• A law firm must keep accounting records in the official language, recording both business and trust account transactions and prepare financial statements that comply with an acceptable financial framework.
• Acceptable financial frameworks include International Financial Reporting Standards (IFRS), and the International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs).
• Standardized accounting rules limit the variety of available accounting practices and eliminates undesirable alternatives.
• Accounting standards are not always rigid rules, allowing more than one desirable alternative, for example inventory and depreciation..

The Conceptual Framework

• The conceptual framework comprises interrelated objectives and theoretical principles which serve for general purpose financial reporting to provide useful information to investors, lenders, and creditors..
• General-purpose financial statements must have the same objectives and be based on the same fundamental theoretical principles.
• General-purpose reporting seeks to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to an entity.s

Accounting Standards and Statements

• In South Africa, the Financial Reporting Standards Council (FRSC) plays an important role in the development of IFRS.
• The International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS) are the documented generally accepted accounting standards and practices.
• The objective of accounting standards is to limit the variety of available accounting practices, without striving for strict uniformity or creating rigid rules and to encourage widespread use of particular standards in financial reporting and to eliminate undesirable alternatives.

Accounting Policies

• An accounting policy determines how such transactions will be treated.
• An accounting policy is thus a set of decisions about how the entity will treat the same type of transactions in order to ensure consistent performance.
• Entities must disclose the accounting policy adopted in its notes to the financial statements.

Fundamental Theoretical Principles based on IAS

• In accordance with the conceptual framework for financial reporting and the framework for the preparation and presentation of financial statements issued by the IASB, the financial statements are prepared on the accrual basis and based on the assumption that the business is a going concern.

Underlying Assumptions

• A business is a going concern when it will continue to trade in the foreseeable future and is not likely to cease trading imminently and have its assets liquidated.
• Expenses incurred to produce income must be included in the same financial period, even if they occurred in different periods. This is referred to as the "matching of costs with revenue”.

Fundamental Qualitative Characteristics

• Only relevant information needs to be disclosed separately in the financial statements; relevance is based on the nature and materiality of the information.
• Financial information must faithfully represent transactions and other events; completeness, neutrality, and freedom from error ensure faithful representation.

Enhancing Qualitative Characteristics

• Completeness involves including all the information that a user needs to understand the economic events and transactions in the financial statements
• Reliable information should be neutral (without bias) in that it should not present information in a manner that will achieve a predetermined result.
• Independent and knowledgeable observers are able to verify information and it should be comparable between different entities or time periods.
• Information should be available in time to influence the decisions of users, and presented clearly and concisely;.

The Cost Versus the Benefit of Financial Reporting

• The cost of providing financial reporting must be justified by the benefits of reporting that information.

Financial Statements

• Objective: providing information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions.
• A complete set of financial statements should comprise:
  • a statement of financial position
  • a statement of profit or loss and other comprehensive income
  • a statement of changes in equity
  • a statement of cash flows
  • notes to the financial statements

The Statement of Financial Position

• Statement provides information about the economic resources available to the entity, its financial structure, and its liquidity and solvency positions.
• The elements include Income and expenses, including gains and losses
• The elements that are directly related to the financial position are assets, liabilities and equity.

Assets

• Assets are a present economic resource controlled by the entity as a result of past events, with the potential to produce economic benefits.
• Cash accounts, bank accounts, savings, petty cash, and cash floats are assets if balances are favorable, and include trade receivables, inventory, vehicles, property, and equipment.

Liabilities

• Liabilities are debts, defined as a present obligation to transfer an economic resource due to past events. They include mortgages, loans, trade payables, and bank overdrafts.

Owners’ Equity

• Equity is the residual interest in the entity's assets after deducting its liabilities, representing the owners' interest in the net assets.

Accounting Equation

• Equity = Assets - Liabilities

Statement of Profit or Loss and Other Comprehensive Income

• Profit or losses is used as a measure of performance. The elements that are directly related to the financial performance are income and expenses. Profit is Income less expenses

Income

• Income consists of revenue and gains; revenue arises from ordinary business activities, while gains may or may not.

Expenses

• Expenses defined as decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
• Operating expenses are related to the entity's primary functions, while non-operating expenses are not directly related to main operations.

The Double-Entry Principle

• In accounting, an account is a record of an entity's financial transactions, and a place to store that information.
• An account consists of a left-hand side (debit) and a right-hand side (credit) and is presented in a “T” format; for every debit entry there must be a corresponding credit entry in another account.

What is a Contra Account?

• As a general rule, we use the opposite or contra account to describe a transaction.
• the contra account is capital: the owner investing in the business.

Explore the accounting information system and statements. Learn about financial statements, including balance sheets, income statements, and cash flow statements. Discover their purpose and how they communicate financial data.