Introduction to Accountancy

Introduction to Accountancy

• Accountancy is the process of recording, classifying, summarizing, and reporting financial transactions of a business.
• It involves systematically recording all financial transactions.
• It aims to provide accurate and reliable financial information to stakeholders.
• This information is used for various purposes including decision-making, investing, and controlling business activities.
• The basic accounting equation is Assets = Liabilities + Equity.

Key Accounting Concepts

• Accrual accounting: Recognises revenue when earned and expenses when incurred, regardless of cash receipt or payment.
• Cash accounting: Recognises revenue when cash is received and expenses when cash is paid.
• Matching principle: Revenue and expenses should be reported in the same accounting period.
• Conservatism: Accountants should be prudent in estimations and avoid overstating assets or income.
• Materiality: Accountants should only record items that significantly affect financial decisions.
• Going concern: Assumes a business will continue to operate for the foreseeable future.
• Objectivity: Financial information should be based on verifiable evidence and not subjective opinions.

Key Accounting Principles

• Consistency: Applying accounting methods consistently over time.
• Full disclosure: Providing sufficient information for stakeholders to understand the financial position and performance of the business.
• Periodicity: Reporting financial performance over specific time intervals (e.g., quarterly, annually).
• Historical cost: Recording assets at their original cost.

Financial Statements

• Income statement: Reports a company's financial performance over a period of time.
  • Shows revenue, expenses, and net income or loss.
• Balance sheet: Reports a company's financial position at a specific point in time.
  • Shows assets, liabilities, and equity.
• Statement of cash flows: Reports the movement of cash over a period of time.
  • Shows cash inflows and outflows from operating, investing, and financing activities.

Accounting Standards and Regulations

• Accounting standards provide a framework for preparing financial statements.
• Different countries and regions have their own accounting standards (e.g., IFRS, GAAP).
• These standards ensure consistency and comparability in financial reporting.
• Regulations govern the accounting practices of entities.
• These regulations help ensure accurate and reliable financial reporting.

Types of Accounts

• Assets: Resources owned by the business (e.g., cash, accounts receivable, equipment).
• Liabilities: Obligations of the business to others (e.g., accounts payable, loans).
• Equity: Residual interest in the assets of the entity after deducting its liabilities.
• Revenue: Inflow of resources from business operations (e.g., sales revenue, fees).
• Expenses: Outflow of resources from business operations (e.g., salaries, rent).

Accounting Cycle

• Analyzing transactions: Identifying and recording transactions in journals.
• Recording transactions: Entering transactions into the general ledger.
• Summarizing transactions: Preparing a trial balance.
• Preparing financial statements: Creating income statement, balance sheet, and cash flow statement.
• Closing the books: Adjusting accounts and preparing financial statements for the end of an accounting period.

Financial Reporting

• The process of preparing and presenting financial statements.
• These reports are used by various stakeholders (e.g., investors, creditors, management).
• The information from financial reports can be used to make financial decisions.
• This involves accurately reflecting a company's financial performance.