Introduction to Accounting PDF

INTRODUCTION TO ACCOUNTING Mr. JMN Wijekumara Lecturer M.Sc. (App. Fin - USJ), B.Sc. (Acc & Fin - RUSL), CTHE (RUSL) ACPM, ACMA, AAT, ACCA (Str. Prof. Level), CA (Str. Level), DABF (IBSL) Dept. of Accountancy and Fin...

INTRODUCTION TO ACCOUNTING Mr. JMN Wijekumara Lecturer M.Sc. (App. Fin - USJ), B.Sc. (Acc & Fin - RUSL), CTHE (RUSL) ACPM, ACMA, AAT, ACCA (Str. Prof. Level), CA (Str. Level), DABF (IBSL) Dept. of Accountancy and Finance Faculty of Management Studies Rajarata University of Sri Lanka  01 Intended Learning Outcomes At the end of this chapter, you should be able to identify: The evolution of accounting 02 Definition and purpose of accounting 03 Accounting functions and process 04 Users of accounting information 05 Accounting environment What do you think of the concept of Accounting????  The evolution of accounting The U.S begins Earliest evidence The American Computerized Single – entry charging income Accounting of accounting Bookkeeping is Association of tax to fund the language comes Public system has been the standards upcoming world from Accountants evolved. war and the need Mesopotamian (AAPA) was for accounts civilizations Established. skyrockets. 8000 – 5000 BC 1400s 1887 1913 Present Day Before 2000 BC 1494 1896 1952 Bookkeepers Italian monk Luca The Accounting IBM released its most likely Pacioli publishes profession is first large emerge while the framework for formally computer and society is still modern recognized. Eg: accountants are under a barter Establishment of among the first to system. CPA use them.  Definition of Accounting American Institute of General Definition Certified Public Accountant American Accounting “The art of recording, Association Accounting is a process classifying and summarizing in “Accounting is the process of of communicating a significant manner and in identifying, measuring and economic information terms of money, transactions communicating economic regarding accounting and events which in part at information to permit informed entity to interested least of a financial character judgments and decisions by users parties for the purpose and interpreting the results of the information”. of making decisions. thereof”. Example:  Objective of Accounting Objective of Accounting The main objective of accounting is to communicate economic information about the accounting entity to interested parties for decision making. Economic Information Financial information is identified as economic Interested parties also have non-financial information. information that is important for decision-making. Examples: Examples: Profit in an accounting year of the business is Rs. The entity hasExample: 500 employees. 200,000/- There is a good response among the public about The total assets of the business are Rs. 200,000/- the business of selling quality goods.  Process of Accounting Input Process Output Business Transaction Identifying Information & Recording to Events Classifying Users Via Financial Summarizing Statements Analyzing Interpreting Communicating Example: Users of Accounting Information Users Internal External Owners Investors Managers Government Employees Competitors Society Researchers Users of Accounting Information  Has a satisfactory profit been made in accordance with the Owner investment?  Should further investments be made? Users of Accounting Information  Are plans being implemented appropriately?  What are the Management necessary plans/decisions for future development? Users of Accounting Information  Is there stability of employment?  Is the business able to increase wages/salaries? Employees Users of Accounting Information  Can the money lent be recovered?  Is it feasible to extend further credit/loans? Creditors and lenders Users of Accounting Information  Are taxes being received on the due dates?  Are relevant reports submitted to appropriate entities? Government- Tax Department  Type of Accounting Accounting Financial Accounting Management Accounting Preparation of information Provision of relevant information about the past transactions of that assist all levels of management an entity in a manner that will to plan, control and make decisions enable external users to make in order to fulfill their economic decisions. responsibilities.  Differences between financial accounting and management accounting Financial Accounting Management Accounting Provides information for internal and Information is provided only for external users internal users Uses historical information Uses historical and budgeted information Information is provided for a specific Provides information as and when period of time required by the management Follows accounting concepts, rules Accounting concepts, Example:rules and and regulations regulations are not relevant.  Accounting Environment Accounting Environment Internal Environment Internal Environment The business environment which The environmental factors that consists of the environmental indirectly affect the business are factors that the business can called the external environment. control and that directly affecting External environmental factors are a business is called the internal those that are beyond the control of environment. the business.  External Environment Factors Economic & Political Environment Changes in the price levels of goods and services in an economy, land, labor, capital and factors of production, market conditions, changes in the exchange rate, changes in the economic structure, changes in government policies, etc., affect business activities and the accounting process. These factors belong to the economic environment. Also, domestic political changes in a country as well as foreign changes affect the accounting process of businesses. Examples are, the effects of tax policies imposed by different countries, Effects of changes in exchange rates Example:  External Environment Factors Social & Cultural Environment Changes in the social and cultural environment affect businesses. Eg - Changes in consumers' lifestyles, thoughts, attitudes, beliefs, customs, habits and beliefs, Changes in population, population migration, etc. These changes affect production, distribution, sales and consumption. E.g. - Clothes, costumes during Sinhala and Hindu New Year celebrations, High demand for food items, crackers etc. Accordingly, changes in the social and cultural environment also affect accounting. Example:  External Environment Factors Legal Environment Each accounting unit must maintain the accounting system in accordance with the legal factors that are directly related to it as well as the existing rules of the country. From the beginning of a business to the liquidation of that business, it must comply with various legal requirements. Sole propritorships, joint ventures, limited companies, state corporations, boards, departments. etc. must comply with the existing rules and regulations. Examples: Companies Act No. 07 of 2007 Partnership Ordinance Act 1890 Example:  External Environment Factors Technical & Professional Environment Accounting is a combination of both technical and professional aspects. In accounting there are a number of techniques used to quantitatively and financially measure the resources of a business. Examples: A business uses methods such as FIFO, WACC etc. to value inventory at the end of the year Example:  External Environment Factors Technological Environment Although accounting work was done using human labor in the early days, nowadays that method is used very little. Because, new discoveries in science and technological advancements affect accounting (Computer technology use of new technical equipment, communication technology). Today, many businesses use computerized accounting software to prepare and manage their accounts. Examples: ACC pac, MyoB, Quick Book, Sage……. Etc. Example: Summery Always bear in mind that your own resolution to succeed is more important than any one thing. Abraham Lincoln THANK YOU