Introduction To Accounting Fundamentals PDF

Introduction to Accounting FUNDAMENTALS OF ACCOUNTING I | Intended learning outcomes i. Nature, purpose of accounting ii. Objectives of accounting iii. Users of accounting information iv. Qualitative characteristics of accounting information v. Accounting principle/Fundamenta...

Introduction to Accounting FUNDAMENTALS OF ACCOUNTING I | Intended learning outcomes i. Nature, purpose of accounting ii. Objectives of accounting iii. Users of accounting information iv. Qualitative characteristics of accounting information v. Accounting principle/Fundamental assumptions vi. Fundamental accounting equation | Conceptual Framework The objective of general purpose financial reporting Qualitative characteristics of useful financial information Financial Statements and the reporting entity The elements of financial statements Recognition and de-recognition measurement Presentation and disclosure Concepts of capital and capital maintenance 11/25/24 MIS Notes 3 |  Nature and purpose of accounting  Accounting is the process of; Collecting-information relating to business events Recording-classifying data in prescribed manner Summarizing-to produce statements and reports interpreting and communicating- financial information to permit informed decisions.  Main branches of accounting financial accounting and management accounting  Financial accounting-external reporting  Management accounting- internal reporting |  Objectives of accounting  To provide information about the financial position.  To provide information about financial performance.  To provide information about liquidity position.  For internal control-safeguarding organisation resources.  Financial reporting -frequent or regular reporting to users. | Users of accounting information  Internal users External users Owner  Tax and regulatory Management authorities employees  Investors  Lenders  Creditors/ suppliers  Competitors  Customers  General public 11/25/24 Report for 2010 6 |  Qualitative Characteristics Qualitative Characteristics of accounting information distinguish better (more useful) information from inferior (less useful) information for decision-making purposes.” | Qualitative Characteristics Fundamental Quality—Relevance To be relevant, accounting information must be capable of making a difference in a decision. | Qualitative Characteristics Fundamental Quality—Relevance Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. | Qualitative Characteristics Fundamental Quality—Relevance Relevant information also helps users confirm or correct prior expectations. | Second Level: Qualitative Characteristics Fundamental Quality—Relevance Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information. | Qualitative Characteristics Fundamental Quality—Faithful Representation Faithful representation means that the numbers and descriptions match what really existed or happened. | Qualitative Characteristics Fundamental Quality—Faithful Representation Completeness means that all the information that is necessary for faithful representation is provided. | Qualitative Characteristics Fundamental Quality—Faithful Representation Neutrality means that a company cannot select information to favor one set of interested parties over another. | Qualitative Characteristics Fundamental Quality—Faithful Representation An information item that is free from error will be a more accurate (faithful) representation of a financial item. | Qualitative Characteristics Enhancing Qualities Information that is measured and reported in a similar manner for different companies is considered comparable. | Qualitative Characteristics Enhancing Qualities Verifiability occurs when independent measurers, using the same methods, obtain similar results. | Qualitative Characteristics Enhancing Qualities Timeliness means having information available to decision- makers before it loses its capacity to influence decisions. | Qualitative Characteristics Enhancing Qualities Understandability is the quality of information that lets reasonably informed users see its significance. | Accounting Principles/Fundamental assumptions  Business entity  Going concern  Accrual basis  Prudence  Substance over form  Matching  Consistency  Materiality  Fair representation 11/25/24 Report for 2010 20 | Business entity  The business is a separate and distinct from owners. Private expenses-schools fees, Business expenses-business rent Going concern  When entity is presenting financial statement, it assumes that it will be in operation for the foreseeable future. They have neither the intention or need to liquidate or curtail the scale of operations. Accrual basis  The effect of a transaction and events should be recorded when they occur but not when the cash is paid/received and should be recorded in the right period. 11/25/24 MIS Notes 21 |  Prudence a.k.a conservative States that in matters of uncertainty that require judgment, we should exercise a degree of caution.i.e should not overstate the assets, income and on the other hand, not understate the liability or expenses. Substance over form In recoding the transactions and events, we should not look at legal form, but we should look at the financial/economic reality. 11/25/24 MIS Notes 22 |  Fundamental Accounting Equation Assets=capital +Liabilities Assets. Resource controlled by entity over the past events in which future economic benefits is going to flow to the entity. Liabilities Present obligation, resulting from past event, in which requires outflow of economic benefit to settle obligations. Capital Amount contributed by owner to start or expand business 11/25/24 MIS Notes 23 | ASSETS There are two classes of assets Non-current assets/Fixed assets Current assets Non-current Assets/Fixed assets An asset acquired for continuing use within the business with an aim of earning income or making profits from its use, not acquired for re-sale to a customer. Non-current assets can either be tangible or intangible. 11/25/24 MIS Notes 24 | Tangible assets have physical existence e.g. Land and buildings, Plant and machinery, Fixtures, furniture and fittings and Motor vehicles Intangible assets have no physical existence.e.g. patents, copyrights, goodwill. 11/25/24 MIS Notes 25 | Current Assets Resources/assets owned by the business with an intention of turning them into cash in a short time (one year usually) That is, they form part of the business’ operating cycle or they are held for trading purposes. 11/25/24 MIS Notes 26 | Stocks/inventories-goods for sale Debtors/trade accounts receivables, which are amounts owing from customers Other debtors’ e.g. accrued income such as rent. Prepayments e.g. rent Cash at bank Cash in hand. 11/25/24 MIS Notes 27 | Liabilities Is an obligation of the firm as a result of past events, settlement of which is expected to result to an economic cash flow from the firm. The two classes of liabilities are; Current liabilities Non-current liabilities. 11/25/24 MIS Notes 28 | Current Liabilities Debts payable or due within one year e.g.Loans payable within one year Bank overdraft, which are usually repayable on demand Trade accounts payable /creditors for goods Other creditors e.g. rent Taxation payable Accruals e.g. rent and electricity. 11/25/24 MIS Notes 29 | Non-current liabilities Not payable within the short term. Therefore they are expected to last for a period of more than one year. e.g.Loans Loan stocks- security issued by limited liability companies at a fixed rate of interest.The security holders are lenders of money to the business. 11/25/24 MIS Notes 30 | Capital Called the owners equity; the owners interest in the firm after deducting the liabilities from the assets. Capital=assets -liabilities Share capital,revaluation reserve,retained earning 11/25/24 MIS Notes 31 | Income This is increase in economic benefit inform of inflows, enhancement of assets, reduction of liabilities. Income is classified into two; Revenue-income generated from ordinary activity of business Gains-income resulting from other activities other than the ordinary activities of the business. 11/25/24 MIS Notes 32 | Expenses  Decrease in economic benefit during the accounting period in form of outflows,decrease in equity ,depletion of assets and increase in liabilities. Expenses are classified into two;  Expenses- resulting from ordinary activities of the business e.g.. Rent, electricity.  Losses-expenses that do not result from ordinary activity of the business 11/25/24 MIS Notes 33 | Ole Sangale Road, Madaraka Estate. PO Box 59857-00200, Nairobi, Kenya Tel +254 (0)20 606155, 606268, 606380 Fax +254 (0)20 607498 Mobile +254 (0)722 25 428, (0)733 618 135 Email [email protected] www.strathmore.edu |