Introduction to Accounting

Rasika Dayarathna

Learning Outcomes

At the end of this module, students will be able to describe terms in financial accounting describe key financial accounting concepts prepare the important financial statements:

profit and loss account, balance sheet, and cash flow statement

prepare financial statements using computer-assisted accounting system

NOTES

Software: TurboCash open source accounting tool

Lecture materials: available at http://www.dwmbeancounter.com/moodle/ - students must create an online account.

Assessment: Assessment: 50% on final examination and 50% on assignments

Business

• What is a business ?

• What are the objective of a business entity?

• What are the different types of businesses ?

• Who are the parties involved?

Business – objectives/types/forms

Objective is making profit

Types of business –

Service

Manufacturing

Trading

Forms of business organization

Sole proprietorship

Partnership

Company

Sole proprietorship

One person

Many professional services – lawyers, doctors,

Retail and small business entities

Accounting point of view – business entity is separated from the owner

Legal point of view- owner is personally liable for the debts of the business

Partnership

Two or more persons

Partnership agreement

Accounting point of view – business entity is separated from the owners

Legal point of view- owners are personally liable for the debts of the business

Company

An artificial person

Owners are known as shareholders

Liability is limited – unpaid share capital

Limited – Ltd

Private limited company

Public limited company

Accounting

Accounting is the process of designing and operating an information system for collecting, analyzing, and recording of business transactions and summarizing and communicating the results of these transactions to users to facilitate the making of economic decisions.

Accounting is also known as language of business.

Accounting

Accounting - the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information.

Economic/financial information

Examples-

• What are economic events ? Examples ?

• What are economic information ? Examples?

• Who are the interested parties and why?

• External parties

• Internal parties

External Parties

• Investors – good investment ?

• Creditors – creditworthiness ? Safe to give loans ? How much and how long ?

• Government – Tax liability ?

• Customers – Entering into contracts?

• General public – performance ?

• Other users – who and why?

• Regulators – e.g. CSE (Colombo Stock Exchange)

Internal parties

• Senior mangers – managing business

• Employees – profitability and profit sharing

Book keeping

Book keeping – Collecting, analyzing, and recording business transactions.

• Mechanical and Repetitive

Accounting is more than book keeping. It involves analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information

Accounting

Financial accounting - focuses on the specific

needs of decision makers external to the

organization, such as stockholders, suppliers,

banks, and government agencies.

Management accounting – concerned with the

preparation and presentation of information to

assist managers.

Financial accounting

Basically outsiders

Historical information

Format

Mainly for taxation and profit sharing

Management accounting

For insiders

Planning, organizing, performance evaluation

Historical and planned data

No specific format

Role of an accountant

Auditing –

• Express the true and fair view of financial statements

• Independent examiner

Taxation – various types of taxes including excise and custom duty

Role of an accountant

Management advisory services-

• Investigate problems

• Suggest corrective actions (quality control, acquisitions of and merging with)

Cost accounting – allocating and controlling cost of production for a product or service

Budgeting – forecast of future operations

Internal auditing – comply with the established procedures and policies

Information security auditors -

Auditor General's Department - http://www.auditorgeneral.gov.lk/

Examination question – 5 marks

Regulations

Company registration act

Stock exchange listing

Accounting standards

Buy 10 units @15 = 150

Buy 10 units @ 18 = 180

Sell 5 units @ 20 = 100

What is the profit ?

Procedures

Sri Lanka Accounting Standards (SLAS) Sri Lanka Auditing Standards (SLAuS) International Accounting Standards (IAS) Generally Accepted Accounting Principles

(GAAP) Why standards ? Advantages ?

Some concepts

Matching principle- matching revenues against all expenses incurred in earning those revenues.

Going concern principle- business entity will continue to operate in the near future.

Historical cost principle- cost are recorded at actual cost or price paid.

Accounting period- prepared for each financial yea.

Accounting entity- clearly defined accounting entity.