Lecture Slides 1 Introduction To Accounting

ACCOUNTING FOR BUSINESS
AND MANAGEMENT
WEEK 1
INTRODUCTION TO ACCOUNTING
Last Updated:12 December 2014
LMS SEGi education group
LEARNING OBJECTIVES
Understand the basics of financial and management

accounting.
Identify
the
roles
of
financial
and
management
accounting.
Discuss on how both guide the businesses to measure

and examine the business practices and communicating
to the relevant users and parties involved.
LEARNING OUTCOMES
Explain the fundamentals of accounting and

finance.
Explain the development history.
Discuss its role until now in these modern days.
Early Accounting
Early forms of accounting can be found in Egypt

and Mesopotamia.
Some records existed before money often in the
form of clay or other forms of recording marks.
Accounting was important for government and
merchants.
Pacioli
Pacioli included a description of double entry

book-keeping in his text on mathematics.
This had been developed by merchants to record

profits made on trading voyages.
Later Development
Modern accounting began in the Industrial

Revolution.
Record keeping was of course done by hand.
The growth of industry and the development of

automatic methods of processing was first
adopted for payroll processing and later by
accounting.
What are accounting and finance?

Accounting
collecting,
analyzing
and
communicating financial information.
Purpose: useful for decisions-making, business

planning and control on business.
Example: financial information needed to decide

whether to develop new products or services.
Accountings role: Not only prepare accounts

but also to provide people better information on
which to base their decisions.
Various users (internal and external) make

decisions using financial information provided by
accountants.

Finance: Concerns with ways funds for a
business are raised and invested.
Business exist to raise funds from investors

(owners & lenders) and make investments
(equipment, premises, inventories etc) in an
attempt
to
make
business
and
owners,
wealthier.
Accounting and User Needs

Owners
Customers
Competitors
Lenders
Financial
Information
& Business
Organization
Employees
Managers
Suppliers
Investment
Analysts
Government
Community
10

Owners
To monitor investments, returns & future

developments
Lenders
Interested in companys ability servicing debts

and financing products
Managers
Useful in decision-making and assess

performance & targets
Suppliers
Assess the long term viability and paying up

credits accordingly to terms agreed
Customers
To maintain business relationship and venturing

possibilities
11

Competitors
Competition analysis: how to complete

benchmark or adopt technology
Employees
Benefits, rewards and recognition or leave

employment
Government
Tax revenue, compliance with laws
Community
No harm, opportunities
Investment
Analysts
Investment possibilities; risks and return

analysis
12
Accounting as a Service Function
Qualities of financial information:
Relevance> Accounting info must able influence

decision. It must be relevant to prediction of future
events (likeliness of earning profit) or relevant in

helping confirm past events.
Reliability> It should be free from significant error or

bias. Expected to yield expected outcome by relying
onto the financial information supplied.
13
Accounting as a Service Function
Qualities of accounting information:
Comparability> Enable users to identify changes in

the business overtime.
Understandability> Accounting reports should be

expressed as clearly as possible and school be
understood by those at whom the information is
aimed.
14
Accounting Concepts
15
The Materiality Concept
In making decisions, one have to consider whether the

information is material, or significant.
It means whether its omission or misrepresentation in
financial reports would really alter the decisions that

users make.
Hence, materiality concept is essential and as long

information is not material, it should not be included.
16
Cost and Benefits of Accounting

Information
More often that if cost of discovering the price is less

than the potential benefit, it is worth having the
information.
17
Accounting as Information System
Role of accounting system: efficiently and effectively

gather and communicate financial information to users.
Common features of accounting information system:
Identifying and capturing relevant information;
Recording in a systematic manner the information collected;
Analyzing and interpreting the information collected;
Reporting the information in a manner that suits the needs of

users.
18
Accounting as Information System

Information
Identification
Information
Recording
Information
Analysis
Information
Reporting
19
Planning and Control
Managers need financial information to plan and

control business activities.
Planning and control can be seen as a

sequence of logical steps.
There are 7 steps in planning and control
system.
20
Step 1: Identify business objectives. Ex: key

objective of private-sector businesses is to
increase wealth of owners.
Step
2:
Consider
options
to
achieve
objectives. Financial information should help
quantify the costs and benefits of each option.
21
Step 3: Prepare long-term plan. Important to

set out financing and investment requirements
for the business and expected sales and
expenses for planning period. Targets can be

set.
22
Step 4: Prepare short-term plans. Ex: budgets.
Step 5: Perform and collect information on

actual performance.
Step 6: Respond to divergence between

planned and actual and exercise control.
Step 7: Revise plans (and budgets) if

necessary
23
Management and Financial Accounting
Management accounting: seeks to meet the

needs of managers. Involve in costing, planning
and control and decision-making.
Financial accounting: seeks to meet the

accounting needs of all the of the users
(mentioned earlier).
24
Management (MA) vs. Financial

Accounting (FA)
Nature of the reports produced. FA for various

users in mind and may specifically intended for
owners. However, MA are specific for managers
need.
Level of details. FA provides users with broad
overview of business performance and position.

MA are detailed enough for operational decision.
25

Accounting (FA)
Regulations. FA are regulated. However, MA

are not and practices are designed for internal
use only .
Reporting intervals. FA are annual matter and

also some interim needs. MA are frequent as
when as needed.
26

Accounting (FA)
Time horizon. FA are time constrained and

usually follow calendar or accounting cut off time
frame. However, MA are concern about own
time frame and more focus future, current and

past performance.
27

Accounting (FA)
Range and quality of information. FA reports

concentrate
on
information
that
can
be
quantified in monetary terms. MA also produces
such reports but is also more likely to produce

reports that contain information of a non-
financial nature such as measures of physical

quantities of inventories and output.
28
Key Financial Statements
Income Statement (also known as profit and loss

account) provide information about financial performance
of a firm describes the revenues and expenses.
Revenues are funds that flow into a business from the

sale of goods or services.
Expenses or operating expenses are costs that directly

related to acquiring the goods or services. These are
funds that flow out in generating the revenues.
29
In revenues exceed expenses, business obtain profits

and loss if revenues are lower than the expenses.
The profits earned are known as profits before tax and

once tax is deducted, then profits after tax show the
actual bottom line.
With
the
convergence
of
International
Financial
Reporting Standards (IFRS), this statement now will

called as Statement of Comprehensive Income.
30
Balance sheets provide information about financial

position of a firm on assets, liabilities and owners equity.
This balance sheets uses accounting equation in

preparing its financial information; assets = liabilities +
owners equity.
With
the
convergence
of
International
Financial
Reporting Standards (IFRS), this statement now will

called as Statement of Financial Position.
31
Assets are economic resources that is used in business

operations in generating future benefits. They are not
held for resale but eventually they are disposed as there
are no longer economically feasible.
Assets include land, buildings, equipment, inventory and
accounts receivables.
These assets are financed by liabilities and owners

equity.
32
Liabilities are debts that firm owes to an outside

party.
Liabilities include loans, overdrafts and accounts

payables.
Owners
equity
is
the
funds
invested
by
shareholders (owners) in the firm.
33
Statement of Cash Flows describes yearly cash

receipts and cash payments.
This statement provides the most details about the

companys ability to generate and use cash.
This statement informs about cash flows from

operations, investing and financing activities.
Truly cash matters and book values not included.
34
Cash flow from operations: this part shows about

cash transactions involved in buying and selling
goods and services.
Cash flow from investing: this part reports on net

cash used in or provided by investing activities. It
includes cash receipts and payments from buying
and selling stocks, bonds, property, equipment and
other productive activities.

35
Cash flow from financing: this part reports on net

cash from all the financing activities. It includes cash
inflows from borrowing or issuing stock as well as
outflows for payments of dividends and repayment
of borrowed money.
36
Reporting Standards and Practices
Accountants follow standard reporting practices and

principles when preparing financial statements. MA does
not have uniformed standards to follow.
This is common language that dictated by standard

practices gives users more confidence in the accuracy
and meaning of financial information.
Now with convergence of IFRS, countries all over the
world is going to practice the ONE set of standards and

no longer harmonizing them.
37
REFERENCES
McLaney, E. and Atril, P., (2006), Accounting and Finance for Non-Specialists, 5th
Edition, FT/Prentice Hall.
McLaney, E. and Atrill, P., (2002), Accounting: An Introduction, FT/Prentice Hall.
Davies, T. and Pain, B., (2002), Business Accounting and Finance, 2002, McGraw
Hill (ISBN 0-07-709825-0).
Arnold, J., Hope, T. and Southworth, A., and Kirkham, L., (1994), Financial
Accounting, 2nd Edition, Prentice Hall International.
Berry, A. and Jarvis, R. (1999), Accounting in Business Context, 3rd Ed, Thompson
Business Press.
Berry, A. (1999), Accounting: an Introduction, 2nd Edition, Thompson Business Press.
Glautier, M.W.E and Underdown, B., (2001), Accounting Theory and Practice, 7th
Edition, Prentice Hall.
Holmes, G. and Sugden, A., (1999), Interpreting Company Reports and Accounts, 7th
Edition, Financial Times/Prentice Hall.
Drury, C. (2001) Management Accounting for Business Decisions, International
Thomson Business Press.
Drury, C. (1998), Costing An Introduction, 4th Edition, International Thomson
Business Press.
Williamson, D., (1996), Cost and Management Accounting, Prentice Hall.
38

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ACCOUNTING FOR BUSINESS

Last Updated:12 December 2014

LMS SEGi education group

Understand the basics of financial and management

Discuss on how both guide the businesses to measure

Last Updated:12 December 2014

LMS SEGi education group

Explain the fundamentals of accounting and

Explain the development history.

Discuss its role until now in these modern days.

Last Updated:12 December 2014

LMS SEGi education group

Early forms of accounting can be found in Egypt

Some records existed before money often in the

form of clay or other forms of recording marks.

Accounting was important for government and

Last Updated:12 December 2014

LMS SEGi education group

Pacioli included a description of double entry

This had been developed by merchants to record

Last Updated:12 December 2014

LMS SEGi education group

Modern accounting began in the Industrial

Record keeping was of course done by hand.

The growth of industry and the development of

Last Updated:12 December 2014

LMS SEGi education group

What are accounting and finance?

communicating financial information.

Purpose: useful for decisions-making, business

Example: financial information needed to decide

Last Updated:12 December 2014

LMS SEGi education group

What are accounting and finance?

Accountings role: Not only prepare accounts

Various users (internal and external) make

Last Updated:12 December 2014

LMS SEGi education group

What are accounting and finance?

business are raised and invested.

Business exist to raise funds from investors

LMS SEGi education group

Accounting and User Needs

Last Updated:12 December 2014

LMS SEGi education group

Accounting and User Needs

To monitor investments, returns & future

Interested in companys ability servicing debts

Useful in decision-making and assess

Assess the long term viability and paying up

To maintain business relationship and venturing

Last Updated:12 December 2014

LMS SEGi education group

Accounting and User Needs

Competition analysis: how to complete

Benefits, rewards and recognition or leave

Tax revenue, compliance with laws

Investment possibilities; risks and return

Last Updated:12 December 2014

LMS SEGi education group

Accounting as a Service Function

Qualities of financial information:

Relevance> Accounting info must able influence