Introduction to Accounting (Topic 1)

Introduction to Accounting (Topic 1)

1. Definition of Accounting

   • Accounting is a discipline that measures and records financial and other information about an entity, and reports and interprets the information to interested parties to enable them to make appropriate decisions.
     • Bookkeeping is usually associated with the physical recording of the monetary transactions of a business and tends to be mechanical – and at times repetitive. Accounting, on the other hand, has a much wider interpretation.

2. Main Users of Financial Information

   • OWNERS / INVESTORS
     • Investing decisions
   • MANAGEMENT
     • Planning, co-ordinating and controlling
   • CREDITORS
     • Credit, lending decisions
   • GOVERNMENT
     • Tax, economic decisions
   • EMPLOYEES LABOUR UNIONS
     • Concerned with performance and financial stability of organisation
   • CUSTOMERS
     • Concerned with continued existence of firm (honouring of warranties)

3. Accounting Assumptions and Principles

   • The whole process of accounting is guided by the generally accepted accounting principle (GAAP). They may be called assumptions or principles. The importance of these accounting assumptions or principles lies in providing a uniform understanding and approach in the practice of accounting all over the world.
   • Accounting entity
     • The business is an entity or body separate from the owners. Transactions are recorded from the viewpoint of the business and the owners are treated as outsiders.
   • Monetary assumption
     • Assumes that all transactions affecting the business are recorded in a common monetary unit i.e. in dollars and cents. Transaction of the business that cannot be expressed in money terms will be excluded from the accounting records.
   • Historical cost (objectivity)
     • Assumes that business transactions are recorded in terms of their cost at the time the transaction occurred.
   • Continuity (going concern)
     • Assumes that business transactions are recorded in terms of their cost at the time the transaction occurred.
   • Accounting period
     • It assumes that the indefinite life of a business is divided into arbitrary time periods.