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Principles of Accounting-501

Khan Atiqur Rahman (BIBM, MBM, 141048, arahman.pstu@prothom-alo.info, 01712167606)

Lecuture-01 (05.01.2010)

What is Accounting?
 An information systems that identify, record and presenting business transactions and
communicating it to the interested parties (internal and external users).

From the definition we find three elements of accounting-


1. Identifying the transactions.
2. Recording transactions.
3. Communicating with interested parties.

 Types of Accounting on the basis of users.

 On the basis of users accounting can be divided into two types-


1. Managerial Accounting.
(Internal parties-eg. payroll accounting, cost accounting)
2. Financial accounting
(External parties-share holders, creditors, auditor, govt.)
Mainly four types of statements prepared in financial accounting
(a) Income statement.
(Show the income after certain point of time deducting the revenues and expenses)
(b) Balance Sheet.
(Balancing the assets and liability’s + owners’ equity’s after a certain period)
(c) Owner’s equity statement.
(Showing the owners equity)
(d) Cash flow statement.
(Expressing the inflow and outflow of cash after a certain period).
 On the basis of recording accounting can be divided into two types-
1. Single entry accounting system. (only one sided, income or expenses)
2. Double entry accounting system. (Debit & Credit, having dual impact of each
transactions)
 Difference between event and transactions.
 Event: Events are economic and non-economic proceedings, which may have or not
impact on the firm’s profits or loss.
For example, Mr. Kabir Ahamed owner of Global Chemical Industries Ltd. buy a computer
for his son costing Tk. 45,000.
 Transactions: Transactions are economic events which have direct impact to the firm’s
profit or loss. It should have to record.
For example, Mr. Kabir Ahamed owner of Global Chemical Industries Ltd. buy a computer
for his son costing Tk. 45,000 taken from his firm’s capital.
***Every transaction must be an event, but all events may not be a transaction.
 Accounting Cycle.

 Recording Process of Accounting Information.

 Assets and Liabilities:

Assets Liabilities

Debit for Credit for Debit for Credit for


Increase Decrease Decrease Increase
Balance Balance

 Owners Equity/capital and owner’s drawings:

Owners Capital/ Equity Owners Drawings

Debit for Credit for Debit for Credit for


Decrease Increase Increase Decrease
Balance Balance

 Revenues & Expenses:

Revenues Expenses

Debit for Credit for Debit for Credit for


Decrease Increase Increase decrease
Balance Balance
Lecuture-02 (10.01.2010)

 Concepts in Accounting.
Two basic concepts of accounting-
 Materiality concept: The materiality concept proposes paying attention to important
events and ignoring insignificant accounting items. For example, 10 ball pens purched for a
large bank, the depreciation of such pen having an insignificant impact on the firm’s net
profit and loss, rather than its recording cost. So it should have to omit.

 Conservatism concept:
Accountants are conservative in recording transactions. This principle has probably
contributed most to the stereotypical image of the professional accountant. They always tend
to take the pessimistic view in recording transactions because they are obligated to protect the
reader of financial statements from concluding that the financial status of a company is
brighter than it really is.
For example, in case of LIFO and FIFO, which minimize the maximum amount of risk,
inventory should be evaluated in this method.

 Qualitative characteristics of Accounting Information.


Accounting information should have the following qualitative characteristics-

 Relevance:
To make a difference in the decision process, information must possess predictive value
and/or feedback value. This implies that, to be useful, accounting information must assist a
user to form, confirm or maybe revise a view - usually in the context of making a decision
(e.g. should I invest, should I lend money to this business? Should I work for this business?)
1. Timeliness- Information is timely when it is available to users early enough to allow
its use in the decision process.
2. Predictive Value-Confirmation of investor’s expectations about future cash
generating ability.

 Reliability:
Reliability is the extent to which information is verifiable, representationally faithful, and
neutral. This implies that the accounting information that is presented is truthful, accurate,
complete (nothing significant missed out) and capable of being verified (e.g. by a potential
investor).

 Comparability:
This implies the ability for users to be able to compare similar companies in the same
industry group and to make comparisons of performance over time. Much of the work that
goes into setting accounting standards is based around the need for comparability.

 Consistancy:
This implies consistent treatment of similar items and application of accounting policies.