UNIT: 1 The Accounting Profession

CONCEPT OF ACCOUNTING
Accounting is the process of identifying, recording, measuring and communicating financial
information which allows balanced judgment and sound financial management decisions.   
Accounting may also be defined as the process of classifying, summarizing, analysing and
interpreting financial information in order to make management decisions.  Accounting
systems have been used throughout history as long as there was need to make financial
decisions, and is used to prepare financial statements.
Book-keeping on the other hand involves the mere recording and posting of financial
information/ data in a systematic way. 

PURPOSE OF ACCOUNTING
The main purpose of accounting is:

 To keep proper records of business transactions. 

 To keep proper control of the finances of a business.

 To assist management in making decisions.

USERS OF ACCOUNTING INFORMATION

Accounting information helps users to make better financial decisions. Users of accounting
information can be classified as being either internal or external.

Internal users (Primary users)

 Management – for analysing the organisation’s performance and position and taking
appropriate measures to improve the company results.

 Employees: for assessing company's profitability and its consequence on their future

remuneration and job security.

 Owners: for analysing the viability and profitability of their investment and
determining any future course of action.

 External users (Secondary Users) 

 Creditors: for determining the creditworthiness of the organization. Terms of credit

are set by creditors according to the assessment of their customers' financial health.
Creditors include suppliers as well as lenders of finance such as banks.
 Government and Tax Authorities: for determining the credibility of the tax returns
filed on behalf of the company.
  Investors: for analysing the feasibility of investing in the company. Investors want to
make sure they can earn a reasonable return on their investment before they commit
any financial resources to the company.

 Customers: for assessing the financial position of its customers which is necessary
for them to maintain a stable source of supply in the long term.

 Regulatory Authorities: for ensuring that the company's disclosure of accounting

information is in accordance with the rules and regulations set in order to protect the
interests of the stakeholders who rely on such information in forming their decisions.

 Local community: will be concerned about the impact of the business on the local
environment and also whether the business will provide employment opportunities

ETHICAL ISSUES SURROUNDING THE ACCOUNTING PROFESSION

Ethical principles of Accounting involve the moral principles and standards that govern the
conduct of those working in the profession. This enhances the profession, maintains public
trust and demonstrates honesty and fairness.

Accountants have special ethical obligations. They have a responsibility to act in the public
interest and comply with certain fundamental principles, which are: integrity, objectivity,
professional competence and due care, confidentiality and professional behaviour.

Integrity – a professional accountant should be straightforward and honest in all professional

and business relationships.

Objectivity – a professional accountant should not allow bias, conflicts of interest or undue
influence of others to override professional or business judgements.

Professional competence and Due care –a professional accountant have a continuing duty
to maintain professional knowledge and skill at the level required to ensure that a client or
employer receives competent professional service based on current developments in practice,
legislation and techniques.

Confidentiality – a professional accountant should respect the confidentiality of information

acquired as a result of professional and business relationships and should not disclose any
such information to third parties without proper and specific authority unless there is a legal
or professional right or duty to disclose.

Professional behaviour – a professional accountant should comply with the relevant laws
and regulations and should avoid any action that discredits the profession.
INAPPROPRIATE APPLICATION OF ACCOUNTING PRINCIPLES
Maintaining high ethical standards often requires real strength of character. When this is
broken down and in some extreme cases, one may see the need to act as a ‘whistle-blower’.
This is when someone feels it necessary to expose what you believe to be a dishonest or
illegal activity within an organisation.
Where accountants act inappropriately, serious consequences will follow.

INAPPROPRIATE APPLICATION OF ACCOUNTING CONSEQUENCE

PRINCIPLES
1. Inappropriate behaviour in workplaces, e.g., maligning a DISMISSAL
colleague 

2. Sharing information about a client with another client LOSS OF

without their permission INTEGRITY

3. Failing to carry out work for a client satisfactorily due to LAWSUIT

lack of technical expertise and up-to-date knowledge

4. Missing deadlines for filing tax documents with the FINES

authorities

5. Being found guilty of fraud IMPRISONMENT

Unit 2: Accounting as a System 

TABLE/SUMMARY OF ACCOUNTING CONCEPTS/CONVENTIONS

Accrual/ Matching Requires all revenues and expenses to be taken into account for
Concept   the period in which they are earned and incurred when
determining the profit (loss) of the business. 
The net profit (loss) is the difference between the revenue
EARNED and the expenses INCURRED and not the
difference between the revenue RECEIVED and expenses
PAID.

Business Entity/Separate Also known as Accounting Entity convention which states that
Entity the business is an entity or body separate from its owner.
Therefore, business records should be separated and distinct
from personal records of business owners.

Consistency Concept According to this convention, accounting practices should

 remain unchanged from one period to another. For example, if
depreciation is charged on fixed assets according to a particular
method, it should be done year after year. This is necessary for
the purpose of comparison.

Prudence/Conservatism Take into account unrealized losses, not unrealized

Concept profit/gains. Assets should not be over-valued, liabilities
under-valued. Provisions are examples of prudence or
conservatism concept. Also, under this prudence/conservatism
concept, stock/inventory is valued at lower cost or market
value. This concept guides accountants to choose options that
minimize the possibility of overstating an asset or income.

The Going Concern

The business will be in operation for the foreseeable future.
Concept

Dual Aspect Concept Every transaction should incorporate a debit and a credit entry.

ACCOUNTING CYCLE

All transactions upon being recorded will pass through a series of accounts and treatments –
the accounting cycle, during an accounting period. The accounting cycle starts with source
documents and ends with final accounts.

Source documents – original information comes from the various source documents e.g.

 Sales and purchases invoices

 Debit and credit notes
 Paying-in slips withdrawal slips
 Receipts
 Cheque stubs/counterfoil
 Vouchers
Books of Original/Prime Entry- information is classified and then placed into the respective
book of original entry or journal e.g.

 Purchases Journal: Record all credit purchases

 Sales Journal: Record all credit sales
 Returns Inwards journal: All customers who return goods to the business
 Returns Outwards journal: The business return goods to their suppliers
 General journal: All other transactions not recorded in the other six books of original
entry
 Cash Book: Record all Cash and bank (cheques) transactions
 Petty Cash Book: Record small items not recorded in the main cash book.
Double Entry System – information is then posted to the ledgers

 Purchases Ledger: Suppliers/creditors 

  Sales Ledger: Customers/ Debtors 
 General Ledger: Assets, Liabilities, Capital, Revenues, Expenses
 Cash Book: Cash & bank receipts & payments
Trial Balance - the accuracy check is then done by way of extracting a trial balance
Adjusting Entries: Control Account systems, Suspense, Bank Reconciliation, Final
Accounts
Income Statement/ Trading Profit & Loss –a calculation is then done of the profit made or
loss incurred for the period.
Statement of Financial Position/Balance Sheet –financial statements showing the
accumulated assets, liabilities and capital for the accounting year/period.

TECHNOLOGY IN ACCOUNTING
Development of technology in accounting
ADDING MACHINE    CALCULATORS      COMPUTER &
ACCOUNTING SOFTWARE
Role and importance of technology in Accounting/Advantages
Technological advances in accounting allows for:

 Increased speed
 Greater accuracy
 Fewer mistakes
 Greater accountability
 Simplifies the rigorous procedures of accounting work

Disadvantages of technology in accounting

1. Loss of data or service– when a business is reliant on technology in accounting (such
as software), any loss of service due to a power or computer outage could cause work
disruption. Work disruption can prevent the input of new information as well as
prevent access to stored information. Additionally, if information is not properly
backed up, loss of financial data could result.

2. Cost – accounting software and technological advances are very costly in general.
Costs here do not only speak to the acquisition of the computer and software but
rather to maintenance, customization and training.

3. Fraud –information stored electronically can be manipulated and accessed if proper

controls and security measures are not in place. Controls therefore need to be
implemented so only authorized personnel can gain access. As financial data is
sensitive and confidential, the use of accounting software creates the potential for
fraud.
 4. Incorrect Information – reports and information received is only as good as the
information put into the system. Therefore, the incorrect input of data can lead to the
generation of incorrect and hence misleading accounts and reports which eventually
leads to incorrect assessment and bad decision making.

Software used in accounting:

 Xero,
 QuickBooks
 Sage Intacct
 Peach tree
 Wave Accounting.  

Trial Balance

The Trial Balance is a list of all the debit and credit account balances for a period.

Type of Account Balance in Trial Balance

Personal & Real Accounts Balance C/D & Balance B/D

Nominal Accounts Transfer to Trading Or P&L A/C/ Income Statement

Nominal Accounts are temporary accounts which are balances off at the end of a period. the steps are
the same as real and personal accounts, except the nominal a/c balances are not carried forward to
the following period but are Transferred to The Trading A/C or The Profit and Loss A/C as
Follows:

Nominal Account Transfer To

Sales Income Statement Or P&L

Purchases Income Statement Or P&L

Returns Inwards/Outwards Income Statement Or P&L

Expenses Income Statement Or P&L

Revenue Income Statement Or P&L

The Account Balances for The Period Are Entered in The Trial Balance as Follows:

Category of Accounts Accounts Balances

Assets Debit

Liabilities Credit

Income/Revenue Credit

Capital Credit

Drawings Debit

Expenses Debit

Sales Credit

Purchases Debit

Returns Outwards Credit

Returns Inwards Debit

Name of Business
Trial Balance as at (Date)

Debit Credit

Assets A/C X

Liabilities A/C X

Income A/C X

Capital A/C X

Expense A/C X

Xxxx Xxxxx
x