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Unit 1: module1: content 1/a - The Development of accounting

1494 - The origins of accounting are attributed to Luca Pacioli an Italian Renaissance
Mathematician. In his 1494 text Summa de Arithematica, Geometria, Proportione et
Proportionalite Pacioli described a system to ensure the efficient and accurate recording of
financial information.

The industrial age and the emergence of large corporations led to the separation of the owners
from the management of businesses and the need to ensure that managers acted in accordance
with owners wishes, coupled with the increasing complexity of business transaction it became
necessary to develop improved approaches for reporting financial information
In the information age with the development of communication technology investors on one side
of the globe were trading and investing with businesses on the other side of the globe
[globalization] - users of accounts needed to be sure that reliance can be placed on the methods
used by a business in calculating its profits and balance sheet values

Prior to 1933 - each company’s management largely determined its financial reporting practices -
thus little uniformity in practice existed among firms.

1960’s - there was a general uproar in financial pages of the national press against the failure of
the accounting profession to lay down consistent principles for businesses to follow. It was
reported that the methods used by the different businesses were showing vastly different profits on
similar data.
In 1973, the international organization called International Accounting Standards Committee
(IASC) was established. Representatives from the UK, US and other countries sit on the
committee. The IASC issued accounting guidelines called IASs, which are intended to be
internationally applicable. The need for the IASC is mainly due to the following:
 Growth in international investment, which required similar methods the world over so
that investment decisions are more compatible.
 Growth in multinational firms which have to produce financial statements covering a
large number of countries thereby requiring standardization between countries makes the
accounting work easier, and reduces cost.
 Harmonization of accounting standards as many countries now have their own standard-
setting bodies.
 The need for accounting standards in countries that cannot afford a standard-setting body
of their own.
In order to ensure high-quality financial reporting, accountants present financial statements in
conformity with accounting standards that are issued by standard-setting bodies. Presently, the
International Accounting Standards Board (IASB) develop accounting standards, which are
followed by more than 130 countries referred to as International Financial Reporting Standards
(IFRS). The 1ASB, headquartered in London, with its 15 board members drawn from around the
world.
Accounting standards are a set of principles/guidelines companies follow when they prepare and
publish their financial statements, providing a standardized way of describing the company’s
financial performance. Publicly accountable companies (those listed on public stock exchanges)
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and financial institutions are legally required to publish their financial reports in accordance with
agreed accounting standards.
As markets become more global, it is desirable to increase comparability in financial reporting; to
this end, the standard-setting bodies have made efforts to reduce the differences between IFRS and
other GAAP. Because of these convergence efforts, it is likely that before long there will be a
single set of high-quality accounting standards that are used by companies around the world.

Some major development of the IFRS foundation and IASB are as follows:
1973 - Part-time International Accounting Standards Committee (IASC) formed, predecessor body
to the International Accounting Standards Board (The Board)

1995 - IASC and International Organization of Securities Commissions (IOSCO) reach agreement
to complete a core set of Standards by 1999

2000 - IASC agrees to restructure itself into a full-time International Accounting Standards Board,
overseen by independent Trustees. IASC completes its standard-setting.

2001 - IFRS Foundation established. The Board holds its first meeting, announces initial technical
agenda, adopts IASC Standards.

2009 - IFRS Foundation Monitoring Board established, providing enhanced public accountability.
The Board issues the IFRS for SMEs® Standard.

2015 - IFRS Foundation publishes mission statement. The mission is to develop IFRS Standards
that bring transparency, accountability and efficiency to financial markets around the world.

2017 - IFRS Foundation launches new website.

Development of the Standard in 2009

On 9 July 2009 the Board published, an International Financial Reporting Standard (IFRS
Standard) designed for use by small and medium-sized entities (SMEs). The standard is the result
of a five-year development process with extensive consultation of SMEs worldwide. This has since
been updated by the 2015 IFRS for SMEs Standard.

Why did the Board undertake this project?

Because full IFRS Standards were designed to meet the needs of equity investors in companies in
public capital markets, they cover a wide range of issues, contain a sizeable amount of
implementation guidance and include disclosures appropriate for public companies.

Users of the financial statements of SMEs do not have those needs, but rather are more focused on
assessing shorter-term cash flows, liquidity and solvency. In addition, many SMEs say that full
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IFRS Standards impose a burden on them—a burden that has been growing as Standards have
become more detailed and more countries have begun to use them.

Thus, in developing the proposed IFRS for SMEs Standard, the Board's twin goals were to meet
user needs while balancing costs and benefits from a preparer perspective.

Project objective
The objective of this project was to develop a Standard expressly designed to meet the financial
reporting needs of entities that (a) do not have public accountability and (b) publish general
purpose financial statements for external users. Examples of such external users include owners
who are not involved in managing the business, existing and potential creditors, and credit rating
agencies.

The SMEs Standard was derived from full IFRS Standards with appropriate modifications based
on the needs of users of SME financial statements and cost-benefit considerations. 

The IFRS for SMEs Standard reflects five types of simplifications from full IFRS Standards:

 some topics are omitted because they are not relevant to typical SMEs;
 some accounting policy options are not allowed because a more simplified method is
available to SMEs;
 many of the recognition and measurement principles have been simplified;
 substantially fewer disclosures are required; and
 the text has been redrafted in ‘plain English’ for easier understandability and
translation.
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Unit 1: module 1: content 1/b - The Nature and scope of financial accounting

The Significance and Limitation of Accounting Information

Limitations of accounting information

1. Accounting transactions are recorded at their original historical monetary cost (historical
cost accounting) – no adjusted is made for inflation.
2. The profit for the period is found by matching the income against the historical cost of
items consumed in generating the revenue, which results in profit overstated when prices are
increasing.
3. Financial statements contain numerous estimates, assumptions and subjective judgments,
which are used in the measurement and reporting of business activity e.g. in determining the
provision for bad debt and depreciation. To the extent that the estimates are inaccurate the
financial statements are inaccurate
4. Companies select from various acceptable accounting practices when determining how well
an organization has performed over a period. Therefore, there is a lack of precision. E.g., a
company may select one method for the valuation of inventory from a number of acceptable
alternatives.
5. Fiscal year end data may not be typical of the financial condition during the year.
Financial statements may therefore not be representative of the balances of the accounts
during the year
6. Diversification within a global environment also limits the usefulness of financial
statements. Many firms are so diversified they cannot be classified by a single industry.
7. Certain events are not conducive to monetary measurement and are not included in
financial statements e.g. the work of good management.

Advantages of historical cost accounting

1. Minimizes subjectivity i.e. records are based on verified by reference to the source
documents.
2. Cheap and simple to operate.
3. The profit concept is well understood. [income less expenses = profit]
4. Within limits historical cost figures provided a basis for comparison with the results of
other companies for the same period.
5. There is no acceptable alternative.
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Unit 1: module 1: content 1/c - The users of accounting information and their needs

Users Needs
Owners/ To make decisions whether to invest in or disinvest in a particular business –
investors they need information concerning the risks and rewards associated with the
business.
Information concerning the financial position and performance to determine
whether managers have acted honestly, efficiently and in the owners best
interest.
Employees Concerns are job security and remuneration - Information concerning the
financial position and performance
Suppliers of Whether the business has enough cash resources to pay for goods and
goods and services supplied – concerned with the liquidity of the firm.
services The ability of the firm to honour and renew long term contracts - financial
position and performance may be required to assess the long term prospects
Lenders Short-term lenders will be concerned with liquidity and the ability to make
repayments.
Long term lenders will be concerned with liquidity as well as long term
survival
Customers Information to satisfy them that the business is able to continue supplying
goods or services at the required rate especially where long term contracts
involving detailed negotiations and binding commitments are being undertaken
- financial position and performance
Government Profits for calculating taxation
Information relating to resources of the business and profits for deciding on the
provision of support, curb or to regulate a particular business or industry

Management For decision making, planning and control so as to ensure that resources are
used in the most efficient manner- information on the current and future
financial position of the enterprise.
Competitors For comparison with their own performance to assess their efficiency and
effectiveness
To obtain an insight into possible future strategy
Financial analyst Information to advise investors – financial position and performance
and advisers
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Unit 1: module 1: content 1/d - The accounting Cycle

9. Prepare 1.
a post Analyze
closing transaction
trial on source
balance documents

8. 2.
Journalize
Journalize
and post the
closing transaction
entries s

7. 3.
Prepare Post to
financial ledger
statements accounts

6. Prepare
4.
an
Prepare a
adjusted
trial
trial 5 balance
balance Journalize
and post
adjusting
entries
Adjusting entries are done to:
1. comply with the accruals concept
2. calculate the prepayments and accruals of income and expenses
3. ensure that expenses such as depreciation and provision for doubtful debts are calculated
and correctly accounted for
4. determine the figures to be transferred to the income statement and the figures to be
disclosed in the balance sheet
5. ensure that the correct balances are carried forward in the ledger account