TOPIC: INTRODUCTION TO ACCOUNTING

MEANING OF ACCOUNTING
Accounting is the art of identifying, recording, classifying and summarizing in an orderly manner
and in monetary terms, transactions and events which are of financial character, communicating
financial information to interested parties and the subsequent interpretation to guide users of the
financial statement in their decision making.

Accounting includes designing forms and records to be used, designing accounting systems, data
analysis, decision making, report and financial statement preparation and the interpretation of these
reports and statements. An accountant is a person responsible for these various functions.

MEANING OF BOOK KEEPING

Book keeping is the recording and safe keeping of the accounting information for the preparation of
accounting statements in forms suitable for easy understanding and retrieval. The recording phase
of the accounting process is referred to as book keeping.

Double-Entry Bookkeeping first emerged in Northern Italy in the 14th century, where trading
ventures began to require more capital than a single individual was able to invest. The development
of joint-stock companies created wider audiences for accounts, as investors without firsthand
knowledge of their operations relied on accounts to provide the requisite information. This
development resulted in a split of accounting systems for internal (i.e. management accounting) and
external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure
regulations and a growing need for independent attestation of external accounts by auditors.

Today, accounting is called "the language of business" because it is the vehicle for reporting
financial information about a business entity to many different groups of people. Accounting that
concentrates on reporting to people inside the business entity is called management accounting and
is used to provide information to employees, managers, owner-managers and auditors. Management
accounting is concerned primarily with providing a basis for making management or operating
decisions.

Accounting that provides information to people outside the business entity is called financial
accounting and provides information to present and potential shareholders, creditors such as banks
or vendors, financial analysts, economists, and government agencies. Because these users have
different needs, the presentation of financial accounts is very structured and subject to many more
rules than management accounting. The body of rules that governs financial accounting in a given
jurisdiction is called Generally Accepted Accounting Principles (GAAP) and International Financial
Reporting Standards (IFRS).

ACCOUNTING FUNCTIONS
Accounting is a measurement and communication process designed to provide useful information.
This process includes identifying, recording, summarizing and interpreting business transactions
and events.

Accounting functions can be summarized by the following:

i. Identifying events which are financial in nature and which are to be recorded
ii. Recording includes writing by hand, use of typewriter, bookkeeping machine and machine
for recording information on magnetic tape paper or card
iii. Classifying or grouping of similar events or items together in order to bring about a more
efficient handling of many different items
iv. Summarizing of various group of data in concise form by way of explanations and through
development of significant relationship
v. Interpretation of financial statements

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BOOK KEEPING AND ACCOUNTING
Book keeping is about making record in a formal manner of each business transaction. It is neces-
sary for day-to-day business control as a businessman will need to be continuously aware of for ex-
ample, who owes him money and how much of these records also form the raw data grown which
the summary statement of profit and loss and capital can be extracted. These reports can then be
used by the owner and investors alike to judge how the business has progressed.

Accounting however, is about measuring the profit or loss by a business over a period of time and
capital, and reporting these summary and facts to interested parties so that they can make informed
business decisions.

ACCOUNTING INFORMATION
Accounting information are those information generated from the business transactions of an
organization. They could be daily, weekly, monthly or yearly information. In other words, they are
those accounting statements prepared from the organization's records either for the management or
the public at large or for both. The prepared summarized reports from already recorded transactions
are known as accounting information or better described as financial statements. Some of these
accounting information include: Income Statement (i.e. Trading and Profit and Loss Account),
Statement of Financial Position (i.e. Balance Sheet), Cash Flow Statement, Value Added
Statements, Bank Statement etc. These accounting information are prepared in summarized forms in
order not to put the users off with all forms of detailed calculations and or comprehensive analysis.

The Income Statement shows sales, costs of sales, net profit and tax, while the Balance Sheet shows
the totals of fixed assets, current assets, current liabilities, working capital, long term debts and the
Equity Value. These are the two most valuable accounting information of an organization because
they show the trading results and the assets and liabilities at a particular date, which meet what
interested parties look out for.

IMPORTANCE OF ACCOUNTING KNOWLEDGE

In any organization, especially the business concern, knowledge of accounting helps individuals to
carry out their duties most judiciously. Accounting knowledge makes internal control to be sound in
application as those carrying out the activities and transactions of the organization are familiar with
accounting as it applies to their functions. The importance of accounting as a means of control
makes it desirable for everyone occupying a responsible position in business entity to understand
accounting principles and practice. Promotion to a position of higher administrative responsibility
increases an individual's contacts with accounting. More of the decisions of senior officers are
based on the accounting figures supplied by the accounts department and as such basic
understanding of the accounting principles will help in quick understanding and interpretation of the
accounting data for decision making.

In summary, the knowledge of accounting helps the individuals in organisations to:

i. Have better understanding of the corporate goal of the business, since it is always primarily
stated in terms of money
ii. Prepare departmental budget
iii. Enables them fit properly into the organization's system and make them officially interact freely
with accounts department
iv. Enables them appreciate the organization better
v. Know the implication of wages negotiation because they can fairly interpret the financial state-
ments

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USERS AND PURPOSE OF ACCOUNTING INFORMATION
The users and purpose for which information they can prepare a financial statement are stated
below:
s/ User Purpose Information Needed
n
1. Management a. For control over assets a. Details of assets
b. To ascertain the efficiency of b. Details of cost revenue
management policy
c. To ascertain the proportion of cost c. Profitability level
incurred to revenue generated
2. Shareholders/ a. To enable them make appropriate a. Profitability level
investment investment decisions such as buying
analyst and selling of share
3. Lenders a. To enable them decide whether more a. Liquidity
including banks facility can be granted b. Interest coverage
c. Ratio of debts to equity
4. Employees a. To enable them decide whether more a. Profitability
facility can be granted b. liquidity
To negotiate their emoluments
b.
5. Tax authorities a. To determine the amount of tax a. Details of revenue and
payable by a company expenses
6. Auditors a. General audit and formation of a. Details of revenue and
opinion of the company’s state of expenses
affairs
7. Government a. To formulate policies a. Details of revenue and
expenses

Other users include: Stock Exchanges

Trade Associations
Financial Reporters and Analysts

Characteristics of Accounting Information

1. Understandability
This implies that accounting information must be expressed in such a way that it will be under-
standable to users who are generally assumed to have a reasonable knowledge of business and eco-
nomic activities
2. Relevance
This implies that accounting information must assist its 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?)
3. Consistency
This implies consistent treatment of similar items and application of accounting policies
4. 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.
5. Reliability
This implies that the accounting information that is presented is truthful, accurate, complete (noth-
ing significant missed out) and capable of being verified (e.g. by a potential investor).
6. Objectivity
This implies that accounting information is prepared and reported in a "neutral" way. In other
words, it is not biased towards a particular user group or vested interest

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REVISION QUESTIONS

SECTION A: Multiple Choice Questions (MCQ)

1. Accounting information is used by investors and creditors of a company to predict
A. future cash flows of the company
B. future tax payments of the company
C. potential merger candidates for the company
D. appropriate remunerations for the company's staff

2. The process of accounting is needed to … I. take a holiday II. assist in decision making
III. invest in startup of a business IV. track money spent
A. I, II and III
B. I, II and IV
C. I, III and IV
D. II, III and IV

3. Which of the following describes the practical framework of bookkeeping?

A. Classifying, recording and summarizing
B. Reporting, analyzing and interpreting
C. Classifying, analyzing and interpreting
D. Recording, summarizing and reporting

4. Which of the following users assesses the attractiveness of investing in a business?

A. Tax authorities
B. Financial analysts
C. Bank
D. Employees

5. Accountants use Generally Accepted Accounting Principles (GAAP) to make the financial
information communicated … I. relevant II. reliable III. comparable IV. profitable
A. I, II and III
B. I, II and IV
C. I, III and IV
D. II, III and IV

6. Which of the following highlights the correct order of the stages in the accounting cycle?
A. Journalizing, final accounts, posting to the ledger and trial balance
B. Journalizing, posting to the ledger, trial balance and final accounts
C. Posting to the ledger, trial balance, final accounts and journalizing
D. Posting to the ledger, journalizing, final accounts and trial balance

7. The main Purpose of Financial Accounting is?

A. To Provide financial information to shareholders
B. To maintain balance sheet
C. To minimize taxes.
D. To keep track of liabilities

8. The process of recording, classifying, measuring and communicating financial data of an

organization to enable users make assessments and decisions is known as …
A. concepts
B. subsidiary books
C. Bookkeeping
D. Accounting

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9. The double entry principle was introduced by …
A. Dutchmen and Simeon Steve
B. Luca Pacioli
C. Association of Public Accountants
D. The Institute of Chartered Accountants of Nigeria

10. Accounting is sometimes called the “language of …”

A. Wall Street
B. business
C. main street
D. financial statements

11. Financial accounting information …

A. should be incomplete in order to confuse competitors
B. should be prepared differently by each company
C. provides investors guarantees about the future
D. summarizes what has already occurred

12. External users of financial accounting information include all of the following except …
A. lenders such as bankers
B. governmental agencies such as the IRS
C. employees of a business
D. potential investors

13. Which of the following groups would have access to managerial accounting information?
A. bankers
B. investors
C. competitors of the business
D. managers

14. All of the following are examples of managerial accounting activities except …
A. preparing external financial statements in compliance with GAAP
B. deciding whether or not to use automation
C. making equipment repair or replacement decisions
D. measuring costs of production for each product produced

15. Which of the following is not true?

A. Organizations share a common purpose or mission
B. Organizations have inflows and outflows of resources
C. Organizations add value to society
D. Organizations need accounting information

16. Which of the following is not considered a stakeholder of an organization?

A. creditors
B. lenders
C. employees
D. a business in another industry

17. Stockholders can best be defined as which of the following?

A. investors who lend money to a business for a short period of time
B. investors who lend money to a business for a long period of time
C. investors who purchase an ownership in the business
D. analysts who rate the financial performance of the business

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18. The main Purpose of Financial Accounting is?
A. To Provide financial information to shareholders
B. To maintain balance sheet
C. To minimize taxes.
D. To keep track of liabilities

19. Recording financial transaction is part of?

A. Accounting
B. Bookkeeping
C. Data Entry
D. Journal

20. Who is an external user of financial statements?

A. Shareholders
B. CEO
C. Manager
D. Creditor

SECTION B: Theory Questions

1. Define Accounting
2. Define Book Keeping
3. Differentiate Accounting from Book Keeping
4. State the functions expected of an accounting department in an organization
5. What is accounting information?
6. Name any 5 users of accounting information and specify at least one purpose each of them
uses the information obtained
7. Name any 2 professional accounting bodies in Nigeria
8. State any 5 features of financial accounting
9. Explain any 5 importance of Book Keeping and Accounting
10. Mention any 4 limitations of Accounting

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