Lecture 1

Introduction to
 History of Accounting
• Luca Pacioli – Father of Accounting
• 1494 – Summa de Arithmetica, Geometrica,
Propotioni et Proportionalite
• Double entry book-keeping
 WHAT IS ACCOUNTING?
Accounting is an information system that
identifies, records, and communicates
the economic events (transactions)
of an organization to interested users.
 Accounting process
 Identifying  Recording
Business Business
Activities Activities
 Communicating
Business Activities
ABC Plc
Annual Report
 Finance and Accounting
• Finance: raising of money
• Accounting: recording and controlling of what
happens to that money
 Purposes for Accounting
• How much profit or loss has the business made?
• How much money does the company owe?
• Is the business financially stable?
• What is the growth potential for the business?
• To meet statutory and regulatory requirements
• To ensure proper record keeping, and financial
control
• To aid planning and objective measuring
• Will the company have sufficient funds to meet
its commitments?
There are three types of
business organizations

 Sole trader
 Partnership
 Limited companies
 Characteristics
• Run by owner or appointed
A Sole trader is
manager
owned by one
• Needs only trading license
individual.
• Sole trader and the business
are legally the same entity
• Owner contributes the capital
Joe’s Electrical • The sole trader is personally
responsible and liable for any
business debts
• Owner takes all the profits
• Auditing financial statements
is not mandatory

A partnership is
owned by two or
more individuals.
Joe and Mary’s Electrical
Characteristics
• There is a minimum of two and a
maximum of twenty partners
(while, in professional
enterprises, this number is
unlimited).
• Managed by one or more
partners or an employed
manager
• No legal personality (the partners
and the business are legally the
same entity)
• Unlimited liability
• A partner cannot sell his/her share in the
business to anyone else without the consent
of the other partners
• Profits are divided between partners
according to stipulations in the partnership
agreement
• No continuity
• A partner is an agent of the partnership and
signs contracts on its behalf.
 Features
A Limited company is • Owned by shareholders and
organized under state run by BOD
or federal statutes as a • Formed to take the
separate legal entity. advantage of limited liability
• Company is a legal entity in
its own rights
• Should register at
J&M Electrical Plc. Companies House
• Must complete MOA and
AOA
• Financial accounts should be
audited and submitted to
Companies House
 Users of Accounting
• Financial information need to be presented to
various parties who are interested in it
• Those recipients of accounting information are
referred as “users” of information
• Different users need information for different
purposes
 Debtors
Owners &
Creditors

Government

Prospective
owners
Users
Competitors

Investors

Management
Employees
Users of Financial Statements

• Investors
– Need information about the profitability, dividend and
financial position in order to assess the quality and the
price of shares of a company
• Lenders
– Need information about the profitability and solvency of
the business in order to determine the risk and interest
rate of loans
• Management
– Need information for planning, policy making and
evaluation
• Suppliers and trade creditors
– Need information about the liquidity of business in order
to access the ability to repay the amounts owed to them
• Government
– Need information about various businesses for
statistics and formulation of economic plan and
taxation purpose
• Customers
– Interested in long-tem stability of the
business and continuance of the supply of
particular products
• Employees
– Interested in the stability of the business to
provide employment, fringe benefits and
promotion opportunities
• Public
– Need information about the trends and recent
development