11 ACCOUNTING

Strand 1: Communication Financial and Sub-strand 1.1 Conceptual Basis of

Non-Financial Information Accounting
LESSON ACTIVITY 1: The Meaning and Role of Accounting

The Specific Learning Outcomes (SLO) targeted in this lesson is provided in the table
below.

SLO # Students are able to: Skill Level SLO Code

1 Define accounting 1 11ACC1.1.1.1
2 Describe the role of accounting 2 11ACC1.1.2.1

A. Introduction

Accounting is often called the language of business. The basic function of a language is to serve
as a means of communication. Language is a means of communicating information both
internally and externally to various users. Just as you need to speak in Bislama to your families
and friends in order to pass on a message, so does accounting. Accounting also serves this
function where it is used as a means or mode or channel of communicating the results of
business operations to various interested parties.

Though accounting is often associated with business but it is not only business which makes use
of accounting. A housewife uses accounting, the government uses accounting and many other
individuals. For example, a housewife has to keep a record of the money received and spent by
her during a particular period, maybe two weeks. She can record her receipts of money on one
page of her “household diary” while payments for different items such as milk, food, clothing,
house, education, etc… on some other pages of her diary in chronological order.

When she does that, the record will help her in knowing about:

i. The sources from which she received cash and the purposes for which it was utilized,
ii. Whether her receipts are more than her payments or vice-versa?
iii. The balance of cash in hand or at the end of a period or maybe two weeks

In case the housewife records her transactions regularly, she can collect valuable information
about the nature of her receipts and payments. For example, she can find out the total amount
spent by her during a period (say a year) on different items say milk, food, education,
entertainment, etc. Similarly she can find the sources of her receipts such as salary of her
husband, rent from property, cash gifts from her relatives, etc. Thus, at the end of a period (say a
year) she can see for herself about her financial position i.e., what she owns and what she owes.
This will help her in planning her future income and expenses (or making out a budget) to a great

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extent. The need for accounting is all the more great for a person who is running a business.
He/she must know:

(i) What he owns?

(ii) What he owes?

(iii) Whether he has earn a profit or suffered a loss on account of running a business?

(iv) What is his financial position i.e. whether he will be in a position to meet all his
commitments in the near future or he is in the process of becoming a bankrupt?

B. Defining Accounting

There are many definitions of accounting that you can use and all of them have a variety of
features that are common to them. However, for the purpose of this course, we will define
Accounting as:

the process of identifying, measuring, recording and communicating economic information

to permit informed judgements and economic decisions by the user of the information
(Hogget, Edwards, Medlin, 2003, p.7).

It is very important that you understand what this definition means because the features
identified (underlined) above are common to any definition of Accounting you may come across.

1. Accounting is considered a language or an art

This means it requires your use of skills and creative judgement. One has to be trained in
this discipline to be able to perform accounting functions well. Like a language, you need
to learn how to speak this language so you can communicate well.

2. Accounting involves interconnected stages or phases

Identifying means being able to recognize and tell what a financial element is, whether if
it is an asset, liability or an expense or revenue to the business.
 Identifying also means being able to figure out whether a transaction or event that
has happened in the business is a financial transaction or not

Measuring involves using a unit of currency to measure the financial transactions and
involves calculating in monetary terms.

Classifying refers to separating accounts into different categories like assets, liabilities,
incomes and expenses.

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  This is important so that the rules of debit and credit can be correctly and
accurately applied.

Recording is the basic phase of accounting and it is also known as bookkeeping. All
financial transactions are recorded in a systematical and chronological manner in the
appropriate books or databases.
It includes records of assets, liabilities, monetary transactions, ledgers, journals and any
supporting documents such as cheques and invoices.

Summarizing involves summarizing the data after each accounting period, such as a
month, a quarter (4 months) or a year.
 The data must be presented in a manner which is easy to understand and used by
both external and internal users of the accounting statements. Graphs and other
visual elements can be used to complement the text in financial reports.

Communicating/Interpreting is concerned with analyzing financial data and is a critical

tool for decision-making.
 The data can be presented in financial statements such as the statement of
financial position (the balance sheet) or the statement of financial performance
(Profit & Loss Statement).
The figures or data in those statements are then interpreted in a manner which
allows the decision-makers to prepare future plans and even frame policies to
execute financial plans.

3. Concerned with transactions and events having financial character

For example, if the business hires a new employee. This is qualitative information with
no financial character or meaning. Therefore, it is not recorded. However, the payment of
salaries, acquisition of an office building, sale of goods etc. are recorded because they
involve financial value.
4. Business transactions are expressed in terms of money
The business entity records amounts in an accounting system using a currency. It is not
enough to just record that the business paid salaries for April. It must include monetary
figures – say for example, 26,000vt salaries expense.

This definition can be simplified further:

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 C. Role/Purpose of Accounting

The main purpose of accounting is to communicate financial information to interested parties so

that they can use this information to make informed and accurate decisions.

D. Functions of Accounting

Below is listed also 5 (five) of the most important functions that Accounting performs:

Means of establishing accountability: Accounting information enables you to account

for your decisions and actions and ensures that the business operations comply with a
Means of Communication: Accounting is a language that is used to
country’s laws. It is especially important to managers who have to account for how the
communicate business information expressed in monetary terms. Users of the
owners’ funds entrusted to the managers were used. Accounting data is collected as
financial/business information must be able to understand the message that is
evidence by the management to help explain the reasons for management decisions
being transmitted. Use of graphs, reports, tables, charts, often help to make
regarding the use of resources available to the entity. It helps them to account for their
non-accountants or basic people understand the information being presented.
stewardship function and discharge their responsibility to a higher authority (the owners) for
the actions and policies undertaken.

Assistance to business decision making: Accounting information enables the

measurement and evaluation of the performance of the business by producing and filing
financial records that allows managers to make informed decisions. It allows managers to
answer the questions like; has the utilization of resources available to the business been
used wisely? Having current, relevant and reliable financial information assists managers
and other internal and external users (owners, employees, suppliers, investors) to make
timely decisions regarding allocation or use of resources in the business e.g. Is the business
making enough profit selling hard copy books or should we sell e-copies?
Control device: Accounting information helps to evaluate whether all sections or
departments within the business is working together efficiently and effectively to 4
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within
Assists interested the business
parties: for example,
Accounting thean
allows for use of budgets,
entity inventory control, petty cash
to prepare
reimbursement
summarised reports etc. Budgeting
of financial statements that controls how the money
permits interested should be spent, if a project or
parties
 E. Scope/Branches of Accounting

Developments in Accounting as a result of changes to its environment have not only caused
changes in the purpose of accounting but also have increased the scope of accounting.

It is not common to see accountants engaged in a variety of tasks that they traditionally were not
involved in. Figure 1.2 gives you an indication of the types of activities that accountants
regularly engage in as part of their work.

You should realise that the increase in numbers of users with different needs created the need for
accountants to specialize in certain areas within Accounting. Some of these briefly discussed
below.

Figure 1.2

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Figure 1.3 below shows a representation of job opportunities that you can find employment in
within the accounting field.

Activity

1. Define accounting

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2. Accounting is known to be a control device. Describe what this statement means.

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3. “One of the function of accounting is it aids decision making.”

Describe how accounting aids decision making.

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 ___________________________________________________________________________
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4. What if there is no knowledge of accounting in our society, what do you think would
happen?

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