CODE:AFU 07101

❑Describe roles of accounting in business organization

❑Demonstrate the knowledge on accounting policies and
principles in recording transaction.
❑Apply accounting principle to record business
transactions in the book of accounting
❑Apply accounting standard to prepare Simple financial
statements;
 topics. 1st semester
CONTI…
❑Employ accounting principles to record business
transaction in the subsidiary books of accounts
❑Apply accounting principle to prepare Bank
reconciliation Statement
❑Employ accounting principles to Prepare
adjustment accounts for Financial Statements
❑Employ accounting principle to prepare the
statement of cost of goods manufactured
1.Accounting, Accounting policies and principles:
Learning Outcomes
a) Define Accounting
b) Explain the Objective/Purpose of Accounting
c) Discuss Accounting principles and policies
d) Distinguish between Financial Accounting and
Management Accounting
e) Describe the Role of International Accounting
Standard Board (IASB)
f) State advantages and disadvantages of International
Accounting Standards (IAS)
Define Accounting
• Accounting may be defined as the process of
recording,classifying,summarizing,analysing
and interpreting the financial transactions and
communicating the results thereof to the
persons who have interest in such information.
• Recording
• Analysing
• Summarising
• Interpreting
• Communicating
• Deals with Financial transactions
Recording
 This the basic function of accounting, which
ensure that all business transactions of
financial character are recorded in an orderly
manner.
 The work of recording is done in the book
termed as “Journal”
Classifying
 Is concerned with the systematic analysis of
the recorded transactions, with the view to
group transactions of one nature at one place.
 The work of classification is done in the book
termed as “Ledger”
Summarising
This involve the presenting the classified
business transactions in a manner which is
understandable and useful to the users of
accounting information.

The process leads to the preparation of the

following statements
1. Trial Balance
2. Statement of Comprehensive Income
3. Statement of Financial Position
Deals with Financial Transactions
• Accounting records only those transactions and
events in terms of money which are of financial
character
For example:
• If a company has got a team of dedicated and
trusted employees (it is good for the
company).But since it is not capable of being
expressed in terms of money,it will not be
Analyses and Interprets
This is the final function of accounting
Ensure that the recorded financial data is analyzed
and interpreted in a manner that the end-users can
make a meaningful judgment about the financial
condition and profitability of the business operations.

Communicates
The accounting information after being meaningfully
analysed and interpreted has to be communicated in
a proper form and manner to the proper persons.
This is done through preparation and distribution of
accounting reports
Objectives of Accounting
1. To keep systematic records
• Accounting is done to keep a
systematic records of business
transactions.
• In the absence of accounting there
would have been terrific burden on
human memory which in most cases
would have been impossible to bear.
2.To ascertain the operational profit or
loss
• Accounting helps in ascertaining the net
profit earned or loss suffered on account
of carrying business.

• This is done by keeping a proper record

of revenue and expenses of a particular
period.
3.To ascertain the financial position of
business:

• The businessman must know about his

financial position i.e., where he stands;
what he owes and what he owns? This
objective is served by the statement of
financial position.
4.To provide information to the users
for decision –making.

• Accounting these days has taken upon

itself the task of collecting, analysing
and reporting of information at the
required points of time to the required
levels of authority in order to facilitate
rational decision - making
5. Providing effective control over the
business
Accounting reveals the actual
performance of the business in terms of
production,sales,profit,loss,cost of
production and the book value of sundry
assets.
Accounting Principles and Policies
Accounting principles and policies
Rules of action or conduct which are
adopted by the accountants universally
while recording accounting transactions.

These principles can be classified into

two categories
1. Accounting Concepts
2. Accounting Conventions
• Includes those basic assumptions upon which the
science of accounting is based.
  The following are the important accounting concepts;
1. Money Measurement Concept
2. Business Entity Concept
3. Going Concern Concept
4. Cost Concept/Historical Cost Concept
5. Dual Aspect Concept
6. Accounting Period Concept
7. Period Matching of Cost and Revenue Concept
8. Realisation Concept
• For an accounting record to be made,it must be
able to be expressed in monetary terms
Note
• There is never any accounting record in
metres,litres and kilogram.
 ACCOUNTING/BUSINESS/SEPARATE
ENTITY
• The business entity concept is a boundary
rule that ensures that accounting records are
kept for the entities and not the people who
own or run the company.
 Business Entity
• Meaning
– The business and its owner(s) are two
separate existence entity
– Any private and personal incomes and
expenses of the owner(s) should not be
treated as the incomes and expenses of
the business

24
• Examples
– Insurance premiums for the owner’s
house should be excluded from the
expense of the business
– The owner’s property should not be
included in the premises account of the
business
– Any payments for the owner’s personal
expenses by the business will be treated
as drawings and reduced the owner’s
capital contribution in the business

25
 Going Concern concept
• Meaning
– The business will continue in
operational existence for the
foreseeable future
– Financial statements should be
prepared on a going concern basis
unless management either intends
to liquidate the enterprise or to
cease trading, or has no realistic
alternative but to do so 26
• Example
– Possible losses form the closure of
business will not be anticipated in
the accounts
– Prepayments, depreciation
provisions may be carried forward
in the expectation of proper
matching against the revenues of
future periods
– Non Current assets are recorded
at historical cost
27
• Accounting entries will be recorded
on the basis of objective evidence.
• Source of documents: such as
invoices,receipts,bank statements
• All information comes from source
documents and is based on Fact not
opinion will be recorded.
 Objectivity
• Meaning
– The accounting information should be
free from bias and capable of
independent verification
– The information should be based upon
verifiable evidence such as invoices or
contracts

29
• Example
– The recognition of revenue should
be based on verifiable evidence
such as the delivery of goods or
the issue of invoices

30
Is a recording and measurement rule that relates to
the practice of valuing assets at their original
acquisition cost.

According to this concept:

1. An asset is recorded at cost at the time of its
purchase, but it may systematically be reduced in
its value by charging depreciation.
Note:
 In the absence of this concept, the figure shown in
the accounting records would have depended on
the subjective views of a person
Example
If a business buys a plot of land for Tshs.20,000,000 in
2018,the asset would be recorded in the books at
Tshs.20,000,000 even if its market price at that time
happens to be Tsh.30,000,000.
In case a year later (2019),the market value of this asset
comes down to Tshs.10,000,000,it will continue to be
shown at Tshs.20,000,000 and not Tshs.10,000,000
• Duality Principle in Accounting (Accounting
equation)
• The dual aspect concept is the recording and
measurement rule that provides the basis for
double entry accounting system.

• It reflects the practical reality that every

business transaction always includes both the
giving and receiving of value.
For example
• A company may pay out cash in return for a
delivery into its warehouse of a consignment of
products that it subsequently aims to sell. The
company’s reduction in its cash balance is
reflected in the increase in its inventory of
products.
• Time period concept refers to a specific interval
of time (fixed period of time) for which entity’s
financial reports are prepared.
• The length of these periods should remain the
same.
• Fiscal year (July 1 –June 30) or 12 months
period
• Natural year (Jan 1 –Dec 31)
• Once a time period is set ,it must not change.
• Matching concept requires that a revenue
should be matched with the expenses incurred
in generating it.
• Revenue and related expenses must be
recorded in the same accounting period, even if
the receipt and payment of the cash occur in
different period.
• Avoid overstatement of income
• The realisation concept also known as revenue
recognition.
• Under this principle,revenue is recognized by the seller
when it is earned irrespective of whether cash from the
transactions has been received or not .
• The concept indicate the amount of revenue that
should be recognized from a given sale.
For example:
• In many instances,the sale of new car is
made at negotiated price that is lower than
the manufacturer’s list (price of the car).
• In these circumstance,revenue is the amount
at which the sale is made,rather than the list
price.
• If the list price is TZS.25,000,000 and the car
is actually sold for TZS.23,000,000,then the
revenue is TZS.23,000,0000.
 These are customs or traditions which guide the
accountant while preparing the accounting statements;
 The following are the important accounting conventions:
1. Full disclosure
2. Consistency
3. Materiality
4. Conservatism
• According to the convention accounting reports
should disclose fully and fairly the information
they purport to represent.
• They should be honestly prepared and sufficient
disclose information which is of material interest
to owners, present and potential creditors and
investors.
• According to this concept once an entity
decides on a method of reporting it must keep
unchanged from one period to another
For example
• If stock is valued at cost or market price
whichever is less, this principle should be
followed year after year
• Similarly if depreciation is charged on fixed
assets according to reducing balance method,it
• Accounting practice that records events that are
significant enough to justify the usefulness of
the information.
• Example
• We do not record a transaction each time we
use sheet of paper as an office supply Expense;
instead we wait until we purchase a large
quantity and then expenses it
 Materiality
• Meaning
– Immaterial amounts may be aggregated
with the amounts of a similar nature or
function and need not be presented
separately
– Materiality depends on the size and
nature of the item

43
• Example
– Small payments such as postage,
stationery and cleaning expenses should
not be disclosed separately. They should
be grouped together as sundry expenses
– The cost of small-valued assets such as
pencil sharpeners and paper clips should
be written off to the profit and loss
account as revenue expenditures,
although they can last for more than one
accounting period
44
The concept suggest the period when revenue should
be recognized.
Rule is to recognize the revenue when it is
reasonably certain and measurable
Recognize expenses as soon as reasonable possible
For Example
In October 2017`,XYZ Company Ltd agrees to buy an
automobile from Real Motors Company, for delivery in
January,2018.Although this is good news for Real
Motors, let us assume that something will go wrong
and the sale will not be consummated.
Therefore, the conservatism concept requires that the
revenue not be recorded (recognized0 until the
automobile is actually delivered.
• Therefore, the conservatism concept requires
that the revenue not be recorded (recognized
until the automobile is actually delivered.
• Thus,Real Motors Company does not recognize
revenue from this transaction in 2017 because
the revenue is not reasonably certain in
2017,even though it was reasonably possible.
• Rather than ,if the automobile is actually
delivery in 2018,the revenue is recognized in
 Prudence/Conservatism
• Meaning
– Revenues and profits are not anticipated.
Only realized profits with reasonable
certainty are recognized in the profit
and loss account
– However, provision is made for all known
expenses and losses whether the amount
is known for certain or just an
estimation
– This treatment minimizes the reported
profits and the valuation of assets 47
• Example
– Stock valuation sticks to rule of the
lower of cost and net realizable value
– The provision for doubtful debts should
be made
– Fixed assets must be depreciated over
their useful economic lives

48
Distinguish Between Financial Accounting and
Management Accounting
Financial Accounting
• Focuses on the specific needs of
decision makers internal and external to
the organization, such as stockholders,
suppliers, banks, and government
agencies

• It is mainly confined to the preparation

of financial statements
Management Accounting
• It is accounting for management, which
covers various areas such as Cost
Accounting, Budgetary Control, Inventory
Control,etc
• It is mainly concerned with providing
necessary information to the internal users
(such as management ) in such a way to
assist the management in the formation of
policies and in the planning and control of the
operations of the business.
• are the written statements
consisting of rules and guidelines set
out by accounting professional boards
for the preparation of uniform and
consistent financial statements.

• How a particular set of transactions

recognized,measured,presented and
disclosed in the financial statements
Qualitative characteristics
of useful financial
information
• Fundamental Qualitative
Characteristics
– Relevancy
– Faithfully Presentation

• Enhancing Qualitative Characteristic

– Comparability
– Verifiability
– Timeliness
Qualitative characteristics
of useful financial
information CONTI…
• Relevancy
– information is relevant if it is capable of
making a difference to the decisions
made by users
– financial information is capable of
making a difference in decisions if it has
predictive value or confirmatory value
• Faithfully presentation
– information must faithfully represent
the substance of what it purports to
characteristics of useful
financial information
CONTI…
– a faithful representation is, to the
maximum extent possible, complete,
neutral and free from error
– a faithful representation is affected by
level of measurement uncertainty
 Enhancing qualitative
characteristics
• the four qualitative characteristics
enhance the usefulness of
information
• but they cannot make non-useful
information useful
reduce/eliminate variation in accounting practice
and to introduce a degree of uniformity into
financial reporting.
Main advantages of this standardization are:-
1. Faithful representation: obligation to comply
more likely provide complete and faithful
representation
2. Comparability: be able to compare financial
statements i.e. trends of the same
organization or other similar organizations.
Is an independent, private-sector body which seeks to
set and enforce standards for accounting procedures.
Previously was known as the International Accounting
Standards Committee (IASC) until April 2001, when it
became the IASB.

It is responsible for maintaining, developing and

approving the International Financial Reporting
Standards (IFRS).