LAGOS STATE UNIVERCITY

DEPARTMENT OF ACCOUNTING
ACC101 INTRODUCTION TO ACCOUNTING
LESSON NOTE 1:
NATURE AND GENERAL FRAMEWORK OF ACCOUNTING
Learning Outcome
Significance of accounting
➢ Financial accounting primarily revolves around the process of reporting an entity's
financial performance and position, serving as a stewardship function primarily directed
towards management to fulfill the basic information requirements of parties not directly
involved in day-to-day operations.

➢ It encompasses activities such as collecting, recording, analyzing, and summarizing

revenue, expenses, assets, and liabilities to assess performance (i.e., profits) and the
financial position (net worth) of the entity within a specific period, typically a year.

➢ A typical set of financial statements includes the Income Statement (showing Profit or Loss
and Other Comprehensive Income for the year, detailing income and expenses), the
Statement of Financial Position (displaying Assets, Liabilities, and Capital at the year-end),
Cash Flow Statements, and accompanying Notes or working papers.

➢ A foundational aspect of Financial Accounting is Book-Keeping, which involves recording

raw data from source documents like receipts, invoices, payment vouchers, and subsidiary
or original entry books (e.g., Sales Day Book, Purchases Day Book, Cash Book, Petty Cash
Book). The primary objective of Book-Keeping is to transparently document the origin and
recording of transactions in subsidiary records or original entry books.
Historical background of accounting
➢ Financial Accounting has ancient roots, as throughout history, business people have
consistently employed various crude methods to assess performance, profits, and gains
from their business endeavors. However, the formal development of Financial
Accounting traces back to 14th-century Italy, where Italian Merchants began utilizing
double-entry systems using plus (+) and minus (-) symbols to record transactions
systematically.

➢ The earliest recorded instance of double-entry theory can be found in the accounts of
the stewards of the Commune of Genoa in 1340. This basic system evolved over time,
culminating in the establishment of formal bookkeeping principles by Fr. Luca Pacioli,
an Italian monk, in 1494.

➢ Pacioli dedicated a chapter in his book titled "Summa de Arithmetica, Geometrica,

Proportioni et Proportionalita" to elucidate the principles of the double-entry system.
Consequently, it became imperative for managers to provide owners with reports
detailing the performance, financial position (net worth), and liquidity of businesses
during the review period. Such reports typically include the following components:

Definition purpose and quality of accounting

Accounting involves the process of documenting, categorizing, summarizing, and analyzing
financial transactions within a business. This information is then presented and communicated
to facilitate significant decision-making in day-to-day operations. Consequently, accounting is
a dynamic process aimed at delivering financial information that holds utility for a diverse
range of users in making crucial economic decisions.
 Bookkeeping serves as the foundational step in financial accounting. It encompasses the
classification and recording of business transactions from source documents into various books
of account, including sales day books, purchases day books, returns inward and outward day
books, petty cash books, and cash books, among other subsidiary records. The recording of
transactions is a routine and repetitive task, providing accountants with essential raw financial
data necessary for the preparation of annual financial statements.

Other Specialized Purposes of Accounting

i. Cost Accounting
Cost accounting involves the systematic accumulation of cost data or initial cost of an item to
provide managerial information for decision-making. It encompasses cost accumulation related
to specific products and departments for planning, control, and decision-making purposes.

ii. Performance Management

Performance management is a continuous process where managers and employees collaborate to
plan, monitor, and review workforce effectiveness in achieving the entity's overall objectives.

iii. Auditing
Auditing is the independent examination of an entity's financial statements by a professional
accountant to ensure completeness and reliability. The auditor gathers various forms of audit
evidence before forming an opinion on the fairness of the financial statements.

iv. Government Accounting

Government accounting involves recognizing and reflecting revenue and expenditure in
government accounts to provide relevant financial information for decision-making and
compliance with government financial regulations. It focuses on planning, control, and appraisal
of government activities.

v. Taxation
Taxation involves using accounting profits to determine taxable profits, considering differences
in allowable expenses and income for accounting and tax purposes. Understanding taxable and
non-taxable items helps entities manage their tax liabilities effectively.

vi. Financial Management

Financial management involves efficiently procuring, utilizing, and accounting for an entity's
financial resources to maximize owner wealth. It encompasses financing decisions, investment
decisions, and dividend decisions. Secondary roles include treasury management, asset
replacement, insurance policies, tax management, and working capital management.

Components of Financial Statement

In accordance with IAS 1 on presentation of Financial Statements, the components of Financial
Statements are:
➢ Statement of Financial Position;
➢ Statement of Profit or Loss and Other Comprehensive Income (OCI, in this syllabus as
Statement of Profit or Loss);
➢ Statement of cashflows, (this is outside the present syllabus, it will be addressed as
candidates progress in the ICAN examinations);
➢ Statement of changes in equity (also, this is also not in this syllabus); and
Qualitative Characteristics of Useful Financial Information
The qualitative characteristics of Financial Statements are the main features or attributes or basic
elements that are inherent in the reports to make it useful and address the purposes why they are
prepared. The International Accounting Standards Board, which is referred to as the IASB’s
conceptual framework; it states that accounting information is useful if it possesses both the

➢ Fundamental and
➢ Enhancing Qualitative Characteristics

Fundamental Characteristics
Relevance
A financial information is relevant if it can make a difference in the decision made by users. A
financial information makes difference in users’ decision when the users are aware capable of
making difference in decisions when it:
➢ has the capacity to directly influence the outcomes of how users used the reports to allocate
economic resources among various alternative courses of actions, that is such report should
have capacity to influence major economic decisions of users on resource allocations;
➢ is supplied in time to directly influence the economic decisions;
➢ has Predictive Value, Confirmative value or both information has predictive value if it helps
the users to predict what happen in the future. Where the information helps users confirm their
earlier assessments and predictions made in the past, it is said to possess confirmatory value b.
Faithful Representation
Financial reports are depictions or representations of economic phenomena in words and numbers.
An information is faithfully presented if it indicates faithfully the transactions they contained, other
events it purports to present and these are reported and accounted for in accordance to the substance
and economic realities but not merely their legal form of ownerships. In other words, for a financial
information to be useful, the information reported must not only represent relevant t h e
phenomena, but it must also faithfully represent the phenomena that it purports to represent. For
an information to be perfectly and faithfully reported, it must have three characteristics. The
information must be:

Enhancing Qualitative Characteristics

These are qualitative characteristics that enhance the usefulness of information that is relevant and
faithfully presented. They include:
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability.

➢ Comparability is that qualitative characteristic of financial information that allows a

choice between. Where an entity is privileged to have information about the financial
performance of other entities of similar sizes in the same industry, a comparison of the
entity’s performance with those of others enables sound economic decisions to be
made.
➢
Verifiability is the characteristic that provides users with confidence that the
information accurately represents what it claims to convey. Consequently, various
knowledgeable individuals examining the information will be capable of reaching
similar conclusions regarding the same matter.
 ➢ Timeliness implies that users are given the relevant information needed to take
economic decisions in Generally, the longer the information had been obtained the less
useful it becomes for making today’s decisions. However, where a user is required to
make some trend analysis, seemingly old information may have some continuing
usefulness. The older an information the less it is not useful to the users of the
information.

➢ Understandability Information should be presented in a way that the user can

comprehend it. This can be achieved if the information is appropriately classified so
that the user easily grasps the information. Financial reports should therefore be
presented in a form that any average knowledgeable reader can understand for it to be
useful to him.
Types of Accounts
An account is a record, which is used to post financial transactions of an entity’s over a stated
period of time. The account has two sides, the debit and the credit sides. The account records twice
every transaction in a period of time.

A ledger is a form of account with the debit and credit sides. The principles of duality or double
entry principles are usually engaged to record transactions into ledgers.

In Financial Accounting, there are two (2) main classifications of ledger.

a) General Ledgers; and
b) Subsidiary Ledgers

General Ledger (GL)

A General Ledger is a set of account, which records the day-to-day transactions of business entity
using the concept of double entries. This is known as duality concept. The General Ledger reveals
the summary of all subsidiary ledgers in which every transaction is recorded. Each transaction has
two parts, these are the debit and the credit parts. GL contains information which is needed to
prepare the financial statements. The transactions recorded in the GL reveals the summary/balance
of assets, liabilities, capital/equity, revenues and expenses. The GL encompasses all transactions
to prepare the Income Statements, Statement of Financial Position and other reports. The GL is
very useful in extracting the Trial Balance, list of balances in all books of accounts of an entity.
This assist in locating errors in the books of accounts.

Subsidiary Ledger
A subsidiary ledger is called books of original entry or books of prime entry. The subsidiary
accounts consist accounts such as Sales Day Book, Purchases Day Book, Returns Inward Day
Book, Return Outward Day Book, Cash Book and Petty Cash Book,

a. Impersonal Accounts
An impersonal ledger account does not involve individuals, firms, sole traders, partnership or
company. Impersonal account does not affect these groups of people.
An Impersonal Ledger Account can be classified into two main categories; these are real account
and nominal account
(i) Real Accounts A real account records transactions relating to tangible property or
possession of individuals, firms, and companies, etc. A real account can never be a
liability account. Real accounts are assets accounts. Examples of real account
transactions include plant and machinery, furniture, equipment, machinery, building,
etc. They physically exist in reality.
 (ii) Nominal Accounts Nominal Accounts consists of accounts of incomes and
expenditures or expenses and intangible assets.

Income relates to gain, that is, excess of revenue over costs; while expenditures are
expenses/costs expended on anything.

Also, intangible assets are assets that do not have physical existence e.g. Franchise,
Patents, Goodwill and Copyright. Examples of expenditures are rent, salaries and
wages, stationery, rates, petrol, lubricants and postages etc.

Examples of incomes are discount received, commission received, sales, interest

received, commission received, and interest received among others.

It should be stressed that all entries in the nominal accounts end in the Statement of
profit or loss. That is, the balances in the nominal accounts are normally used to prepare
the Statement of Profit or Loss for the year ended 31 December, 20X2. In smaller
entities, every account may be kept in just one ledger but bigger organizations keep
their accounts in many ledgers.

b. Personal Accounts On the opposite, personal ledger records the accounts of various
individuals, firms, sole traders, partnerships, companies etc. Examples include Yinka’s,
ABC’s account, Olukunle’s Account. It can be further categorized as: Receivables’ Ledger,
which records customers who bought business goods on credit, it is called sales ledger. It
may also be Supplier’s Ledger – records of suppliers who sold goods on credit to the
business. Also, there is a private ledger.
c. A private ledger records private information such as capital account, drawings account,
loans account, personal advances, bank/cash account and Statement of Profit or Loss for
the ended-- - Capital Account monitors the resources use in starting business and
Bank/Cash account, is used to keep all monies of the business.

Users of Financial Statements Accounting information.

a) Direct Users; and

b) Indirect Users Direct users are mainly the stakeholders in the business.

The direct users bear the consequences of losses made in the course of a business. They are owners
of business, management, employees, long and short-term supplier of funds.

The indirect users of financial statements do not have financial stake in the running of a business
entities.

Examples of indirect users of financial statements are the Federal Inland Revenue Services, State
Inland Revenue Services, customers, financial analysts, government at various levels, community
and associations among others.

The following people are likely to be interested in accounting information.

(a) Owners of the business/investors: These are Sole traders, partners and shareholders. They
need accounting information to asses show efficiently the management is performing –they want
to know how profit able the business is and how much of this profit they can withdraw for their
own use. It will also allow shareholders to make appropriate investment decisions such as buying
and selling of shares, deciding on whether to dispose some or all the shares, or to acquire more of
the entity’s shares.

(b) Management: These are the people who manage the affairs of the business for the owners. In
limited liability company, they are the member so the board of directors and other management.
They need accounting information to ascertain the efficiency of the policy they formulate and to
plan and control their sources of the business.

(c) Trade Payables: These are the people who supply goods to the business on credit. The trade
payables want to know the ability of the business to pay or the good supplied to the business
promptly. They will be interested in the liquidity of the business.

(d) Customers: These are the people who purchase the goods or services provided by the business.
The customers want to know whether the business will continue to be are liable source of supply;
though they will also be interested in the quality

QUESTIONS
1. The last phase of book keeping is
a) Extraction of the Trial Balance
b) Preparation of financial statements
c) Issuing annual reports
d) Preparation of source document
e) Interpretations of accounts
2. Who reports on the “true and fair view” of the financial statements?
a) Government agencies
b) Owners of the entity
c) The entity’s accountant
d) The Auditor
e) Financial Director
3. What is the use fullness of the Annual Reports and Accounts?
a) To boost entity’s profit
b) For periodic review of entity’s performance
c) For daily operations of the entity by management
d) To be able to minimize tax payable by the entity
e) Personnel Management
4. One of the following is NOT an example of business entity
a) Sole trader
b) Partnership
c) Limited liability Company
d) Club or Association
e) Religious Association
5. One of the following is NOT an importance of accounting and book keeping.
a) Book keeping provides permanent records for all financial transactions
b) The records are used by the Inland Revenue for tax assessment.
c) The records can be used to determine the promoters of the organization
d) The assets and liabilities of a business are shown
e) Fraud discovery
6. Which of the following is recorded in the statement of profit or loss?
a) Revenue
b) Bad debt
c) Return inward
 d) Return outward
e) Depreciation reserve
7. Which of the following is an indirect user of financial accounting? (a) Tax Authority (b)
Management (c) Employee (d) Lenders (e) Trade Union
8. A procedure for accumulating cost is called______ (a) Performance Management (b) Cost
Accounting (c) Financial Management (d) Taxation (e) Financial Accounting
9. A new branch of accounting which deals with non-governmental accounting is called__ (a)
Fiduciary Accounting (b) Sustainability Accounting (c) Environmental Accounting (d)
Fund Accounting (e) Project Accounting
10. A financial statement that is capable of making a difference in the decision made by the
users is said to be _____ (a) faithfully represented (b) relevance (c) comparable d)
verifiable (e) complete
11. The two main financial statements drawn up by a sole trader are..................
and........................
12. Which form of accounting provide information needed for the day to day running of a
business?
13. The body responsible for developing International Financial Reporting Standards is
the............................
14. Financial Accounting is majorly concerned with reporting on ______
15. An accountant primarily relies on the work of _____ to prepare and analyse financial
information.
16. The first theory of double entry was found in the account of _______
17. The book titled the Summa De Arithmetical Geometry and Proportion was published in the
year______
18. Financial Accounting was developed in which country?
19. An acronym GAAP means.
20. State two (2) main processes involved in double entries
21. Define the following
a) Accounting
b) Book-keeping
c) Social and environmental accounting
d) Forensic accounting
e) Performance Management
22. Briefly trace the historical development of accounting to the present day.
23. A professional accountant performs many roles for an entity. State and explain the roles of
professional accountants to an entity.
24. Explain the qualitative characteristics of Useful Financial Information.
25. Explain the functions of each of:
(i) The IASB
(ii) The IFRIC
(iii) The FRCN

References
Financial accounting made simple – Robert Igben FCA
ICAN ATSWA PACK