Financial

Accounting-I
BCIS 4th Semester
Pokhara University

- Dr. Sunil Pokharel

 Unit I: The Conceptual Foundation of Accounting
Accounting as a Language of Business:
 Accounting is often referred to as the "language of business" because it
provides a common way to communicate financial information to different
stakeholders, such as investors, creditors, managers, and government
agencies.
 Accounting uses a set of standardized rules and principles to record,
summarize, and report financial transactions. This allows stakeholders to
understand the financial performance and position of a business in a clear
and concise way.
 Accounting is also a valuable tool for managers. It can be used to track costs
and revenues, identify areas for improvement, and make informed decisions
about the future of the business. For example, managers can use accounting
data to set budgets, develop pricing strategies, and make investment
decisions.
 Here are some specific examples of how accounting is used as the language
of business:
• Financial statements: Financial statements are the primary means of
communicating financial information to external stakeholders. They provide a
summary of the company's financial performance and position for a specific
period of time.
• Management reports: Management reports are used to provide managers with
information about the company's financial performance and position. This information
can be used to make informed decisions about the day-to-day operations of the business.

• Tax returns: Tax returns are used to report the company's financial performance to the
government. This information is used to calculate the company's tax liability.

• Audits: Audits are an independent assessment of the company's financial statements.

They are used to ensure that the financial statements are accurate and fairly represent
the company's financial performance and position.

 Accounting is an essential tool for businesses of all sizes. It provides a common way to
communicate financial information to different stakeholders and helps managers to
make informed decisions.
 Forms of Business Organizations
 There are four main forms of business organizations:

• Sole proprietorship: A sole proprietorship is a business that is owned and

operated by one person. It is the simplest and most common form of business
organization to form. However, sole proprietors have unlimited liability,
meaning that they are personally responsible for all of the debts and liabilities of
the business.

• Partnership: A partnership is a business that is owned and operated by two or

more people. Partnerships can be either general partnerships or limited
partnerships.
• Corporation: A corporation is a legal entity that is separate from its owners.
Corporations are formed by filing articles of incorporation with the state. Corporations
have limited liability, meaning that the shareholders of the corporation are not
personally responsible for the debts and liabilities of the corporation.

• Limited liability company (LLC): An LLC is a hybrid business entity that combines
the features of a partnership and a corporation. LLCs have limited liability, like
corporations, but they are taxed as partnerships, which means that the owners of the
LLC pass through their share of the profits and losses of the LLC to their personal
income tax returns.

 The best form of business organization for a particular business will depend on a
variety of factors, such as the size and complexity of the business, the industry in
which the business operates, and the personal preferences of the owners.
 Types of activities performed by business organization

 Business organizations perform a variety of activities, depending on their

industry and specific business model. However, there are some common types
of activities that most business organizations perform, including:
• Procurement: Businesses need to procure the goods and services they need to
operate. This may include purchasing raw materials, inventory, supplies, and
equipment.
• Production: Businesses that produce goods need to have a production process
in place. This may involve manufacturing, assembling, or processing goods.
• Marketing: Businesses need to market their products and services to potential
customers. This may involve advertising, public relations, and sales promotions.
• Sales: Businesses need to sell their products and services in order to generate
revenue. This may involve direct sales, indirect sales, or online sales.
• Customer service: Businesses need to provide customer service to their customers.
This may include answering customer questions, resolving customer issues, and
providing support to customers.

• Accounting: Businesses need to keep track of their financial transactions. This may
involve accounting for sales, expenses, assets, and liabilities.

• Finance: Businesses need to manage their finances. This may involve budgeting,
forecasting, and investing.

• Human resources: Businesses need to manage their employees. This may involve
hiring, training, and compensating employees.

• Information technology: Businesses need to use information technology to support

their operations. This may involve using computers, software, and networks.
 Users of accounting information: internal and external
 The users of accounting information can be divided into two main
categories: internal users and external users.
 Internal users are individuals or groups within an organization who use
accounting information to make decisions about the organization's
operations. Internal users include:
• Managers: Managers use accounting information to make decisions
about such things as pricing, budgeting, and investing.
• Employees: Employees use accounting information to understand
their compensation and benefits, and to track their performance.
• Owners: Owners use accounting information to assess the financial
performance of their organization and to make decisions about
whether to invest more money in the organization or to sell it.
 External users are individuals or groups outside of an organization who use
accounting information to make decisions about the organization. External users
include:
• Investors: Investors use accounting information to decide whether or not to
invest in an organization.
• Creditors: Creditors use accounting information to assess the creditworthiness
of an organization and to decide whether or not to lend money to the
organization.
• Government agencies: Government agencies use accounting information to
collect taxes and to regulate businesses.
• Customers: Customers use accounting information to assess the financial
stability of an organization and to make decisions about whether or not to do
business with the organization.
• Public: The public uses accounting information to understand the financial
performance of businesses and to make informed decisions about where to work,
shop, and invest.
 Qualitative characteristics of accounting information
 The qualitative characteristics of accounting information are the
attributes that make accounting information useful for decision-
making. The two fundamental qualitative characteristics are:
• Relevance: Accounting information is relevant if it is capable of
influencing the decisions of users.
• Faithful representation: Accounting information is faithfully
represented if it is complete, neutral, and free from material error.
 In addition to these two fundamental qualitative characteristics, there
are four enhancing qualitative characteristics:
• Comparability: Accounting information is comparable if it can be
compared with other accounting information for the same entity over
time and for different entities at the same point in time.
• Verifiability: Accounting information is verifiable if different knowledgeable
and independent observers could reach consensus, although not necessarily
complete agreement, that the information is faithfully represented.

• Timeliness: Accounting information is timely if it is available to users in time to

influence their decisions.

• Understandability: Accounting information is understandable if it is presented

in a clear and concise way that is comprehensible to users with a reasonable
knowledge of business and accounting.

 These qualitative characteristics are important because they help to ensure that
accounting information is useful for decision-making.
 The Accounting Profession: Role and Activities of an Accountant
 The accounting profession is a broad field that encompasses all aspects of
financial reporting and management accounting. Accountants play a vital
role in the global economy, helping businesses of all sizes to operate
efficiently and effectively.
 Accountants have a wide range of responsibilities, which can vary
depending on their area of specialization. However, some of the most
common activities of accountants include:
• Preparing financial statements: Accountants prepare financial
statements, such as balance sheets, income statements, and cash flow
statements, which provide a snapshot of a company's financial
performance and position.
• Conducting audits: Accountants conduct audits to ensure that a
company's financial statements are accurate and reliable.
• Providing tax advice: Accountants provide tax advice to
businesses and individuals, helping them to comply with tax
laws and minimize their tax liability.
• Managing financial systems: Accountants manage financial
systems, such as accounting software and ERP systems, which
help businesses to track their financial transactions and generate
reports.
• Providing financial analysis: Accountants provide financial
analysis to businesses, helping them to make informed decisions
about pricing, budgeting, and investing.
Accountants play a vital role in the global economy by helping
businesses of all sizes to operate efficiently and effectively.
 The Accounting Framework - GAAP
 Generally Accepted Accounting Principles (GAAP) is a comprehensive set
of accounting rules and standards that are used to prepare financial
statements. GAAP is developed and promulgated by the Financial
Accounting Standards Board (FASB) and the Governmental Accounting
Standards Board (GASB).
 GAAP is designed to ensure that financial statements are accurate,
reliable, and consistent. This allows investors, creditors, and other
stakeholders to make informed decisions about businesses.
 GAAP is composed off the following:
o Accounting Concepts/Assumptions
o Accounting Principles
o Accounting Conventions
 Accounting Concepts/Assumptions
• Business Entity Concept:
The business entity concept states that the business enterprise is
separate from its owner. In simple terms, for accounting purposes, the
business and its owners are treated separately. If an owner invests
money in the business, it will be treated as a liability for the
business.
• Money Measurement Concept:
The money measurement concept says that a business should record
only those transactions which can be expressed in monetary terms. It
means that transactions like purchase and sale of goods, rent
payment, expenses payment, earning of revenue, etc., will be
recorded in the books of accounts of the firm.
• Going Concern Concept:
 The going concern concept assumes that an organization would continue its
business operations indefinitely. It means that it is assumed that the business
will run for a long period of time, and will not liquidate in the foreseeable
future.
• Accounting Period Concept:
 The accounting period concept defines the time span at the end of which an
organization has to prepare its financial statements to determine whether they
have earned profits or incurred losses during a specified time span. It also states
the exact position of the firm’s assets and liabilities at the end of the specified
time span.
• Cost Concept:
 The cost concept of accounting states that an organization should record all of
its assets at their purchase price in the books of accounts. This amount also
includes any transportation cost, acquisition cost, installation cost, and any
other cost spent by the firm for making the asset ready to use.
 Accounting Terminology
 Accounting terminology is the language of business. It is used to
communicate financial information to investors, creditors, managers, and
other stakeholders. Accounting terminology can be complex, but it is
important to have a basic understanding of the key terms.
 Here are some of the most common accounting terms:
• Assets: Assets are anything of value that a business owns. Examples of
assets include cash, accounts receivable, inventory, and property, plant, and
equipment.
• Liabilities: Liabilities are amounts that a business owes to others.
Examples of liabilities include accounts payable, accrued expenses, and
long-term debt.
• Equity: Equity is the difference between a business's assets and liabilities.
It represents the owners' investment in the business.
• Revenue: Revenue is the income that a business generates from its
operations. Examples of revenue include sales revenue, interest
revenue, and dividend revenue.
• Expenses: Expenses are the costs that a business incurs in order to
generate revenue. Examples of expenses include cost of goods sold,
operating expenses, and interest expense.
• Income statement: The income statement is a financial statement
that shows a company's revenue and expenses over a period of time.
It is also known as the profit and loss statement.
• Balance sheet: The balance sheet is a financial statement that shows
a company's assets, liabilities, and equity at a specific point in time.
• Cash flow statement: The cash flow statement is a financial
statement that shows a company's cash inflows and outflows over a
period of time.
 Accounting Information System in Modern Business
Organizations
 An accounting information system (AIS) is a system that collects, stores,
processes, and reports financial data. AISs are used by businesses of all
sizes to track their financial performance and make informed decisions.
 In modern business organizations, AISs are typically computer-based
systems that use a variety of software applications to manage financial data.
AISs can be integrated with other enterprise systems, such as ERP and
CRM systems, to provide a holistic view of the business.
 Here are some examples of how AISs are used in modern business
organizations:
• A retail company might use an AIS to track its sales, inventory, and
expenses. This information can be used to make decisions about pricing,
product selection, and store location.
• A manufacturing company might use an AIS to track its production costs,
inventory levels, and shipments. This information can be used to make decisions
about production scheduling, inventory management, and customer deliveries.
• A service company might use an AIS to track its billable hours, expenses, and
customer payments. This information can be used to make decisions about
staffing, pricing, and customer service.
 AISs are essential for modern business organizations. By providing accurate and
timely financial information, AISs help businesses to make informed decisions
and achieve their goals.
 Here are some of the benefits of using an AIS in a modern business organization:
• Improved efficiency: AISs can automate many of the manual tasks involved in
accounting, such as recording transactions and generating reports. This can free
up employees to focus on more strategic tasks.
• Reduced errors: AISs can help to reduce errors in accounting data. This is
because AISs use computerized systems to record and process data, which
reduces the risk of human error.
• Increased accuracy: AISs can help to improve the accuracy of
financial reporting. This is because AISs use standardized accounting
procedures and generate reports that are compliant with GAAP.
• Better decision-making: AISs can provide managers with real-time
access to financial data. This information can be used to make better
decisions about pricing, product selection, and other business
operations.
• Enhanced compliance: AISs can help businesses to comply with
financial regulations. This is because AISs can generate reports that are
compliant with GAAP and other financial reporting standards.
 Overall, AISs are an essential tool for modern business organizations.
By providing accurate and timely financial information, AISs can help
businesses to improve their efficiency, reduce errors, increase accuracy,
make better decisions, and enhance compliance.
 Use of Computers in Accounting Process
 Computers are used in all aspects of the accounting process, from recording
transactions to generating financial statements. Here are some specific
examples of how computers are used in accounting:
• Recording transactions: Computers can be used to record transactions in
real time, which can save time and reduce errors. Accounting software can
also be used to automate the recording of recurring transactions, such as
payroll and depreciation.
• Processing transactions: Computers can be used to process transactions
quickly and efficiently. Accounting software can perform complex
calculations and generate reports that would be difficult or time-consuming
to prepare manually.
• Analyzing financial data: Computers can be used to analyze financial data
and identify trends. Accounting software can generate reports that show how
a company's performance has changed over time and how it compares to
other companies in the same industry.
• Generating financial statements: Computers can be used to
generate financial statements, such as balance sheets, income
statements, and cash flow statements. Accounting software can
generate these statements in a variety of formats, including PDF,
Excel, and HTML.
• Auditing financial statements: Computers can be used to audit
financial statements and identify any potential problems. Audit
software can be used to test the accuracy of the financial statements
and to identify any areas where the company may be at risk of fraud
or error.
Overall, computers have revolutionized the accounting process. By
automating tasks and providing real-time access to financial data,
computers have helped accountants to become more efficient and
effective.