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ACF 255
FINANCIAL
ACCOUNTING 1
UNIT 1
THE CONTEXT, PURPOSE AND REGULATORY FRAMEWORK OF FINANCIAL REPORTING
 LEARNING OBJECTIVES
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1 2 3 4 5 6

Define and Explain the Explain the Identify the Explain the Explain the
explain the accounting kinds of users of key qualitative
meaning and process financial accounting components characteristic
purpose of statements and information of the s that make
accounting their and explain Conceptual information
purpose(s) their Framework in financial
informational statements
needs useful
 FINANCIAL ACCOUNTING
DEFINED
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• ‘Financial accounting’ is a term that describes:

• maintaining a system of accounting records for

business transactions and other items of a
financial nature and reporting the financial
position and the financial performance of an entity
in a set of ‘financial statements’.

• Financial accounting can therefore be defined as

the system by which economic information about
an entity’s activities is identified, measured,
recorded and summarised so it can be
communicated to users for decision making.
 THE ACCOUNTING PROCESS
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Four (4) key elements can be identified in the accounting process:

Preparing and Analysing and

Identifying Recording
presenting interpreting

Identifying Recording Preparing Analysing

business transactions, and and
accounting classifying presenting interpreting
transactions and accounting the reports
summarising reports to for users
data users
THE ACCOUNTING PROCESS CONT’D…
5 1. Collect and
analyse
information from
source documents

7. Analyse and
2. Journalise
interpret the transactions
accounts

Continuousl
y

Periodically (or
immediately in a 3. Post
6. Record and post
End of Period computerised transactions to
adjusting entries system accounts in the
ledger

4. Balance off
5. Prepare accounts and
financial extract a trial
statements
balance
BUSINESS ORGANISATIONS

A business is an organisation in which basic resources (inputs) are assembled

and processed to provide goods or services (outputs) to customers.

Profit Activities Ownership

motive • Manufacturing structure
• Profit oriented • Merchandising • Sole
• Governmental • Service Proprietorship
• Non- • Partnership
governmental • Company
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 FEATURES OF BUSINESS ORGANISATIONS

Business structure Sole trader Partnership Company

Ownership
Liability for the unpaid debts
and other obligations of the
business
One person Several individuals working Shareholders
together (two or more up to 20)
Personal liability of owner Personal liability of partners May be Limited

Management Managed by owner Managed by owners (partners) Large companies managed

by professional managers
Raising capital Capital provided by the sole Capital provided by the owners Capital provided by the
owner (partners) shareholders. Public
companies can raise
capital from the public
through an exchange

Financial accounting and Financial accounts needed Financial accounts needed for Regulation of financial
auditing for tax purposes the benefit of partners reporting. Auditing is legal
requirement
 CHARACTERISTICS OF SOLE TRADER
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Advantages Disadvantages

Owner enjoys all profits Limited source of funding

Less expensive to operate Lacks perpetual succession

Quick decision making Unlimited liability of owner

Easy to form and end if needed Difficulty in ownership transfer

CHARACTERISTICS OF PARTNERSHIP
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Advantages Disadvantages

Business continues even if a

Unlimited liabilities
partner leaves

Pooling of skills and resources Limited sources of funds

Less accounting regulation Sharing of profits with others

Possible disagreement between

partners
CHARACTERISTICS OF COMPANY
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Advantages Disadvantages

Limited liabilities Subject to strict regulations

Separation of ownership and

Delayed decision making
management

Ease in transferring ownership

Wide access to raising funds

11 SCOPE AND OBJECTIVE OF FINANCIAL
REPORTING

• ACCORDING TO THE CONCEPTUAL FRAMEWORK, FINANCIAL

REPORTING IS PRIMARILY FOR THE BENEFIT OF THE “EXTERNAL”
STAKEHOLDERS OF THE ENTITY.

• FINANCIAL REPORTING IS ALSO USEFUL TO MANAGERS. HOWEVER,

THEY OBTAIN BETTER INFORMATION ON THE OPERATIONS OF THEIR
BUSINESS THROUGH MANAGEMENT ACCOUNTING SYSTEMS.

• THE OBJECTIVE OF GENERAL-PURPOSE FINANCIAL REPORTING IS TO

PROVIDE FINANCIAL INFORMATION ABOUT THE REPORTING ENTITY
THAT IS USEFUL TO EXISTING AND POTENTIAL INVESTORS, LENDERS
AND OTHER CREDITORS IN MAKING DECISIONS ABOUT PROVIDING
RESOURCES TO THE ENTITY.
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INFORMATION FOR ECONOMIC DECISIONS

• PRIMARILY, FINANCIAL REPORTING PROVIDES USEFUL FINANCIAL

INFORMATION ABOUT ECONOMIC ENTITIES TO STAKEHOLDERS/ USERS.

• INFORMATION – INCLUDING FINANCIAL INFORMATION – HAS NO VALUE

UNLESS IT IS USED.

• USERS OF FINANCIAL INFORMATION USUALLY HAVE AN INTEREST IN SOME

ASPECT OF WHAT THE ENTITY DOES OR MIGHT DO IN THE FUTURE.

INTERNA EXTERN
• USERS OF FINANCIAL REPORTS CAN THEREFORE BE CATEGORISED
L USERS AL AS:
USERS
 USERS OF FINANCIAL REPORTS AND THEIR INFORMATION NEEDS
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Management
• Profitability
• Liquidity
• Solvency
• Stock market performance
• Assess their stewardship.
• To support their functions
of planning, operating,
and evaluating (control).
Suppliers and other
Investors
trade payables
• Profitability • Liquidity
• Liquidity
• Asset efficiency
• Stock market performance
• Assess return on • Assess ability of entity to
investment. settle its obligations to
suppliers.
• Payment of dividends.
• Assess credit limits and
• Shareholder wealth policies.
maximisation.
USERS OF FINANCIAL REPORTS AND THEIR INFORMATION NEEDS
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Customers and other

Loan providers Government
trade receivables

• Profitability • Profitability • Profitability

• Efficiency • Liquidity • Efficiency
• Good corporate image • Solvency • Long-term survival
• Good corporate image

• Assess survival of entity • Assess ability of entity to • Assess entity for payment
to provide quality goods pay interests and loan of taxes
and service that are principal at maturity.
relied on. • Derive data to inform
policy formulation and
regulation.
USERS OF FINANCIAL REPORTS AND THEIR INFORMATION NEEDS
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Employees and trade Financial analysts and
Public
unions advisors

• Profitability • Profitability • Long-term survival

• Liquidity • Liquidity
• Efficiency • Solvency
• Solvency • Asset efficiency
• Stock market performance
• Good corporate image

• Bargain for better • Provide advice to clients • Assess contribution of the

working conditions. on which entity to invest entity to the local
or disinvest community
• Assess security of
employment.
 FINANCIAL STATEMENTS
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A complete set of financial statements comprise of:

• The statement of financial position at the end of the reporting period

• The statement of profit or loss and other comprehensive income for the reporting
period

• Statement of cash flows for the reporting period

• Statement of changes in equity for the reporting period

• Notes comprising summary of significant accounting policies and other

explanatory information
 FINANCIAL STATEMENTS
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Statement of Statement of
Statement of Statement of Notes to the
Financial Changes in
Profit or Loss Cash Flows accounts
Position Equity
• Shows the • Shows financial • Shows sources of • Shows the change • Provides
financial position performance over cash (inflow) and in owners equity supplementary
at a point in time a period of time uses (outflows) over a period information in
over a period of including: three forms:
• Summarises the • Summarises time • Significant
assets, liabilities revenue and • Net profit or loss accounting
and owners equity expenses for shareholders policies applied
• Changes in share • Additional
capital reserves details of items
• Dividends to in the financial
shareholders statement
• Gains and losses • Additional
recognised information on
directly in items not on the
equity financial
statement
 ACCOUNTING REGULATION AND
18 INTERNATIONAL ACCOUNTING
STANDARDS

• Financial reporting is regulated and

controlled.

• Countries have their own national laws and

regulations for financial accounting.

• The accountancy profession has developed a

large number of regulations and codes of
practice that professional accountants are
required to use when preparing financial
statements. These regulations are accounting
standards issued by the International
Accounting Standards Board (IASB).
 SOURCES OF REGULATION OF FINANCIAL
19 REPORTING IN GHANA

• The Conceptual Framework for Financial Reporting

• Accounting Standards e.g., IFRS, IPSAS, ISA

• Acts of Parliament e.g., Companies Act, 2019 (Act 992),

Incorporated Private Partnership Act, 1963 (Act 152),
Banks and Specialized Deposit-Taking Institutions Act
(Act 930).
 IFRS FOUNDATION
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• The body with overall responsibility for international accounting is
the IFRS Foundation formerly called the International Accounting
Standards Committee Foundation or IASC Foundation.

• The members of the IASC Foundation have no direct involvement in

setting accounting standards, but they have oversight of three bodies
that do:

I. The International Accounting Standards Board (IASB)

II. The International Financial Reporting Standards Advisory
Council (IFRS AC)
III. The International Financial Reporting Standards Interpretations
Committee (IFRS IC).
THE INTERNATIONAL ACCOUNTING STANDARDS
BOARD (IASB)

•Independent standard-
setting board.

•Develops and approves

International
Financial Reporting
Standards (IFRSs).

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IFRS INTERPRETATIONS COMMITTEE

•IFRS Interpretations Committee issues

interpretations and guidance for
accounting standards.

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THE IFRS ADVISORY COUNCIL

• The IFRS Advisory Council

(IFRSAC) provides a forum
through which the IASB is able
to gather opinions and advice
from different countries and
industries. The IFRSAC
consists of experts from
different countries and different
business sectors, who offer
advice to the IASB.

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 THE ROLE OF INTERNATIONAL
24 FINANCIAL REPORTING STANDARDS

• International Financial Reporting Standards provide rules and guidelines

for the preparation and presentation of financial statements, but they do
not cover every aspect of accounting and every type of business
transaction.

• Where there is no relevant accounting standard for particular aspects of

financial reporting, preparers of financial statements are expected to apply
the general principles and concepts of accounting that are set out in the
Conceptual Framework.

• A role of IFRSs is to encourage business entities in all countries to apply

similar principles, concepts and accounting methods, so that the financial
statements of all companies can be compared.
 CONCEPTUAL
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FRAMEWORK

• The purpose is to provide a coherent set of principles that:

• assists with standard consistency

• assists preparers deal with issues not addressed by a standard

• assists auditors in forming an opinion on compliance

• assists users to interpret statements.

 THE COMPONENTS OF THE CONCEPTUAL FRAMEWORK
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IASB’s objective of
financial
conceptual reporting
concepts of financial
framework for capital and
capital
statements and
the reporting
financial maintenance entity

reporting
comprises 8 qualitative
characteristics
presentation IASB’s
of useful
chapters and disclosure Framework
financial
reporting

elements of
measurement financial
statements
recognition
and
derecognition
 QUALITATIVE CHARACTERISTICS
OF USEFUL FINANCIAL
27 INFORMATION

The IASB Conceptual

Framework describes:
Fundamental Enhancing
qualitative qualitative
characteristics characteristics

• relevance • comparability
• faithful • verifiability
representation • timeliness
• understandability
 FUNDAMENTAL QUALITATIVE
28 CHARACTERISTICS

• Capable of making a difference in the

decisions made by the capital
- Relevance providers.
• Predictive and confirmatory value.

• Attained when the economic

- Faithful phenomenon is depicted completely,
representation neutrally and free from material
error.
 ENHANCING QUALITATIVE
CHARACTERISTICS
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- Comparability
Quality of information that enables
users to identify similarities in and
differences between two sets of
economic phenomena.
- Verifiability
Quality of information that helps
assure users that information
faithfully represents the economic
phenomena.
 ENHANCING QUALITATIVE CHARACTERISTICS
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- Timeliness - Understandability
Having information available to It is the quality of information that
decision makers before it loses its enables users to comprehend its
capacity to influence decisions. meaning.
31 REQUIRED READING MATERIALS/RESOURCES

 Chapter 1 & 2 of Marfo-Yiadom, Asante & Tackie (2020)

 Chapter 1 & 10 of Wood & Sangster (2008)
 Part N of Companies Act, 2019 (Act 992);
 Sections 32 to 35 of Incorporated Private Partnership Act, 1963 (Act 152)
• https://www.youtube.com/watch?v=ABjCVTBnO_U
• https://www.ifrs.org/about-us/who-we-are/
• https://www.ifrs.org/about-us/our-structure/
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