ACCOUNTING

Dini Verdania Latif

 Financial Accounting is often called the language of business;

Characteristic of Business :
1. Economic activity:
Business is an economic activity of production and distribution of
goods and services. It provides employment opportunities in
different sectors like banking, insurance, transport, industries, trade
etc. it is an economic activity corned with creation of utilities for
the satisfaction of human wants.

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 Characteristic of Business
• 2. Buying and Selling:
The basic activity of any business is trading. The business involves
buying of raw material, plants and machinery, stationary, property
etc. On the other hand, it sells the finished products to the
consumers, wholesaler, retailer etc. Business makes available
various goods and services to the different sections of the society.

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 Characteristic of Business
• 3. Continuous process:
Business is not a single time activity. It is a continuous process of production and distribution
of goods and services. A single transaction of trade cannot be termed as a business. A
business should be conducted regularly in order to grow and gain regular returns.
• 4. Profit Motive:
Profit is an indicator of success and failure of business. It is the difference between income
and expenses of the business. The primary goal of a business is usually to obtain the highest
possible level of profit through the production and sale of goods and services.

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 Type of business
• 1. Service Business
• 2. Merchandising Business
• 3. Manufacturing Business
• 4. Hybrid Business

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 Service Business
• A service type of business provides intangible products (products
with no physical form). Service type firms offer professional
skills, expertise, advice, and other similar products.

• Examples of service businesses are: salons, repair shops, schools,

banks, accounting firms, and law firms

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 Merchandising Business
• This type of business buys products at wholesale price and sells the same at
retail price. They are known as "buy and sell" businesses. They make profit
by selling the products at prices higher than their purchase costs.

• A merchandising business sells a product without changing its form.

Examples are: grocery stores, convenience stores, distributors, and other
resellers

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 Manufacturing Business

• Unlike a merchandising business, a manufacturing business buys products with the

intention of using them as materials in making a new product. Thus, there is a
transformation of the products purchased.

• A manufacturing business combines raw materials, labor, and overhead costs in its
production process. The manufactured goods will then be sold to customers.

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 Hybrid Business

Hybrid Business
• Hybrid businesses are companies that may be classified in more than one
type of business. A restaurant, for example, combines ingredients in making
a fine meal (manufacturing), sells a cold bottle of wine (merchandising), and
fills customer orders (service).

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 Why is accounting important in business?
• Without accounting, you wouldn’t know how much money your business has
earned. You could easily forget how much money you paid out. And, you wouldn’t
remember how your current profit or loss compared to the previous quarters’.

• Which customers haven’t paid you? Wait, what debts haven’t you paid yet? If you
use accrual accounting, you (should) know exactly how much your accounts
receivable and payable are.

• In short, accounting shows you exactly what your business has been up to when it
comes to finances.

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 WHAT IS ACCOUNTING ?

• Accounting can be defined as an information system that

provides reports to stakeholders about the economic
activities and condition of a business
• Information System :
Information system, an integrated set of components for
collecting, storing, and processing data and for providing
information

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 Information System

• Every systems consists of inputs, processes, outputs, and

feedback. The chart that you see above is sometimes called, "the
systems model."

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 Input, Process, Output
• Inputs-Inputs are the things that go into the system. These are the
things that are needed to use, create, or maintain the system
• Processes-A process is basically what is happening in the system
• Outputs-The output of a system is basically what comes out of the
system

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 Activities

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 Transaction
Example :
• an occasion when someone buys or sells something, or when
money is exchanged or the activity of buying or selling

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 Transaction Definition
• The simplest definition of an accounting transaction is an event that occurs
that has an impact on your business’ financial statements. This event is
recorded in your business’ accounting records, and keeping track of the
totality of these transactions allows you to analyze and predict your
business’ financial health.
• Some examples of a transaction in accounting include making a sale to a
customer, purchasing supplies for your business from a supplier, or
borrowing money from a lender (such as taking out a loan from the bank).

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 Sale Report

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 WHO ARE STAKEHOLDER?
• anyone or any entity that has an interest in the
economic performance and well-being of a
business

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 Different types of Accounting

• Financial accounting is primarily concerned with the recording &

reporting of economic data and activities for a business to
external parties
• Managerial accounting uses both financial accounting and
estimated data to aid management in running day-to-day
operations and in planning future operations

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 OBJECTIVES OF ACCOUNTING
SYSTEMS
• To process the information efficiently-at low cost
• To obtain reports quickly
• To ensure a high degree of accuracy
• To minimize the possibility of theft or fraud

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Accounting Cycle
 Accounting Principle
• Accounting principles are the rules and guidelines that companies must
follow when reporting financial data.

• THREE CRITERIA OF ACCEPTANCE FOR PRINCIPLES

• Relevance –
when its result in information that is meaningful and useful to those who
need to know something about the organization.

• Objectivity –
when the information is not influenced by personal bias or judgment of
those who furnish it.

• Feasibility –
that it can be implemented without undue complexity or cost.
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 IFRS
• International Financial Reporting Standards (IFRS) set common rules so that financial
statements can be consistent, transparent, and comparable around the world.
• IFRS are issued by the International Accounting Standards Board (IASB). They specify how
companies must maintain and report their accounts, defining types of transactions, and
other events with financial impact. IFRS were established to create a common accounting
language so that businesses and their financial statements can be consistent and reliable
from company to company and country to country

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 ACCOUNTING CONCEPTS
• Money measurement
• Entity
• Going-concern
• Cost
• Dual aspects
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
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Money Measurement- An accounting record is made only of
information that can be expressed in monetary terms.

The Entity Concept- The owners of the business are considered

separate and distinct from the business itself. Hence, accounts are
kept for the entity as distinguished from the persons associated
with the entity.

The Going-Concern Concepts- unless there is good evidence to the

contrary, it is assumed that the business will operate indefinitely.

The Cost Concept- The economic resources of an entity are called

assets. An asset is ordinarily entered in the accounting records at
the price paid to acquire it- that is, at its cost.
The Dual-Aspect Concept-
Assets= Liabilities+ Owner’s Equity

Accounting Period- Accounting measures activities for a

special time interval, usually one (1) specified.

Conservatism- revenues are recognized only when they are

reasonably certain, whereas Expenses are recognized as soon
as they are reasonably possible.

Realization- Revenues are usually recognized in the period in

which goods were delivered to costumers or in which services
were rendered. The amount recognized is the amount that
costumers are certain to pay.
Matching- when a given event affects both revenues
and expenses, the effect on each should be
recognized in the same accounting period.

Consistency- Once an entity has decided on a certain

accounting method, it should use the same method in
all subsequent events of the same character unless it
has sound reasons to change methods.

Materiality- insignificant events may be disregarded,

but there must be full disclosure of all important
information