a 7 Mount Kenya University DAF 1102 FINANCIAL ACCOUNTING I Pre- requisite: None Purpose: To develop the learners understanding of the principles of book-keeping and accounts and the ability (0 maintain books of accounts and preparation of financial statements Expected Learning Outcomes: By the end of the course unit the student should be able to:~ i. Compile accounting data ii, Prepare financial statements iii, Interpret accounting information iv. Use accounting information in decision making. Course Content: TOPIC 1: Introduction to Accounting- WEEK 1: + Purpose of accounting + basic principles WEEK 2: ‘* concepts and conversions underlying accounting reports + Accounting equation WEEK 3: accounting terminology ‘users of finapeial statements and their information needs TOPIC 2: Double entry book: WEEK 4: © Keeping and books of original entry » * Distinction between and treatment of capital revenue and expenditure in accounts WEEK 5 CATI WEEK 6: «Types of ledgers and their uses «Types of errors and their correction ‘© Control ledger accounts TOPIC 3: Petty cash book: WEEK: 7 Analysis petty cash book ‘© Imprest systemTOPIC 4: Preparation of final accounts: WEEK: 8 CAT IL WEEK: 9 Cd + Reconciliation of bank and cash balances * adjustment of Provisions and depreciation WEEK: 10 * Preparation of the trading, profits and loss accounts (Income statement on sole proprietorship) WEEK: 11 * Balance Sheet{ financial statement on sole proprietorship ) Teaching / Learning Methodologies Lectures and tutorials; group discussion; demonstration; Individual assignment; Case studies Instructional Materials and Equipment: Projector; test books; design catalogues; computer laboratory; design software; simulators Course Assessment Continuous assessment tests and assignments (CAT) 20% Assignments 10% End of Semester Examination 70% Total 100% Core Text books + Honrgren and Sundem, G. L, Introduction to Financial Accounting, (6th Edition), New York; Prentice Hall premio nm KM and Pyte, D, Fundamentals of Accounting Principles, (12th Edition) , Prentice Hall Text Books for further Reading: + Wood, Frank, Business Accounting (17th Edition), Intemational Thompson Other support materials'Various applicable manuals and journals; variety of electronic information resources as Prescribed by the lecturerNTRODUCTION 1 The nature, scope, and purpose of accounting To account is to render an explanation. The American Institute of Certified Public Accountants (1961) defined accounting as the art of record fy mmarizing in a significant manner and in terms of money, transactions and events, which are, in part of at least, of financial character, and interpreting the results thereof, The accounting Standards Board(1991) on the other hand has defined accounting as ‘the provision of information about the financial position, performance and financial adaptability of an enterprise that is useful {0 a wide range of potential users in making economic decision”. Prof N.D Nzomo in his manual Basic accounting defines accounting as :the art and science of recording transactions, processing the recorded transactions into a comprehensible form and communicating the information to interested parties”. The definition provided by the American Institute of Certified Public Accountants (AICPA) focuses more on the procedures of accounting while the definition provided by the Accounting Standards Board(ASB) focuses on the purpose of accounting. The underlying purpose of accounting as implied in the definition provided by ASB, is to provide information about an economic entity to individuals to aid them in making economic decisions.”it may be useful to emphasize at this juncture thatthe role of financial accounting and Feporting in the economy is to facilitate the making of commercial and economic decisions but not to determine what those decisions should be.(N.D Nzomo, advanced Financial Accounting, Kenya Literature Bureau,Nairobi;1992 pp. 1) The use of accounting is not limited to the business world, Rather, virtually everyone engages in a form of accounting .Accountants serve decision makers by providing them with financial information about an economic entity. * Accounting as a social science lends itself easily to its analysis as an information system. thas the attributes of a system. It has a basic goal, which is to provide information, thas clear and well defined elements in the form of people and equipment. * Ithas the typical activities of systems, namely; input, process and output. An important aspect of accounting as an information system is the definition of its boundaries. The first boundary is the filtering process by which the accountants select data. The filtering process is provided by conventions of accounting, ‘The second boundary is established by specific information needed of its users. The output requirements determine the type of data selected as the input.inc not only the nature of the data : : : sift A Control refers to the extent to which users needs should deter ayy cost benefit analysis a but also the extend of the data input which should be deter PUL is the financial statements and reports: j has meaning The task of an accountant is to transform raw data into information (i. Form that and is able to influence decisions.) The analysis of deductions: i ii, ‘ ia ant accounting as an information system enables us to make some importa The goal of the system is to provide information which meets the needs of its users. The output requirements determine the type of data selected as the input for processing into information output. iii, Welfare considerations may be taken into account in the selections of data. Users of accounting information. Users of accounting information are varied and they use accounting information in order to satisfy some of their different needs for information. They include: A. Present and potential investors. The providers of risk capital and their advisers are concerned with the risk inherent in, and retum Provided by their investments. ‘They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends. Profitability and financial soundness would, therefore, be matters of prime importance to them. B .lenders, suppliers and other creditors. These are entities that have extended or consider extending loans or credits. Lenders are interested in information that enables them to determine whether their loans and the interest attaching to them will be paid when due. Suppliers and other creditors are interested in information that enables them to determine whether the amounts owing to them will be paid when due. They will be concemed about the liquid assets of the enterprise relative to the amount of liability falling due in the near future, and about the owner’s investment relative to outside funding. To the lenders, suppliers and other creditors, owner’s investment serves as a protecting buffer between lenders, suppliers and other creditors and any losses which may befall the enterprise. C. Employees.Employees and their representative groups are interested about the profitability and stability and their employees. They are also interested in information which enables them to assess the ability of the enterprises to provide remuneration, retirement benefits and employment opportunities. D., Management. Management require accounting information to assist them in discharging their managerial function. The management process may be analyzed into three major functions-planning, organizing and controlling the activities of the enterprise. These various management functions have one thing in common: they are all concemed with making decisions. E. Governments and their agencies. Governments and their agencies are interested in allocation of resources and therefore the activities of the enterprise. They also require information in order to regulate the activities of the enterprises, determine taxation policies and as a basis for national income and similar statistics. These will include employment, provision of goods and series and the contribution of enterprises to the socio-economic development. f. Customers Customers have an interest in information of an enterprise indicating the continuance of an enterprise, faimess of pricing policies, differential costs between one product and another produced by the same firm at a different price. g- Competitors Enterprises compare their performance with those of other enterprises. They asses their position vis- a- vis their competitors. Financial statement enables them to know profit-margins, value of assets, resource utilization etc of their competitors. h. Public The general republic requires information on the activities of enterprises in light of social benefits and costs that accrue to the community The public is very depended on enterprises not only because they provide employment but because they affect the entire socio-economic structures of the environment .Firms provide employment, create demand for local services, as well as extensions in the provisions of welfare services as the economic well being of the community improves.