KABARAK UNIVERSITY
SCHOOL OF BUSINESS AND ECONOMICS
BACHELOR OF COMMERCE
UNIT CODE: ACCT 110
UNIT TITLE: FOUNDATIONS OF ACCOUNTING I
YEAR OF STUDY: Y1S1
Week one
Introduction to financial Accounting
Introduction
This topic is aimed at equipping the learners with the knowledge that will enable them to
understand the meaning of accounting and the general concepts of the accounting practice
Learning outcomes
At the end of the lesson the learners should be able to:
1. Explain the meaning of accounting
2. Describe the accounting cycle
3. Explain the various branches of accounting
4. Identify and explain users of accounting information
5. Explain qualities of good accounting information
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Meaning of accounting
It refers to the art of recording, classifying and summarizing in a significant manner and
in monetary terms, transactions and events which are in part of financial character and
the interpretation thereof.
It is the language accountants use to communicate i.e. record business transactions
and summarize results of business operations. It encompasses the recording of
information of economic value to a business. The information then forms the basis for
judgment by the users
Definition of key terms used in Accounting
1. Accounting
It may be defined as the process of identifying, measuring, recording and communicating
financial information in order to permit users make informed economic judgments and decisions.
2. Accounting Equation
This is a mathematical description of the relationship between Assets, Liabilities and Capital
3. Accounting Policies
These are specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements
4. Assets
These are resources or items owned and controlled by an entity and which will generate future
economic benefits.
5. Liabilities
These are obligations of the organization to other parties
6. Capital
These are resources put into the business by its owners
Branches of accounting
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Accounting in its broadness is classified into five areas of specialization
Financial Accounting – It concerns itself with the collection and processing of accounting data
and reporting to interested parties inside and outside the firm
Cost Accounting- It is a branch of accounting that concern itself with cost ascertainment and
cost control. It helps establish costs relating to the production of a good or service and allocating
it to the various factors that contributed to the cost of production.
Management Accounting - deals with the generation of accounting information to
be used categorically by the firm’s internal management in their day-to-day decision
making.
Tax Accounting- It is a branch of accounting that deals with the determination of the firm’s tax
liability which could be, Value added tax (VAT), customs duty, Pay as you earn (PAYE),
corporation tax etc.
Auditing – This is a branch of Accounting that concerns itself with the vouching
and verification of transactions from the financial accounting to determine that
they are a true representation of the business’ activity i.e. the true and fair view of
the company’s state of affairs.
Accounting cycle or phases of the Accounting Process
Accounting process can divided into four phases
1. Recording phase
This involves the routine and mechanical process of writing business transactions and events in
the books of accounts referred to as books of original entry or simply journals in a chronological
order in accordance with established accounting rules and procedures. The information is
obtained from source documents
2. Classifying phase
It involves sorting and grouping transactions into their respective classes and then posting them
into the ledger.
3. Summarizing Phase
This involves the preparation of financial statements or reports. It is usually done periodically
e.g. monthly, annually etc.
4. Reporting and interpretation phase
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It involves analysis and reporting of accounting information to the users so that they can be able
to make informed economic judgments and decisions
This can be illustrated in the diagram below
Recording Phase Classifying Phase
Summarizing Phase
Reporting and Interpretation
Phase
Figure 1: Accounting Cycle
Users of accounting information
1. Management
Management of business entities need accounting information to assist for planning and
decision making. They will need the information to prepare budgets and compare with the
actual results of operations. They will also be interested in the cost consequences of a
particular course of action to assist them in making decisions
2. Present and potential investors
They need accounting information to assess the risk inherent in, and the return provided by
their investments. They need information to decide whether they should maintain, increase,
decrease of dispose altogether their investments.
3. Employees
They are interested about the stability and profitability of their employer. It is a source of
stability for them and they need to know whether to start searching for employment
elsewhere or keep their current postings. They are also concerned about the ability to provide
remuneration, retirement benefits and employment opportunities
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4. Lenders.
They are the givers of some part of the company’s capital. They need to know if the loans
and the corresponding interests will be paid when due.
5. Customers.
They require financial data in order to anticipate price changes and to seek alternative
sources of supplies when necessary.
6. The government.
Governments and their agencies require information to regulate the activities of the
enterprises. They also need the financial information to determine level of taxation and also
in preparation of national statistics.
7. Competitors
They need financial statement information in order to compare the relative performance of
their business and also to enable the design their competitive strategy.
Qualities of good accounting information
These are the attributes that makes the information provided in the financial statements to be
useful to the users. There are four principal useful qualitative characteristics i.e.
a) Understandability
b) Relevance
c) Reliability
d) Comparability
1. Understandability
An essential quality of the information provided in the financial statements is that it should be
readily understandable by the users. For this purpose users are assumed to have a reasonable a
reasonable knowledge of business and economic activities and that they have the willingness to
study the information with reasonable diligence.
2. Relevance
For information to be useful it must be relevant to the decision making needs of the users.
Information has the quality of relevance if it influences the economic decisions of the users by
helping them to evaluate the past, present or future events or in confirming and correcting their
past evaluation.
3. Reliability
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To be useful information must be reliable. Information has the quality of reliability when it is
free from material error and bias and it can be depended upon by the users to represent faithfully
what it either purports to represent or what it could reasonably be expected to represent. The
information may be relevant but so unreliable in nature or its representation and its recognition
may be potentially misleading. The following are the elements of reliable financial statements.
Faithful representation- To be useful information must faithfully represent transactions
and other events it either purports to represent or could reasonably be expected to
represent.
Substance over form- If information is to represent faithfully the transactions and other
events that it purports to represent it is necessary that they are accounted for and
represented in accordance with their substance and economic reality and not merely their
legal form e.g. assets acquired on hire purchase transactions
Neutrality- To be reliable the information contained in the financial statements must be
neutral i.e. free from bias. Financial statements are not neutral if by their selection or
presentation of the information they influence the decision making or judgments in order
to achieve a predetermined result or outcome.
Prudence- For information to be reliable it has to contend with the uncertainties that
inevitably surround many events and transactions and circumstances e.g. collectability of
doubtful debts, probable useful life of plant and machinery etc. Such uncertainties should
be recognized by disclosure of their nature and extents by the exercise of the prudence
concept which is the inclusion of a degree of caution in the exercise of judgments needed
in making estimates.
Completeness- To be reliable the financial statements must be complete within the
boundaries of materiality and cost. An omission can cause information to be false or
misleading and therefore unreliable and deficient in terms of relevance.
4. Comparability
Users must be able to compare the financial statements of an entity over time. This is in order to
identify trends in its financial position and performance. They must be able to compare the
financial statements of different entities in order to evaluate their relative financial position,
performance and changes in their financial performance.
Other qualities may include
1. Timeliness
2. Accuracy
3. Adequacy
4. Preciseness etc
Review questions
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Review questions
1. Explain meaning of the term Accounting (2marks)
2. Explain the following terms as used in accounting
a) Accounting equation (2marks)
b) Accounting policies (2marks)
c) Assets (2marks)
d) Liabilities (2marks)
e) Capital (2marks)
3. Elucidate five branches of accounting (10marks)
4. Describe the four phases of the accounting cycle (8marks)
5. Identify and Explain six users of Accounting information clearly outlining their
information needs (12marks)
6. Examine four qualities of good accounting information (8marks)
Conclusion
At the end of the lesson the learners should be able to answer the review questions and carry out
further research to add to the materials provided here in.
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