Chapter 1 - FINANCIAL ACCOUNTING

Chapter 1

Introduction to Accounting

Learning objectives

To define the meaning of “accounting”.

To have an overview of the three activities of accounting -
Identification, Recording and Communication.

To know the objective of financial reporting.
To identify the main user groups of financial
statements and how these groups use information
contained in the financial statement to make decision.
To understand the qualitative characteristics of the
accounting information.

What is Accounting is an information system
accounting? that measures business activities,
processes data into reports, and
communicates results to decision
makers.

(Harrison & Hongren, 2004)

Accounting is the process of identifying,
recording and communicating economic
information to permit informed judgment
and decisions by users of the information.

(Anthony, Hawkins & Merchant, 1999)

Basic Identification – selecting
Accounting economic transactions.
Activities
Recording – record, classify
and summarize.

Communication – preparing
accounting reports, analyze
and interprets the reported
information.

Objectives of The objective of financial
Financial reporting is “to provide
Reporting information about the financial
position, performance and
changes in financial position of
an enterprise that is useful to a
wide range of users in making
economic decisions.”

[According to International
Accounting Standard Board (IASB)]

Purpose of To enable outsiders to assess the
financial stewardship of management.
reporting
To assist report users’ economic decision
making.

To provide information to users that is
useful for making and evaluating
decisions about the allocation of scarce
resources.

To enable reporting entities to
demonstrate accountability between the
entity and those parties to which the
entity is deemed accountable.

Users of INternal users
accounting
information •Business owners
•CFO
•CEO
•Finance Manager
•Employees

External Users

•Investors

•Creditors
•Government regulatory agencies
•Tax authorities
•NGOs

Qualitative Characteristics of
Financial Reports

•To ensure that the information provided in the
financial reports is useful for economic decision
making, the attributes or qualities of the information
must be emphasized.

IASB Framework provides that, the information in the financial
reports must possessed the following qualitative characteristics:

*Relevance
*Faithful representation
*Comparability
*Verifiability
*Timeliness
*Understandability

Relevance

A piece of accounting information is considered as relevant
if it can influence the user’s decision making.

The relevance of accounting information depends on
certain situation and its materiality as well as its
predictive and confirmatory value.

Faithful representation

Faithful representation means that the information presented in the financial
report reflects the phenomena that it is supposed to represent.
Information should be free from errors or mistakes.
It must be neutral and complete.

Comparability

The information can be used to evaluate different aspects of an entity’s
financial position and financial performance by comparing the financial
information of one period with another and the financial information of
one entity with another entity’s financial information.

Verifiability

The usefulness of information is enhanced if it is verifiable that is, different
sources of information would still provide similar information.

For example, the information provided in the financial report is similar to the
information stated in the source document.

Timeliness

Information has to be reported timely so that prompt and good decisions as well as
actions can be undertaken.

Timely information may influence decision and hence if the information is not reported
timely, it may lose its relevance and no longer useful.

Understandability

Accounting information is useful if it can be comprehended by
users who have reasonable knowledge about the business and its
economic activities.

End of
chapter 1