INTRODUCTION

ABAB 113

TOPIC OUTLINES
HISTORY AND DEVELOPMENT OF ACCOUNTING
DEFINITION AND OBJECTIVES OF ACCOUNTING
USERS OF ACCOUNTING INFORMATION
ACCOUNTING CONCEPTS AND PRINCIPLES
INTRODUCTION TO BUSINESS FORMATION

ABAB 113

HISTORY AND DEVELOPMENT OF

ACCOUNTING

abacu
s
Clay
token

Mesopotamia
ABAB 113

HOW

WHAT
?

HISTORY OF
ACCOUNTIN
G

computare

WHE
N

>7000 years ago

WHER
E
3

is an information system
is the language of
business
communicates
information about a
business
to people who make
financial decisions

DEFINITION OF ACCOUNTING

People who have to make

financial decisions
based on accounting
information.
identifying
measuring

interpreting

HOW
communicati
ng
provide information
for decision making
assist in discharging
accountability
help evaluate
performance
ABAB 113

WHO

WHAT

ACCOUNTING
the system of
recording and
summarizing
business and
financial
transactions
and analyzing,
verifying, and
reporting the
results; also :
the principles
and procedures
of accounting
WHE
WHY
N

WHER
E

used in every
facet of
business

When financial
information is required to
be
recorded and interpreted
so that decisions can be
4
made.

OBJECTIVES OF ACCOUNTING
Providing Information
for Decision-making

Through financial figures

Through the written reports

Evaluate performance
Financial reports
internal & external

ABAB 113

Assist in discharging
accountability

USERS OF ACCOUNTING INFORMATION

EXTERN
AL
USERS

ABAB 113

- RESOURCE
PROVIDERS
GOVERNMENT
- OTHERS

INTERN
AL
USERS

MANAGEMENT
/ OWNERS

ACCOUNTING CONCEPTS AND PRINCIPLES

GOING-CONCERN CONCEPT
THE BUSINESS WILL CONTINUE TO OPERATE IN THE FORESEEABLE FUTURE
ASSETS WILL NORMALLY BE VALUED AND SHOWN IN THE BALANCE SHEET AT
THEIR HISTORICAL VALUE.
THE GOING CONCERN ASSUMPTION SHOULD NOT BE TAKEN INTO CONSIDERATION
WHEN THE BUSINESS IS GOING TO CLOSE DOWN IN NEAR FUTURE AND WHEN
THE BUSINESS HAS A SHORTAGE OF CASH WHEREBY IN CERTAIN THAT THE
BUSINESS WILL HAVE TO CEASE.

ABAB 113

ACCOUNTING CONCEPTS AND PRINCIPLES

ACCRUAL CONCEPT
ACCRUAL CONCEPT DISTINGUISHES BETWEEN RECEIPTS OF CASH AND THE RIGHT TO
RECEIVE CASH, AND BETWEEN PAYMENT OF CASH AND THE OBLIGATION TO PAY CASH.
REVENUE IS RECOGNISED WHEN THERE IS A RIGHT TO RECEIVE CASH AND EXPENSES
RECORDED WHEN THERE IS AN OBLIGATION TO PAY FOR THE BENEFITS RECEIVED.
IN OTHER WORDS TRANSACTIONS ARE RECORDED WHEN IT OCCUR BUT NOT WHEN
THE ACTUAL MONEY RECEIVED.
REVENUE = IS RECOGNISED WHEN EARNED/SALES TAKES PLACE, NOT WHEN THE CASH IS
RECEIVED
EXPENSES = RECORDED WHEN INCURRED, NOT WHEN THE PAYMENT IS MADE

ABAB 113

ACCOUNTING CONCEPTS AND PRINCIPLES

MATCHING CONCEPT
ENTERPRISES MEASURE PROFITS PERIODICALLY BY COMPARING THE REVENUE
FOR THE PERIOD WITH THE EXPENDITURE INCURRED TO EARN THAT REVENUE
COSTS SHOULD BE SET AGAINST THE REVENUE, WHICH THEY GENERATE AT THE
POINT IN TIME WHEN THIS ARISES.
COSTS THAT WILL GENERATE REVENUES ONLY IN THE CURRENT ACCOUNTING
PERIOD ARE EXPENSED IMMEDIATELY. E.G. ADVERTISING, SALARIES REPAIRS ETC
(EXPENSED IN THE PERIOD IN WHICH THEY ARE INCURRED)

ABAB 113

ACCOUNTING CONCEPTS AND PRINCIPLES

ENTITY CONCEPT
THE BUSINESS UNIT IS TREATED AS A SEPARATE ENTITY.
THE AFFAIRS OF A BUSINESS ARE TO BE TREATED SEPARATELY FROM THE
PERSONAL ACTIVITIES OF THE OWNER.
THEREFORE ANY PERSONAL ASSETS OF THE OWNERS ARE NOT RECORDED IN THE
FINANCIAL STATEMENT OF THE BUSINESS AND VICE VERSA

ABAB 113

10

ACCOUNTING CONCEPTS AND PRINCIPLES

MATERIALITY CONCEPT
ONLY MATERIAL ITEMS ARE SHOWN SEPARATELY IN THE FINANCIAL STATEMENTS.
INFORMATION IS MATERIAL WHEN ON OMISSION WILL CAUSE A REASONABLE
USER TO CHANGE HIS DECISION.

ABAB 113

11

ACCOUNTING CONCEPTS AND PRINCIPLES

PERIODICITY CONCEPT
THE BUSINESS ENTITIES MEASURE THEIR PERFORMANCE OVER A PERIOD OF TIME.
FINANCIAL STATEMENT SHOULD BE PREPARED AT YEARLY INTERVAL.
PERIODICITY CONCEPT IS A BASIS FOR THE ACCRUAL CONCEPT, MATCHING
CONCEPT AND REALISATION CONCEPT

ABAB 113

12

ACCOUNTING CONCEPTS AND PRINCIPLES

COST CONCEPT (OR HISTORICAL COST CONCEPT)

ASSETS ARE NORMALLY VALUED AND SHOWN AT THEIR COST PRICE I.E.
PURCHASE PRICE
ASSETS ACQUIRED (OR CONSTRUCTED) ARE RECORDED INITIALLY AT THE PRICE
PAID AND NOT AT THE VALUE OF THE ASSETS TO THE BUSINESS. COST INCLUDES
THE PRICE PAID TO THE SUPPLIER AND ALL INCIDENTAL COST SUCH AS
INSTALLATION COSTS, DUTIES ETC, INCURRED TO MAKE THE ASSETS READY FOR
INTENDED USE.
BECOME LESS RELEVANT ---> FAIR VALUE
ABAB 113

13

ACCOUNTING CONCEPTS AND PRINCIPLES

MONETARY CONCEPT
ACCOUNTING INFORMATION DEALS WITH MATTERS THAT CAN BE EXPRESSED IN
MONETARY TERMS.
IN OTHER WORDS, ONLY TRANSACTION DATA CAPABLE OF BEING EXPRESSED IN
TERMS OF MONEY SHOULD BE INCLUDED IN THE ACCOUNTING RECORDS OF THE
ECONOMIC ENTITY.
WHEN PREPARING FINANCIAL STATEMENTS, IT IS ASSUMED THAT THE MONETARY
UNIT OF MEASUREMENT HAS A CONSTANT VALUE.

ABAB 113

14

ACCOUNTING CONCEPTS AND PRINCIPLES

DOUBLE-ENTRY/ DUALITY CONCEPT
THERE ARE TWO ASPECTS OF ACCOUNTING, ONE REPRESENTED BY THE ASSETS
OF THE BUSINESS AND THE OTHER BY THE CLAIMS AGAINST THEM.

ABAB 113

15

ACCOUNTING CONCEPTS AND PRINCIPLES

PRUDENCE CONCEPT (CONSERVATISM CONCEPT)
REQUIRES THE ENTERPRISE TO ANTICIPATE NO PROFITS UNTIL EARNED BUT TO
PROVIDE FOR ALL ANTICIPATED LOSSES..
RECOGNISE LOSSES IMMEDIATELY THEY ARE IDENTIFIED, RECOGNISE GAINS ONLY
WHEN DEFINITE
THIS CONCEPT SIMPLY MEANS THAT IT WOULD BE BETTER FOR COMPANIES TO
UNDERSTATE THEIR PROFIT AND OVERSTATE THEIR LOSSES

ABAB 113

16

ACCOUNTING CONCEPTS AND PRINCIPLES

CONSISTENCY CONCEPT
IT IMPLIES THAT THE COMPANY RECORD TRANSACTIONS BASED ON THE SAME
METHOD
FOR INFORMATION TO BE COMPARABLE, THE ACCOUNTING POLICIES ADOPTED
SHOULD BE CONSISTENTLY APPLIED.
ITEMS ARE TREATED IN THE SAME WAY FROM PERIOD TO PERIOD.

ABAB 113

17

INTRODUCTION TO BUSINESS FORMATION

SOLE
PROPRIETOR
SHIP

REGISTERED
WITH CCM
PROFIT
ORGANISATIO
N

PARTNERSHIP
S

LIMITED
LIABILITY
PARTNERSHIP
LIMITED
LIABILITY

COMPANIES

BUSINESS

NON-PROFIT
ORGANISATIO
N

REGISTERED
WITH
ROS
ABAB
113

COOPERATIVE

PRIVATE
LIMITED
LIABILITY

CLUB &
SOCIETIES
18