Accounting Notes

Lecture 1
Introduction to Accounting
What is Accounting?
Identifying Various Users

Decision Making
Financial  Management
Measuring Information  Stockholders
 Creditors
Communicating  Financial analysts
 Government
2
What is Accounting About?
• Definition:
• Accounting is the process of identifying, measuring and
communicating financial information about a business entity
to permit informed judgement and decisions by users of the
information.
• Based on this definition, we can try to answer the following
questions:
– How is financial information identified?
– How is financial information measured?
– How is financial information communicated?
– What are the common types of business entity?
– Who are the users of financial information?
3
– What types of judgements and decisions do these users make?
Major differences between Management
Accounting and Financial Accounting
Management accounting Financial Accounting
Purpose of information Help internal managers make Communicate org’s financial
decisions position to external parties –
investors, banks, regulators
Primary users Internal managers External users
Focus and emphasis Current and future oriented Past / historical
Rules of measurement Internal measures and reports Financial statements must be
do not have to follow IFRS prepared according to IFRS,
and be certified by external,
independent auditors
Time frame and type of Varies from hourly information Annual and quarterly financial
reports to 15 to 20 years and includes reports, primary on the
both financial and non- company as a whole and
financial information on presented as consolidated
products, departments, financial statements
territories and strategies
4
What is a Business Entity?
• Consists of activities necessary to provide
members of society with goods and services
• Forms of business Entities:
Sole Proprietorship
Partnership
Corporation
5
Users of Accounting Information
• Internal Users of accounting information are managers who plan,
organize, and run a business. These include marketing managers,
production supervisors, finance directors, HR and company officers.
As well as employees.
• External Users of accounting information include:

• Investors (owners) use accounting information to make decisions to buy,
hold, or sell stock.
• Creditors such as suppliers and bankers use accounting information to
evaluate the risks of selling on credit or lending money
• Taxing authorities, such as the Tanzania Revenue Authority, want to know
whether the company complies with the tax laws
• Regulatory agencies, such as the Securities and Exchange Commission
6
Users of Accounting Information
Users Who are they and what are their Information Needs?
Managers These are day-to-day decision makers. They need to know how well the
business is performing financially and about the financial position of the
business
Owners These are the investors who have entrusted their money to the company and
expect something in return. They want to be able to see whether or not the
business is profitable
Employees Employees and their representatives are interested in information about the
stability and profitability of their employers to assess their ability to provide
remuneration and benefits, retirement and employment opportunities
Lenders/Creditors They provide finance on a short-term as well as long-term basis. They are
interested in information that enables them to determine whether their
loans and related interest will be paid when due
Suppliers and Suppliers of goods and services are interested in information that enables
other trade them to decide whether to sell to the entity and to determine whether
creditors amounts owing to them will be paid when due
Governments and They require information for Government policies, including regulation of
their agencies businesses, assessment and collection of taxes from businesses based on
profits, basis of national income and economic statistics
7
Objectives of Financial Statements
• To provide information about the financial position,
performance and changes in the financial position of
an enterprise that is useful to a wide range of users
in making economic decisions.
• To show the results of stewardship of management,

defined as the accountability of management for the
resources entrusted to it.
8
Composition of Financial Statements
According to IFRS, a complete set of Financial
Statements include:
• A Statement of Comprehensive Income (Income Statement or Profit and
Loss Account) for the period – an activity statement that shows details
and results of a company’s profit-related activities during a period of
time;
• A Statement of Changes in Equity for the period;
• A Statement of Financial Position (Balance Sheet) at the end of the
period – a position statement that shows the financial status of a
company at a specific date;
• A Statement of Cash Flows – an activity statement that shows the details
of the Company’s activities involving cash during a period of time; and
• Notes to the Financial Statements which summarise the significant
accounting policies along with other explanatory information
9
Preparation of Financial Statements
Order of Preparation Date
1. Income Statement For the period ended
2. Statement of Changes in Owners For the period ended

Equity
3. Statement of Financial Position As of the end of the period

(balance Sheet)
4. Statement of Cash Flows For the period ended
10
Qualitative Characteristics of Financial
Statements
• The IASB Framework sets out qualitative characteristics that
make the information provided in financial statements useful
to users.
• The four principal qualitative characteristics are:
1. Understandability
2. Relevance
3. Reliability
4. Comparability
11
Qualitative characteristics of Financial
Statements/information
• Understandability – the financial statements must be readily
understandable by the users. It is assumed that the users have
knowledge of the business and economic activities and
accounting and a willingness to study.
• Relevance - Accounting information is relevant when it is

capable of making a difference in a decision by helping users to
form predictions about the outcomes of past, present, and future
events or to confirm or correct prior expectations.
• Timeliness and materiality are key aspects of relevance. If
information is not available when it is needed it lacks relevance
and is of little or no use. Therefore, in the context of financial
reporting, timeliness means that information must be made
available to users before it loses its capacity to influence their
decisions. 12
• Reliability - Information is reliable when it is free from material error
and bias and can be depended upon by users to represent faithfully what it
claims to represent.
• Reliability includes the following characteristics:
• Faithful representation – financial statements should represent faithfully the
transactions that resulted in assets, liabilities and equity at the reporting
date.
• Substance over form – Transactions must be accounted for and presented in
accordance with their substance and economic reality and not merely their
legal form.
• Neutrality – financial information must be free from bias
• Prudence – inclusion of a degree of caution in the exercise of judgement
needed in making the estimates required under conditions of uncertainty.
• Completeness – information in financial statements must be complete 13
within the bounds of materiality and cost.
• Comparability - The quality of comparability
includes the fundamental accounting concept of
consistency, since the usefulness of information is
greatly enhanced if it is prepared on a consistent
basis from one period to the next, and can be
compared with corresponding information of the
same entity for some other period (inter-period
comparison), or with similar information about
some other firms in the same industry (inter-firm
comparison).
14
What makes Financial Information Useful?-
Summary
Ability to perceive the significance of the
Understandability information - Users' ability, aggregation, and
classification
Information that has the ability to influence

Relevance decisions - predictive value and confirmatory
value
Information that is faithfully represented,

Reliability neutral, free from material error, complete, and
prudent
Comparability Discerning and evaluating similarities and

differences - consistency and disclosure
15
LIBRARY ASSIGNMENT
• Define the terms book-keeping and accounting,
differences between book-keeping and accounting
• Regulatory Framework of Accounting in Tanzania
• The history of accounting profession in Tanzania
• The role of National Board of Accountants and
Auditors (NBAA), the role of the International
Federation of Accountants (IFAC). And the
Professional Code of Conduct issued by NBAA
16
• The role of National Board of Accountants and
Auditors (NBAA), the role of the International
Federation of Accountants (IFAC).
• Accountants Professional Code of Conduct
issued by NBAA
17

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Lecture 1

Identifying Various Users

• External Users of accounting information include:

• To show the results of stewardship of management,

1. Income Statement For the period ended

2. Statement of Changes in Owners For the period ended

3. Statement of Financial Position As of the end of the period

4. Statement of Cash Flows For the period ended

• Relevance - Accounting information is relevant when it is

Information that has the ability to influence

Information that is faithfully represented,

Comparability Discerning and evaluating similarities and

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