COMPUTERIZED BOOK-KEEPING (PART1)

a) NATURE AND CONTEXT OF

ACCOUNTING
Accounting is described as the language of business
where the practitioners in the field of accounting are
referred to as Accountants.
Accounting functions are therefore many and varied:
sampled as:
 Accumulating, selection and recording of data.

 Summarizing, analyzing and interpreting financial

information.
 Planning and controlling the day-to-day operations
and activities of the business enterprise.
 Making proper decisions that affect the financial
position of the enterprise.
Distinct Categories of Accounting

 Financial Accounting
 Financial accounting is concerned with the recording of data,
classifying and summarizing the recorded
 Managerial Accounting
 Managerial accounting is concerned with the duty performed by
management to make decisions that are based on financial
statements.
 Management analyzes and interprets financial statements in order
to make decisions that affect the financial position of the firm.
 In this case, managerial accounting begins from where financial
accounting ends.
  Cost Accounting
 Cost accounting is a branch of management
accounting that determines the actual cost
associated with manufacturing a product or
providing a service by looking at all expenses
within the supply chain.
 It is done for the purpose of budget preparation
and profitability analysis.
  Auditing
 Auditing refers to a systematic and independent
examination of books, accounts, documents and
vouchers of an organization to ascertain how far the
financial statements present a true and fair view of
the concern.
 It also attempts to ensure that the books of
accounts are properly maintained by the concern as
required by law
  Tax Accounting
 Tax accounting comprises of methods that are
meant solely for taxes and not for the purpose of
public communication.
 Tax is the mandatory charge that is imposed on a
person whether natural or legal as the payment for
the profit making services executed in the country.
Financial Accounting Statements

According to IFRS(IAS 1.8), an entity for

communication and decision making purposes should
prepare one or all of the following financial accounting
statements:
 The statement of comprehensive income

 Statement of financial position

 Cash flow statement

 Statement of changes in equity

 Notes that may be necessary to explain matters

relevant
Objectives of Financial Accounting

 Provide and communicate useful information to

various interested parties such as investors,
creditors, money lenders, employees, trade unions,
management etc. for making rational business and
investment decisions.
 Provide and inform bank about the past and future
prospects of the enterprise as regards to its ability
to generate net cash inflows through its earnings
and financial activities.
 Provide speedy and objective information on the
activities of the enterprise, in order to permit informed
judgement and decisions.
 Provide information about the volume of economic
resources available to the enterprise (assets); its
obligations to transfer part of these resources to others
(liabilities); the extent of its earnings from operations
and other financial activities; changes in financial
position; the firm’s financial plans (budgets); forecasts;
non-quantifiable events and conditions that affect
business.
 Provide interpretive information to allow
prediction, comparison and evaluation of business
performance in terms of its earning power,
solvency, gearing, efficient utilization of time and
resources.
Elements of Financial Statements
There are those elements that directly related to the measurement of
financial position in the Statement of Financial Position. These are:
a) Assets
 An asset is a resource controlled by the enterprise as a result of past

events and from which future economic benefits are expected to flow to
the enterprise.
b) Liabilities
 A liability is a present obligation of the enterprise arising from past

events, the settlement of which is expected to result in an outflow from

the enterprise of resources embodying economic benefits.
c) Equity
 Equity is the residual interest in the assets of the enterprise after

deducting all its liabilities.

There are those elements that are directly related to the measurement
of performance in the income statement. These are:
a) Income
 Income are increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or

decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
b) Expenses
 Expenses are decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets

or incurrences of liabilities that result in decreasesin equity, other
than those relating to distributions to equity participants
Measurement of the Elements of Financial Statements

The accounting framework acknowledges that a

variety of measurement bases are used today to
different degrees and in varying combinations in
financial statements including:
 Historical cost

 Current cost

 Net realizable (settlement) value

 Present value (discounted)

Users of Accounting Information

Investors
 Investors need information to determine whether they

should buy, hold or sell their underlying assets. Shareholders

are also interested in information which enables them to
assess the ability of the enterprise to pay dividends.
Employees
 Employees are interested in information to assess the

stability and profitability of their employers. They are also

interested in information which enables them to assess the
ability of the enterprise to provide remuneration, retirement
benefits and employment opportunities
Lenders
 Lenders are interested in information that enables

them to determine whether their loans and the

interest attached to them will be repaid when due.
Suppliers and trade creditors
 Suppliers and creditors are interested in

information that enables them to determine whether

amounts owing to them will be paid when due.
Customers
 Customers have an interest in information about the continuance of an

enterprise especially when they have a long-term involvement with or

are dependent on the enterprise.
Government
 Government and their agencies are interested in the allocation of

resources and therefore the activities of enterprises, determine taxation

policies and as the basis for national income and similar statistics.
Public
 Enterprises affect members of the public in a variety of ways. For

example enterprises may make a substantial contribution to the local

economy in many ways including the number of people they employ
and their patronage of local suppliers.
Accounting Concepts and Principles

 Accounting Concepts and Principles are a set of

broad conventions that have been devised to
provide a basic framework for financial reporting.
 All companies are required to comply with the
broad accounting principles as explained below.
 If they fail to comply, they must disclose, quantify
and justify the divergence from the principle.
Relevance
 Information should be relevant to the decision

making needs of the user.

 Information is relevant if it helps users of the

financial statements in predicting future trends of

the business (Predictive Value) or confirming or
correcting any past predictions they have made
(Confirmatory Value).
Reliability
 Information is reliable if a user can depend upon it

to be materially accurate and if it faithfully

represents the information that it purports to
present.
 Significant misstatements or omissions in financial

statements reduce the reliability of information

contained in them.
Impartiality
 Information contained in the financial statements

must be free from subjectivity.

 It should reflect a balanced view of the affairs of

the company without attempting to present them in

a favored light
Faithful Representation
 Information presented in the financial statements

should faithfully represent the transaction and

events that occur during a period.
 Faithful representation requires that transactions

and events should be accounted for in a manner

that represents their true economic substances
rather than the mere legal form.
Substance over Form
 Substance over form requires that if substance of

transaction differs from its legal form then such

transaction should be accounted for in accordance
with its substance and economic reality.
Prudence
 Preparation of financial statements requires the use

of professional judgment in the adoption of

accounting policies and estimates.
 Prudence requires that accountants should exercise

a degree of caution in the adoption of policies and

significant estimates such that the assets and
income of the entity are not overstated whereas
liability and expenses are not understated.
Completeness
 Reliability of information contained in the financial

statements is achieved only if complete financial

information is provided relevant to the business and
financial decision making needs of the users.
 Therefore, information must be complete in all

material respects
Money Measurement Concept
 All transactions and events recorded in the

financial statements must be reduced to a unit of

monetary currency.
 Where it is not possible to assign a reliable

monetary value to a transaction or event, it shall

not be recorded in the financial statements
Timeliness
 Timeliness principle in accounting refers to the

need for accounting information to be presented to

the users in time to fulfill their decision making
needs.
 Timeliness is important to protect the users of

accounting information from basing their decisions

on outdated information.
Consistence
 Financial statements of one accounting period must

be comparable to another in order for the users to

derive meaningful conclusions about the trends in an
entity's financial performance and position over time.
Understandability
 Transactions and events must be accounted for and

presented in the financial statements in a manner that

is easily understandable by users.
Materiality
 Materiality therefore relates to the significance of

transactions, balances and errors contained in the

financial statements.
 Materiality defines the threshold or cutoff point

after which financial information becomes relevant

to the decision making needs of the users.
Going Concern
 Financial statements are prepared assuming that a

business entity will continue to operate in the

foreseeable future without the need or intention on
the part of management to liquidate the entity or to
significantly curtail its operational activities.
Accruals Concept
 The accruals concept requires that revenue and costs

are recognized as they are earned or incurred, not

when the money is received or paid.
Separation Concept
 The business entity is therefore considered to be

distinct from its owners for the purpose of accounting.

 Therefore, any personal expenses incurred by owners

of a business will not appear in the income statement

of the entity.
 Similarly, if any personal expenses of owners are paid

out of assets of the entity, it would be considered to be

drawings for the purpose of accounting much in the
same way as cash drawings.
Accounting Terminologies
Transaction
 A transaction is the event which gives rise to an

entry in accounting records.

 In a simple statement, transaction means the

exchange of money worth from one account to

another account like purchase and sale of goods,
receipt and payment of cash etc
 There are two types of transactions including Cash

transaction and Credit transaction.

Debtor
 A debtor is a person who owes money to the firm

mostly on account of credit sales of goods.

Creditor
 A creditor is a person to whom money is owed by

the firm.
Capital
 It means the amount (in terms of money or assets

having money value) which the proprietor has

invested in the firm or can claim from the firm.
 It will always be equal to assets less liabilities, say:

Capital = Assets - Liabilities.

Liability
 It means the amount which the firm owes to outsiders.

 Liabilities are debts; they are amounts owed to creditors.

Asset
 Asset is tangible or intangible thing or right owned that has a

money value.
 In other words, an asset is that expenditure which results in

acquiring of some property or benefits of a lasting nature.

Goods
 Articles/Things which are bought for resale for profit are

known as Goods.
Revenue
 It means the amount which, as a result of

operations, is added to the capital.

 It includes all incomes like sales receipts, interest,

commission, brokerage etc.,
 However, receipts of capital nature like
additional capital, sale of assets etc., are not a
part of revenue
Expense
 Expense refers to the amount incurred in the

process of earning revenue.

Expenditure
 Expenditure takes place when an asset or service is

acquired.
 The purchase of goods is expenditure, whereas cost

of goods sold is an expense.

Purchases
 Buying of goods by the trader for selling them to

his customers is known as purchases.

 As the trade is buying and selling of commodities,

purchase is the main function of a trade.

Sales
 When the goods purchased are sold out, it is known

as sales. Here, the possession and the ownership

right over the goods are transferred to the buyer.
 It is known as Business Turnover or Sales

Proceeds.
 It can be of two types, Cash sales and Credit sales.
Stock
 The goods purchased are for selling, if the goods

are not sold out fully, a part of the total goods

purchased is kept with the trader until it is sold out,
it is said to be a stock.
 If there is stock at the end of the accounting year, it

is said to be a closing stock.

 This closing stock at the year-end will be the

opening stock for the subsequent year.

Drawings
 It is the amount of money or the value of goods

which the proprietor takes for personal use. It is

usually subtracted from capital.
Losses
 Loss stands for something against which the firm

receives no benefit.
 It represents money given up without any return
Account
 It is a statement of the various dealings which occur between

a customer and the firm.

 It can also be expressed as a clear and concise record of the

transaction relating to a person or a firm or a property (or

assets) or a liability or an expense or an income.
Invoice
 Is a statement giving the particulars such as the quantity,

price per unit, the total amount payable, any deductions

made and shows the net amount payable by the buyer.
Voucher
 A voucher is a written document as the support to a

transaction.
 It is a proof that a particular transaction has taken place for

the value stated in the voucher.

Proprietor
 The person who makes the investment and bears all the risks

connected with the business is known as proprietor.

Discount
Refers to the deduction in the prices of goods made/allowed by
the businessman to customers.
Solvent
 Is a person who has assets with realizable values

which exceeds his liabilities.

Insolvent
 Is a person whose liabilities are more than the

realizable values of his assets.