Select Business & Technology College

Department of Business
Administration
Course Title: Financial and Managerial
Accounting
Course Code: MBA 611
CHAPTER 1:- Context of Accounting

Instructor :- [Link] R.

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 LEARNING OBJECTIVES
 Accounting: definition
 A short history of accounting
 Who uses accounting data
 Functions of accounting
 Nature of accounting
 Objectives of accounting
 Branches of accounting
 Fundamental accounting concepts and principles
 Basis of accounting
 Basic financial statements 2
 Accounting: Definition
 Accounting can be defined as an information
system that provides reports to users about the
economic activities and condition of a business.
 Accounting consists of three basic activities—it
identifies, records, and communicates the
economic events of an organization to interested
users.
 The basic function of any language is to serve as a
means of communication. You could think of
accounting as the “language of business.” This is
because accounting is the means by which businesses
financial information is communicated to users. 3
Accounting: Definition…
 The process by which accounting provides
information to users is as follows:
1) Identify users.
2) Assess users’ information needs.
3) Design the accounting information system to meet
users’ needs.
4) Record economic data about business activities
and events.
5) Prepare accounting reports for users.

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 A Short History of Accounting
 Accounting has evolved through different stage of
development at different parts of the world and at
different periods of time depending on the
economic development of the society.
 The gradual increase in production and economic
transactions from time to time has, depending on
technological enhancement, created difficulty to
memorize and manage all these economical events
and compel people to record.

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 Cont.
 According to Alexander (2002), people started
recording economic transactions for the first time on
clay in Mesopotamia and then advanced to record on
Papyrus in Egypt.
 In the 5th century B.C., Greece used "public
accountants" to allow its citizenry to maintain real
authority and control over their government's
finances.
 Perhaps the most important Greek contribution to
accountancy was its introduction of coined money
about 600 B.C.
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 Cont.
 The innovative Italians of the Renaissance (14th -
16th century) are widely acknowledged to be the
fathers of modern accounting. The Italian Luca
Pacioli for the first time in 1494 AD. In his book on
Mathematics, Made presentation of the currently in
use double entry accounting system.
 Single Entry System is the system in which only
one aspect of each transaction is recorded. In this
system only transaction relating to personal
accounts are recorded.
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 Cont.
 Double entry accounting is based on a simple
concept: each party in a business transaction
will receive something and give something in
return. What is received is a debit and what is
given is a credit
 Thereafter, the accounting has become an
integral part of each facet of life.

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 Double-Entry Accounting

 Double-entry accounting is based on a simple

Scale or Balance

Luca Pacioli
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
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 Functions of Accounting
Accounting is expected to perform the following
functions:
 To provide the means of guiding and controlling the
business activities;
 To analyze and interpret the results enabling the
management to find out what has happened, what is
happing, and what is going to happen in the future
in the interest of the company;
 Accounting as a recordkeeping device
 Accounting as an information system
 Accounting as a service activity
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 Nature of accounting
 Accounting as a process: Accounting is the process of
recording financial transactions pertaining to a business.
 Stewardship function: Stewardship means persons who run
or manage businesses are not always those who have invested
money and/or resources in the business. They manage money
and/or resources which are owned by others, and act as
stewards (or agents ) on behalf of owners.
 Accounting as a means to an end: Accounting is not an end
but rather a means to an end. Accounting gives information
needed for decision making and that is the end of accounting
but is the users who are going to decide on what, where, and
how are they going to use the information giving for. 11
 Users Accounting Data
 There are two broad groups of users of financial
information:
a) Internal users of accounting information are those
directly involved in managing and operating an
organization. Internal users (management, human
resources, finance and marketing).
b) External users of accounting information are not
directly involved in running the organization.
External users (Investors, creditors, regulators,
customers, Government). External users are
individuals and organizations outside a company who
want financial information about the company.
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 Specialized fields in Accounting
i. Financial Accounting– is concerned with providing
information to stockholders, creditors, and others who
are outside the organization. It is mainly concerned
with the preparation of financial statements for the use
of outsiders like creditors, debenture holders,
investors and financial institutions.
ii. Managerial accounting- is a field of accounting that
provides economic and financial information for
managers and other internal users. Managerial
Accounting is the generation and analysis of relevant
information to support managers’ strategic decision-
making activities. 13
Specialized fields in Accounting (Cont.)
iii. Cost Accounting may be regarded as “a specialized
branch of accounting which involves classification,
accumulation, assignment and control of costs.”
According to the Chartered Institute of
Management Accountants (CIMA)- Cost accounting
is the process of accounting for cost from the point at
which expenditure is incurred or committed to the
establishment of its ultimate relationship with the cost
centers and cost units.
iv. Budgetary accounting- Concerned mainly about
financial plans and comparisons.
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Specialized fields in Accounting (Cont.)
v. Financial Management- mainly concerned with wise
use of financial resources, safeguarding of assets,
analysis of investment plans, etc…
vi. Auditing– designed to enable an independent review
and assurance services of records, reports and
operations.
vii. Tax Accounting- mainly focuses on determining tax
returns.
[Link] and NFP Accounting- designed to help
accounting and reporting for entities whose operating
purposes are other than to provide goods or services at
a profit or profit equivalent. 15
Specialized fields in Accounting (Cont.)
ix. Social Accounting- also known as social
responsibility accounting, aims to measure and
inform the general public about the social welfare
activities undertaken by the enterprise and their
effects on the society.
x. Forensic Accounting- Forensic accounting is a
investigative techniques used to discover financial
crimes. Forensic accountants explain the nature of a
financial crime to the courts.

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Specialized fields in Accounting (Cont.)
xi. Inflation Accounting- A range of accounting methods
designed to correct problems arising from historical
cost accounting in the presence of high inflation and
hyperinflation. Also called price level accounting.
xii. Human Resource Accounting - Human Resource
Accounting is the process of identifying and
measuring data about human resources and
communicating this information to interested parties.
Human Resource Accounting is an attempt to identify
and report investments made in human resources of
an organization.
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 Fundamental Accounting Concepts and Principles
 If companies did not follow the same rules when
reporting financial information, comparisons among
companies would be difficult.
 Accounting principles and concepts developed from
research, accepted accounting practices, and
pronouncements of regulators.
 “Accounting” is based on a number of rules or
conventions, which have evolved over time. These
principles are known as Generally Accepted
Accounting Principles (GAAPs).

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 Cont.
 Financial Accounting Standards Board (FASB) has
the primary responsibility for developing accounting
principles.
 The FASB publishes Statements of Financial
Accounting Standards as well as Interpretations of
these Standards.
 In addition, the Securities and Exchange
Commission (SEC), has authority over the
accounting and financial disclosures for companies
whose shares of ownership (stock) are traded and
sold to the public.

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 Cont.
 Many countries outside the United States use
accounting principles adopted by the International
Accounting Standards Board (IASB). The IASB issues
International Financial Reporting Standards (IFRS).
Differences currently exist between FASB and IASB
accounting principles.
❑ International Financial Reporting Standards include:
 IAS issued by IASC (from 1973 to 2001)
 IFRS being issued by IASB(since 2001)

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Principles, Assumptions and
Constraints of Accounting
Basic
Principles Constraints
Assumptions

1. Historical cost 1. Economic entity 1. Cost benefit

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 A. PRINCIPLES
1. Measurement The measurement principle, also
called the cost principle, usually prescribes that
accounting information is based on actual cost (with a
potential for subsequent adjustments to market). Cost
is measured on a cash or equal-to-cash basis. This
means if cash is given for a service, its cost is
measured as the amount of cash paid.
2. Revenue recognition Revenue (sales) is the amount
received from selling products and services. The
revenue recognition principle provides guidance on
when a company must recognize revenue. To
recognize means to record it. 22
 PRINCIPLES (Cont.)
3) Expense recognition The expense recognition
principle, also called the matching principle,
prescribes that a company record the expenses it
incurred to generate the revenue reported.
4) Full disclosure The full disclosure principle
prescribes that a company report the details
behind financial statements that would impact
users’ decisions. Those disclosures are often in
footnotes to the statements.

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 B. Accounting Assumptions
1) Going concern The going-concern assumption
means that accounting information reflects a
presumption that the business will continue
operating instead of being closed or sold.
2) Monetary unit The monetary unit assumption
means that we can express transactions and events in
monetary, or money, units. Money is the common
denominator in business.
3) Time period The time period assumption presumes
that the life of a company can be divided into time
periods, such as months and years, and that useful
reports can be prepared for those periods.
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 Accounting Assumptions (Cont.)
4) Business entity The business entity assumption
means that a business is accounted for separately
from other business entities, including its owner.
The reason for this assumption is that separate
information about each business is necessary for
good decisions. A business entity can take one of
three legal forms:
a) Proprietorship,
b) Partnership, or
c) Corporation.

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 C. Accounting Constraints
1) Materiality The materiality constraint prescribes that only
information that would influence the decisions of a
reasonable person need be disclosed. This constraint looks
at both the importance and relative size of an amount.
2) Benefit exceeds cost The cost-benefit constraint
prescribes that only information with benefits of
disclosure greater than the costs of providing it need be
disclosed.
3) Accounting conservatism requires company accounts to
be prepared with caution and high degrees of verification.
All probable losses are recorded when they are
discovered, while gains can only be registered when they
are fully realized.
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 Basis of Accounting
 The basis of accounting describes how
financial activities are recognized and
reported.
 The bases of accounting include the
following:
a) Cash Based Accounting
b) Accrual Accounting

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 Basis of Accounting (Cont.)
1) Cash Based Accounting:
 Most of us use the cash method to keep track of
our personal financial activities.
 The cash method recognizes revenue when
payment is received, and recognizes expenses
when cash is paid out.
 Not an accurate picture of true profitability

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Basis of Accounting (Cont.)
2) Accrual Accounting:
 Accrual accounting revenues and expenses are
recorded when they are earned or incurred
rather than when they are received or paid.
 The accrual method relies on the principle of
matching revenues and expenses.
 Provides a more accurate picture of company’s
profitability

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End of Chapter 1

Thank you

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