Chapter 1: Introduction to Accounting

Accounting is defined as the systematic process of identifying, recording, classifying, summarising, interpreting and communicating information about financial transactions to the users of the accounting information, such as the owners, government, investors, creditors, etc.

It provides the following information:

1. Resources available in the firm.
2. The means employed to finance those resources.
3. Results achieved by using those resources.

The end product of Financial Accounting is shown below:

1. Income statement: The Trading and Profit and Loss Account is part of the income statement; it determines the financial position of the business based on gross/net loss or profit.
2. Balance Sheet: A balance sheet is helpful in presenting the exact financial position of the business. It provides information about the assets and liabilities of a business to users of the business information.

The main objectives of accounting are discussed below.

1. To keep a systematic record of all financial transactions.

2. To determine the profit and loss of a business as reflected in a P & L account.

3. Making information available to users of the information (employees, shareholders, stakeholders).

4. To determine the financial position of the business by preparing a balance sheet.

There are two types of users for accounting information. They are

1. Internal Users
2. External Users

Internal Users include management, employee and owners. While external users consist of investors, creditors, the government, the public and customers.

The long-term lenders seek the following accounting information:

1. Liquidity of a business

2. Profitability

3. Operating efficiency

4. Growth potential of the business

5. Ability to repay the creditors

External users are those users who are not part of a business but are interested in accounting information. Some examples are government, suppliers, banks, labour unions, tax authorities, etc.

The following are the information needs of management:

1. Gather data that assist in decision-making and planning.
2. To determine the soundness of business by preparing reports on funds, profits and costs.
3. To compare current financial statements with past statements of own and of other similar businesses to determine the operating efficiency of the business.

Examples of revenues are

1. Dividends
2. Sales Revenue
3. Interest Received

Debtors and Creditors have the following differences:

Profit and Gain can be distinguished as follows:

Comparing accounting information is necessary for

1. To determine how a firm is performing as compared to its competitors.
2. To determine the internal performance of a firm to check how a firm has been performing over the years.