Course Content
Nature and Purpose of Accounting The objective of Financial Accounting The Elements of Financial Statements The Accounting Equation The Users of Accounting Information
The Source documents such as receipts and invoices The Books of Prime entry/Original Entry from the journals, cashbooks, Petty cash books and registers The Ledger and the concept of double entry The Trial Balance The Financial Statements
The legal sources of regulation The professional sources of regulation (local and international bodies) and ethical requirements Accounting Standards Common accounting principles/concepts Qualities of useful financial information
CPA 001: Financial Accounting
About Lesson
  • Accounting is a service activity intended to provide quantitative financial information about economic entities for decision-making among various alternatives (American Institute of Certified Public Accountants, AICPA).
  • Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decision by users of the data (American Accounting Association (AAA).

Definition of Key Terms 

  1. Accounting: Accounting is the process of identifying, measuring, recording, and communicating financial information to permit users to make informed decisions.
  2. Accounting equation: A mathematical representation of the connection between assets, liabilities, and capital
  3. Accounting policies: Concepts, foundations, conventions, regulations, and practices that a company uses to prepare and report financial statements.
  4. Assets: Valuable items that a company has.
  5. Capital: Owners’ resources invested in the business.
  6. Liabilities: The organization’s obligations to third parties.

Phases of the Accounting Process

We can see from the preceding definition that accounting is a four-phased process.

  1. Recording phase: The routine and mechanical process of recording business transactions and occurrences in the books of accounts in chronological order by entities and other defined accounting rules and procedures
  2. Classifying phase: Sorting and categorizing similar transactions by posting them to a ledger. A ledger is a collection of similar accounts. Accounts are the primary accounting records that track changes in the value of an asset, liability, income, or expense account.
  3. The summarizing phase: is when financial statements or reports are prepared. It is performed regularly, e.g., monthly, annually, etc.
  4. Interpretation: This refers to the examination of accounting data. It comprises the breakdown and making meaning of financial data to aid users in making financial decisions. For this reason, accounting is known as the “language of business.”

Branches of Accounting

Accounting can be sub-divided into areas of specialization;

  1. Financial accounting: Financial accounting involves gathering and processing accounting data and reporting to internal and external stakeholders.
  2. Tax accounting; Concerned with determining a company’s tax liability, which may include things like a value-added tax (VAT), customs duty, pay as you earn (PAYE), corporation tax, and so on.
  3. Cost accounting; Aids in the determination of expenses associated with the production of a good or service and the allocation of those costs to the various elements that contributed to the cost of production.
  4. Managerial accounting; Concerned with the generation of accounting data for use by the firm’s internal management in making day-to-day decisions.
  5. Auditing; Concerned with the vouching and verification of financial accounting transactions to ensure that they accurately represent the business’ activity, i.e., the truthful and fair view of its financial situation.

Purpose of Accounting

The main purpose of Accounting is:

  1. To collect and report financial information on a company’s performance,
  2. To collect and report financial information on a company’s financial position,
  3. To collect and report financial information on a company’s cash flows.

This data is then used to judge how to run the company, invest in it, and lend money to it. The data is gathered in accounting records by capturing the accounting transactions, either standardized company operations like customer invoicing or supplier bills, or more specialized transactions like journal entries. This financial data is frequently gathered into financial statements, which contain the following reports:

  1. A financial statement
  2. Statement of financial position
  3. A cash flow statement
  4. Retained earnings statement

Disclosures accompany financial statements. Financial statements are prepared following accounting principles, the most widely used of which are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) (IFRS). The financial statements’ results can vary depending on the framework used. The financial statement recipient’s preferences determine the framework that a business uses. Accounting is primarily concerned with the collection of financial data and its subsequent reporting.

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