The nature and scope of financial
1 accounting
General objectives
At the end of this chapter, you
should be able to:
understand the nature and
scope of financial accounting.
Specific objectives
You should be able to:
describe the principles
and concepts of financial
accounting and their
applications to business
situations
explore the role of financial
accounting as an information
system that can be used to
assist in decision making
discuss the place of accounting
in a changing economic and
social environment.
CAPE ACC U1.indb 6
Introduction
In this chapter, you are introduced to the development of the art and
science of accounting. We discuss the principles and concepts that make
the subject a science. We also learn how to communicate in the language of
accounting, since it is the method by which people make rational decisions
in a social and economic environment, which is constantly changing.
At the end of this chapter, you will have gained an appreciation of the
environment in which accounting is conducted and be able to describe
how accounting serves the society.
Content
 The nature and scope of financial accounting
Development of accounting
Traditionally, accounting has been the recording and analysing of financial
transactions. Today, however, accounting is considered to be user-oriented.
There has been some controversy as to whether accounting is an art or
a science. The early method of accounting can certainly be defined as
an art, because it involved recording, classifying and summarising in
a significant manner and in terms of money, transactions and events,
which were in part, at least, of a financial nature. The accounts were in
a narrative form. The Old Testament refers to an audit of accounting
records in the story of Joseph. Joseph was manager of Potiphar’s
household. All of the household assets were entrusted to Joseph (Genesis
39:6–8). A commentary on the Bible explains that Joseph’s work was ‘to
check the records of account’.
The modern view of accounting is that it is a service activity, and since
its function is to provide quantitative information about economic
entities, primarily financial, it may be considered a science, albeit not an
accurate science.
Most British and North American textbooks on accounting trace the
development of accounting from the Greeks and Romans, who were
traders in the fourth and fifth centuries BC, down to the Italians, who
were the first bankers. In 1458 Benedetti Cortrugh wrote an essay on
double-entry bookkeeping and since then the narrative method of keeping
accounts began to disappear.
Double-entry bookkeeping started out as a system of ‘discharging’.
The principle of charge and discharge was implicated primarily by the
cashier of the company, who charged with his receipts and discharged of
his payments. Debtors who borrowed money or bought goods on credit
were ‘charged’ and payments were a ‘discharge’. The Italian words dare
meaning ‘to give’ and avere meaning ‘to receive’ were later translated into
English as ‘debit’ (DR) and ‘credit’ (CR).
Accounting in the Caribbean would have come with the settlers –
Spanish, British, French, Dutch and Portuguese.
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 Chapter 1 The nature and scope of financial accounting

Accounting information
The main purpose of accounting is to provide information for decision
making. The final outcome of accounting information is the decision
that is made. Accounting is often referred to as the language of business Activity 1.1
because it is the way in which we communicate. There are certain words List eight users of accounting
(e.g. expenses, revenue, assets and liabilities) and terms (e.g. generally information. Indicate four types of
accepted accounting principles, matching principle and prudence) that are information they require. Identify
peculiar to accounting, so it is necessary that all the users of accounting three economic circumstances
information know what they mean. In the first activity you will be that influence the information that
required to identify users of accounting information and their accounting they find useful.
information needs.

Feedback

A good answer to this question should list some of the users of accounting information and what they need to know
to be able to make decisions from their point of view. Examples could include:
 owners/shareholders  investors – potential shareholders
 financiers – the bank  trade associations – Chamber of Commerce
 suppliers – creditors  employees and their representatives (trade unions)
 customers  general public.
 management
Accounting is useful if it provides the information that the users need. The kind of information users may need to know
includes:
 how much money is available at a particular  how much money is owed to the suppliers at the end of
point in time a particular day
 how much an item for resale costs  which product line is most profitable
 how much revenue is earned in a month or a quarter  if customers are paying their bills on time.
The economic circumstances that influence the information required are:
 the type of business  the type of ownership.
 the type of activity in which the business is
operating
More on accounting information
This activity showed us how important accounting information is, but there are other things to think about besides
the users and what they need.

Significance and limitation of accounting information

Significance
The main objective of financial information is to decide on the amount
and certainty of cash for investment and for credit. In considering
economic activities in the form of transactions, it is possible to plan
ahead.

Limitations
However, there are some limitations of accounting information. By nature,
financial statements are historical, so we get the information after the
fact. There is no guarantee that the future will be exactly the same as the
past; most likely it will not be since we live in a rapidly changing society.

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 Accounting Unit 1

There are several figures on financial statements that are estimates. For
example, the life of an asset is not accurately known; nevertheless we select
a timeframe based on how similar assets in the business have performed.
Accounting information is based on a set of rules known as generally
accepted accounting principles, which if not understood could make the
figures misleading. Generally accepted accounting principles, often
referred to as GAAP (pronounced ‘gap’), are broad guidelines that are a
combination of tradition and experience.
The boundaries of GAAP include:
1 accounting standards
2 company law
3 stock exchange requirements
4 other acceptable accounting treatments.
These generally accepted accounting principles have been developed by
the accounting profession. The next chapter deals with the way in which
the accounting profession functions and the conceptual framework.

The accountancy profession in the Caribbean

The Institute of Chartered Accountants of Barbados (ICAB) was
incorporated in 1971. It does not have a locally based qualification. For
membership, an individual must be a Barbadian citizen or ordinarily
resident in Barbados and be a member of one of the recognised
professional bodies (ACCA, ICAEW, ICAS, IAS, CA, CPA, CIMA,
CMA or CGA)1, as well as having not less than five years’ approved
accountancy experience.
The council of the ICAB issues practising certificates to some of its
members listed above who satisfy certain prerequisites. The Institute has
the same organisational structure as UK professional bodies: a president,
vice-president and deputy president, elected from among the council
members. The following committees are formed from the elected council
members: Executive and Administrative, Disciplinary, Investigation,
Appeals, Continuing Professional Education, Student Affairs, Accounting
Standards, Auditing Standards, Taxation and Law, Membership and
Application Advertising. These titles give an indication of the areas of
focus of the professional body. The ICAB was directly involved in the
initial stages of drafting the Companies Act 1982 and also with the
establishment of the Securities Exchange of Barbados. It currently sponsors
regular seminars, two or three times a year, to ensure that members are
able to meet the continuing professional education requirements, which
are mandatory for renewing the practising certificate annually.
In 1985, after the Companies Act 1982 came into effect, the council of
the ICAB agreed that certain IAS be adopted and given legal backing. Since
then it has agreed that all IAS should be adopted. In 1985 a newsletter of
the ICAB stated: ‘These standards were to apply to all companies, even
small ones whose members may elect not to appoint auditors.’

1
Association of Certified Accountants of the United Kingdom (ACCA); Institute of
Chartered Accountants in England and Wales (ICAEW); The Institute of Chartered
Accountants of Scotland (ICAS); International Accounting Standards (IAS); one of the
provincial Institutes/Order of Chartered Accountants in Canada (CA); the American
Institute of Certified Public Accountants (CPA); Chartered Institute of Management
Accountants in England (CIMA); Society of Management Accountants of Canada
(CMA); Certified General Accountants Association of Canada (CGA).

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 Chapter 1 The nature and scope of financial accounting

The ICAB prepared its first accounting standard and auditing guideline,
which was at the exposure draft stage in 1992. It was designed for entities
governed by the Co-operative Societies Act 1990.
The ICAB’s website (www.icab.bb) features informative articles; students
should try to access the site for additional information on the ICAB.
The Institute of Chartered Accountants of Jamaica (ICAJ), established in
1965, was an amalgamation of the Association of Accountants of Jamaica
Incorporated (founded 1946), the Jamaican branch of the Association of
Certified and Corporate Accountants (founded 1962) and the Society of
Chartered Accountants of Jamaica (founded 1972). It was incorporated
by the Jamaican Public Accountancy Act 1968. The founder members
were mainly members of the recognised British professional bodies
ICAEW, ICAS and ACCA who had qualified abroad (see the footnote on
page 8). Full membership is restricted to Jamaican citizens who pass the
Institute’s examinations or other recognised examinations and obtain
the required practical experience. Non-Jamaicans who were ordinarily
resident in the island prior to the Institute’s incorporation and who
were members of certain recognised bodies were admitted into full
membership on the incorporation of the ICAJ. There are two categories
of membership of the Jamaican Institute: the associate member (CA) and
the fellow (FCA). Five years of approved practical experience is required
for admittance as an associate. A practising certificate is granted after
two and a half years in a practising office. Fellowship is automatic after
10 years of associate membership or five years if in practice. Unlike the
other two institutes described here, the Jamaican Institute is comprised
almost exclusively of individuals with a British qualification.
Like the ICAB, the ICAJ is organised along the same lines as the professional
bodies in the UK. Charter, the official journal of the ICAJ, is produced four
times a year, as well as a members’ newsletter. It includes interesting articles,
which are good resource material. The ICAJ has adopted some of the IAS
but, in addition, the Institute has issued some recommendations. These are
intended as a guide to members and compliance is strongly urged, but they
do not carry the same weight as the IAS.
The Institute of Chartered Accountants of Trinidad and Tobago (ICATT)
was formed in 1970. Members and/or graduates of certain accountancy
bodies2 are eligible for admission to membership. The council of ICATT
has a president, vice-president, treasurer and nine elected members. The
standing committees of ICATT are Accounting and Auditing Standards,
Accounting and Auditing Standards for Oil and Gas, Disciplinary,
Education and Professional Development, Investigation, Legislation,
Membership, Public Relations and Taxation. Newsletters are regularly
issued by the Institute of Chartered Accountants of the Caribbean (ICAC).
ICATT became a member of IFAC in 1977. ICATT was the driving force
behind the Company Law Reform in Trinidad and Tobago.
The Institute of Chartered Accountants of the Caribbean (ICAC) was
incorporated in October 1988. The regional institutes are its members

2
Association of Certified Accountants of the United Kingdom (ACCA); Institute
of Chartered Accountants of England and Wales (ICAEW); Institute of Chartered
Accountants of Scotland (ICAS); one of the provincial Institutes/Order of Chartered
Accountants in Canada (CA); the Institute of Certified Public Accountants of the
United States of America (CPA); the institute of Cost and Management Accountants in
England (CIMA); the Society of Management Accountants in Canada (CMA); Institute
of Certified General Accountants of Canada (CGA); graduates of the University of the
West Indies’ (St Augustine campus, Trinidad) M.Sc. programme before 1984.

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 Accounting Unit 1
Activity 1.2
What do you think are the roles of
the regional institutes of chartered
accountants?
Feedback
A good answer should include:
 establishing standards of
financial reporting
 developing or adopting
accounting standards
 giving guidance to the public,
preparers, auditors and users on
financial reporting
 assisting in the education of
accountants and auditors
 providing oversight on the
conduct of accountants in the
profession.
10
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and it currently shares the offices and administrative staff of the Institute
of Chartered Accountants of Jamaica (ICAJ). The founding members were
the Institutes of Chartered Accountants of the Bahamas, Barbados, Belize,
Guyana, Jamaica, St Lucia and Trinidad and Tobago. The board is made
up of one director from each territory, from whom are chosen a president,
vice-president, secretary and treasurer. One of its projects has been to
launch a regional professional accountancy qualification.
Activity 1.3
(a) Have you heard of an organisation that fits the following description?
It is made up of persons who have passed the professional accounting
examination of one of the professional bodies in the developed countries,
including the following:
In the UK:
(i) The ACCA (Association of Chartered Certified Accountants)
(ii) The ICAEW (Institute of Chartered Accountants in England and Wales)
In the US:
(i) The AICPA (American Institute of Certified Public Accountants)
In Canada:
(i) The CICA (Canadian Institute of Chartered Accountants)
(ii) The CGA (Certified General Accountants)
These individuals are recognised as qualified accountants and can audit
the accounts of business entities in their respective territories. They are
committed to exercise due care and skill in doing their work, have a set of
ethical guidelines, which govern their professional conduct, and agree to
prepare financial statements in a standard form.
In Barbados, this organisation is known as the Institute of Chartered
Accountants of Barbados (ICAB). The Barbados Companies Act mentions
this organisation and gives it the power to decide who can audit. ICAB issues
practising certificates to those persons provided they have a minimum of
three years’ practical experience. ICAB has also taken the decision that
financial statements must be prepared in accordance with International
Accounting Standards (IAS).
(b) Is there an organisation similar to this in your country?
(c) What is its name?
(d) If one exists in your country, try to make contact with a member and talk
to them about the organisation.
(e) If one does not exist, try to find an individual such as described above and
ask them about IAS.
Feedback
A good answer should identify the name of one of these accounting bodies:
 Institute of Chartered Accountants of Antigua and Barbuda (ICAAB)
 Bahamas Institute of Chartered Accountants (BICA)
 Institute of Chartered Accountants of Barbados (ICAB)
 Institute of Chartered Accountants of Guyana (ICAG)
 Institute of Chartered Accountants of Jamaica (ICAJ)
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 Chapter 1 The nature and scope of financial accounting

 Institute of Chartered Accountants of Trinidad and Tobago (ICATT)

 St Kitts/Nevis Association of Chartered Accountants.
Discuss what that body does and how it functions. Mention should also be
made of the umbrella body, the Institute of Chartered Accountants of the
Caribbean (ICAC).

Key points

ACCOUNTING INFORMATION

INFORMATION USERS INFORMATION

Investors ASSETS & LIABILITIES
Creditors Furniture & fittings
Managers Land
Owners Loans
Customers Receivables/Payables
Employees
Government CASH FLOWS
Regulators From operations
(Stock Exchange) From financing

Users of accounting information and their needs

Professional organisations internationally (ACCA, AICPA, CICA),
regionally (ICAC) and nationally (local institutes/associations of chartered
accountants) play an important role in determining the quality of the
accounting information that is used for decision making.
Other professional bodies which have an impact on accounting
information are management accountants (members of ICMA (UK),
CMA (US and Canada), internal auditors (members of IIA), government
auditors, persons who work in the Inland Revenue Department, the
regulatory body of the Stock/Securities Exchange as well as the persons
who work in firms of chartered accountants.

Conclusion
Accounting is a service activity and an information system. It identifies,
measures and communicates financial information about businesses to
persons who are interested.
Many types of people are interested in financial information and they are
each looking for different kinds of information. They include investors,
creditors, taxation authorities, customers, labour unions, economic
planners and other regulatory agencies.
In preparing financial statements, accountants need to make sure that
the statements are understood by all the readers, wherever they are in the
world. To help with this, the accounting professional bodies have attempted
to develop standards that are generally accepted and practised globally.
Financial accounting is influenced by several situations and conditions.
It must be recognised that the private sector owns most of the resources,
while the government provides the environment in which businesses can
operate. Accounting records the economic resources and obligations that
can be expressed in terms of money.

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 Accounting Unit 1

Suggested further reading

Weygandt, J., Keiso, D.E. and Kell, W.G. (1998) Accounting Principles.
New York: John Wiley and Sons.
Newsletters and magazines produced by the national and regional ICAC

End test
1 Describe accounting in terms of the language of business and the role accounting
information plays in decision making.
2 The below diagram depicts a typical high street (the business area) on Any Island. Try
to work out the type of ownership for each premises and make any observations that
you think might have an effect on their financial accounts. Write your notes in the table
below.

(The Mendes
family
T. BARKER residence)
Dentist
THE
EYE COPY
MENDES THE VISION SHOP
DALEY & DRY ROTI LTD
SONS GOODS HUT
Cleaners

D.J. CARTER & B.J.’s SUPERMARKET THE KIM LEE

PARTNERS CO-OPERATIVE Chinese
BANK Restaurant
Chartered
Accountants

Name Ownership Observations

T. Barker

D.J. Carter & Partners

Daley & Sons

B.J.’s Supermarket

The Co-operative Bank

Kim Lee

Mendes Dry Goods

The Roti Hut

Eye Vision Ltd

The Copy Shop

3 Accounting information is gathered to facilitate decision making.

(a) As an investor in a company, what would be your primary objective?
(b) As a manager of a company, what would be your primary objective?
(c) Is the same information likely to be useful in the different positions?

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 Chapter 1 The nature and scope of financial accounting

End test feedback

1 Accounting is the way in which information about a business is communicated. Different users have different needs
as the decisions they make are different. For example, trade unions want to be able to bargain for benefits for their
members; employees need to decide whether or not a particular organisation would be a good place to work based
on the wages and salaries. The main purpose of accounting information is for decision making; therefore, it is a
means to an end. The end is the decision, which is made better using the accounting information.

2 Name Ownership Observations

T. Barker Most likely a sole proprietor Dentist who works alone

D.J. Carter & Partners Partnership Could be a partnership agreement stating

how the profits are to be shared
Daley & Sons May be a partnership or could be a name
carried over from the previous owners
B.J.’s Supermarket Could be a private company Most likely operates on a strictly cash basis

The Co-operative Bank Could be either a public company or a The special nature of their accounts is that
private company the persons who deposit money with the
bank are shown as liabilities, while the
persons who have borrowed money from
the bank are shown as assets
Kim Lee Could be either sole trader or partnership Will need to be able to account for tips

Mendes Dry Goods Could be a private company May offer hire purchase arrangements to
its customers
The Roti Hut Could be either sole trader or partnership Will need to be able to account for tips

Eye Vision Ltd Private limited company

The Copy Shop Could be run by a sole proprietor Part of a chain of businesses out of North
America

3 Accounting information is gathered for different (b) Managers would be interested in deciding on the
purposes. price to be set for the product or service. This
means that they are interested in the cost of all the
(a) As an investor the main concern is to ensure that
inputs. Managers would also want to know how
the money invested is secure and that you will get
certain departments are performing.
back your money plus some extra. The investor
expects to get a reasonable rate of return when (c) No, investors would get their information from
compared to investing it elsewhere. Another financial accounts while managers would get their
objective would be to invest in a company where information from management accounts.
the investor does business (e.g. if the investor
likes ice cream, they would invest in an ice-cream
company).

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 Accounting Unit 1
Tutor-marked assignment
1 Define the purpose of accounting.
2 Distinguish between financial and managerial accounting.
3 Name some outside groups that might be interested in a company’s financial information and state their particular
interests.
4 What are generally accepted accounting principles (GAAP) and who establishes them?
5 Discuss the role of the Institute of Chartered Accountants of the Caribbean (ICAC).
Solution for the tutor-marked assignment
1 The purpose of accounting is to identify, measure,
record and communicate the economic activities of an
organisation (business and non-business) to persons
who are interested.
2 Financial accounting is information that describes
what a business entity or individual owns, owes
and the transactions in which they are involved. It
is designed to help investors decide where to place
their resources. Managerial accounting is information
that is provided to assist management in running the
business. Management uses this information to set
the company’s goals and evaluate the performance of
departments and individuals.
3 Some of the outside groups interested in a company’s
financial information:
 Investors – judge whether or not to buy, sell or hold
shares.
 Suppliers – decide on the risk of granting credit.
 Bankers – evaluate the risk of lending money to the
business.
 Inland revenue/tax department – ensure compliance
with the tax laws.
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CAPE ACC U1.indb 14
 Labour unions – decide if the business has the ability to
pay increased wages and salaries.
 Customers – estimate whether a company will be able
to honour product warranties.
 Regulatory agencies (stock exchange) – decide if the
company is operating within the prescribed rules.
4 Generally accepted accounting principles (GAAP)
are a common set of rules and procedures that have
been established to help give guidance on how to
report economic activities. They are established
by authoritative bodies, such as government and
regulatory agencies.
5 The Institute of Chartered Accountants of the
Caribbean has the following roles:
 They have to be relied upon to adopt the International
Accounting Standards at a national level.
 They identify issues on accounting that have particular
relevance and put these forward for research.
 They participate in discussion on exposure drafts by
the International Federation of Accountants (IFAC) and
comment from a Caribbean perspective.
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