Business Accounting

Lecture 1 Introduction to Accounting

(Lecturer’s copy)

Learning Objectives
At the end of the lecture you should be able to:
• state the nature and purpose of accounting.
• describe how accounting information help users in their decision making.
• describe the nature of business.
• describe the types of business organisation by ownership.
• explain accounting assumptions and principles underlying the preparation of financial reports.
• apply the accounting assumptions and principles in different business scenarios.

Reference Warren, Reeve, Duchac, Fung, Cheong, Fadhlina, Ooi – ‘Accounting: An Asian
edition’, third edition, Singapore: Cengage Learning, Chapter 1 p. 8 - 12

Kirkwood, Ryan, Falt, Stanley – ‘Accounting: An Introductory Framework’, second

edition, Pearson Longman, Chapter 12 p. 482 - 483

1. What is Accounting?
Definition
Accounting is that discipline which measures and records financial and other information
about an entity, and reports and interprets that information to interested parties to enable them
to make appropriate decisions.

Is accounting the same as

bookkeeping?

Bookkeeping is usually associated with the physical recording of the monetary transactions
of a business and tends to be mechanical – and at times repetitive. Accounting, on the other
hand, has a much wider interpretation (see definition above)

B A: Accounting
A
B: Bookkeeping

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2. Main Purposes of Accounting

Individuals need some simple form of accounting to deal with their personal financial matters.
Business firms and other organisations need accounting systems to provide information (via
financial reports / statements) on profitability and financial position of the firms to various
interested parties.

3. Accounting Assumptions and Principles

The whole process of accounting is guided by generally accepted rules and they may be called
accounting concepts. The importance of the accounting concepts lies in providing a uniform
understanding and approach in the practice of accounting all over the world.

• Accounting Entity (Business entity)

The business is an entity or body separate from the owners.
The transactions are recorded from the viewpoint of the business and the owners are
treated as outsiders. The accounting process is concerned with the activities of the
business organisations and not the activities of the owners.

• Monetary Assumption (Monetary measurement)

It assumes that all transactions affecting the business are recorded in the common
monetary unit in use, i.e. in dollars and cents.
Any transaction of the business that cannot be expressed in money terms will be excluded
from the accounting records.

• Historical cost
Assumes that business transactions are recorded in terms of their cost at the time the
transaction occurred.

• Continuity (Going concern)

This concept is closely related to the concept of historical cost.
It is assumed that the business will continue to operate for a long time and will not be
selling its assets in the near future. As such, we report assets at their historical costs.
Where a firm is going out of business or into liquidation (i.e. continuity assumption is no
longer applicable), the firm will typically report the assets at their liquidating values
(selling prices) instead.

• Accounting period
It assumes that the indefinite life of a business is divided into arbitrary time periods. This
period is generally one year for reporting to external parties, but can be varied for internal
reporting.

• Principle of Conservatism / Prudence

Generally, the principle means the adoption of cautious accounting practices. When
determining the periodic profit for a business, accountants traditionally tend towards
caution with profits being recognised only when they have actually been earned. On the
other hand, provision must be made to account for all probable losses.

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• Principle of Consistency
The principle requires that the accounting methods adopted should remain unchanged from
period to period so that accounting reports for consecutive periods have greater
comparability.

• Principle of Disclosure
All information and explanation necessary for interpretation of reports and statements
should be conveyed to users.

• Principle of Materiality
The principle means that the treatment of an item depends on its importance and
accounting significance. It depends on the judgement of the accountant and the size of the
business. For example, cents are ignored or rounded to the nearest dollar, and even dollars
may be rounded to the nearest ten or hundred dollars in published accounting reports.

• Matching Principle (Lecture 6 – Preparation of Financial Statements)

Matching of expenses with the revenue generated during the period by those expenses.

• Accrual Basis of Accounting

Recognises revenue and expenses in the same period when they are earned or incurred, not
when cash has been received or paid for that transaction.
Please refer to Warren p. 8 – 12 for a more detailed explanation of the above concepts.
Lecture Exercise Do you agree? State the relevant accounting concepts.
1. Rich Company decides to change his accounting method (e.g. using another method to
value his inventories) this year because the change will result in showing higher profits.
_________________________________

2. Alan Cafeteria bought a refrigerator for $800 from a neighbourhood shop. The same
refrigerator would cost $960 at most departmental stores. Alan decided to put in his
accounting records, the cost at $800.
_________________________________

3. A fire destroyed the warehouse of a shoe manufacturer last week. The company has to report
its financial position at the end of this month. The manager does not want to disclose the
incident in the financial reports because he fears that it will reflect badly on the financial status
of the company.
_________________________________

4. Dr Fickle is a general practitioner in private practice. Over the weekend, he invited some of his
friends for BBQ at his new house. He intends to show the full costs of the BBQ in the
accounting records of his medical practice because he claims that it is perfectly all right since
it is against his own profits.
_________________________________

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5. In submitting the current year’s sales figures to management for budgeting purpose for the
coming year, the accountant decides to report it as $1,200,500 instead of the actual figure of
$1,200,510.45.
_________________________________

6. If a hotel is suing a guest for setting its room on fire and its lawyer indicates the case will be
won (by the hotel) and estimates the amount of settlement, the amount is not recorded.
On the other hand, if the hotel is a defendant in a lawsuit and its lawyer indicates the hotel will
lose the lawsuit and most likely will pay a stated amount, this “expense” is recognised and
recorded immediately.
_________________________________

7. Simple Co. Pte Ltd reports the revenues earned and expenses incurred on a monthly basis for
internal management review. It also prepares an audited annual income statement that covers
the 12 month-period ended 31 December for submission to the Accounting and Corporate
Regulatory Authority.
_________________________________

8. A business excludes such relevant information as the prime location of its retail outlets, quality
of service, morale of employees and health of owner from the accounting records as these
could not be quantified in terms of money.
_________________________________

Please refer to Appendix 1 for full answers. (Appendix 1 will be released through LMS on last day of
week to assist in preparation of tutorial)

Since accounting is all about providing financial information to

users, what are some of the qualitative characteristics inherent in
financial reports in order that they be useful to people?

• Relevance
• Reliability
• Materiality
• Comparability
• Understandability

(refer to KW p. 482 – 483)

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4. Users of Financial Information

These people need information for decision-making purposes:

• Owners / Investors
- Investing decisions

• Management
• Planning, co-ordinating and controlling

• Creditors
• Credit, lending decisions

• Government
• Tax, economic decisions

• Employees / Labour Unions

• Concerned with performance and financial stability of organisation

• Customers
• Concerned with continued existence of firm (honouring of warranties)

5. The Nature of Business & Types of Ownership

5.1 Nature of the business

• Manufacturing
- A manufacturing firm converts raw materials into products to be sold to trading firms.

- E.g.: Computer hardware manufacturer, household products manufacturer

• Trading (wholesale or retail)

- A wholesaler buys in very large quantities from the manufacturer and distributes in
smaller quantities to the retailer.
- E.g.: Sole distributor of printers, electronic products

- A retailer buys goods from the wholesaler and sells goods to the final consumers.
- E.g.: Departmental store, provision shop, minimart

• Service
- A service business provides services to the public for which a fee is charged.
- E.g.: Solicitor, accounting firm, transport company, airline

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5.2 The types of ownership

• Sole proprietorships
• Partnerships
• Corporation or companies
• Statutory bodies
• Co-operatives

In BA, we will be covering sole proprietorships and companies.

~ End of Lecture 1 ~

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