INTRODUCTION TO ACCOUNTING

Definitions of Accounting

There are many definitions of accounting as there are authors in this subject. None of those
definitions is inaccurate in trying to explain what accounting is. However the following
definitions are more appropriate.

Accounting is the art and science of recording and classifying financial transactions
in the books, summarizing and communicating financial information through
production of financial statements/reports and interpretation of the operating
results portrayed in these statements/reports to facilitated decision making.

Accounting is the process of identifying, measuring and communicating economic
information to permit informed and rational decisions to be made.
Key aspects of the accounting definition include recording transactions/data, classifying
and summarizing data and communicating what has been leant from the data.
Every accountant is a communicator. Accounting is a medium through which business
information is communicated to decision makers. Accounting is therefore called the
language of business. It is also emphasized in the definitions that accounting enables
rational and informed decisions to be made.

Brief history of Accounting

Accounting began because people needed to:
- Record business transactions
- Know if they were being financially successful
- Know how much they owned and how much they owed other people.
It started as a form of collecting invoices (these showed the details of a transaction) and
receipts (which were confirmation of payment being made). These were used by the owner
of the business to calculate the profit or loss of the business. This practice persists to this
day in many small businesses.
As businesses grew in size, it become less common for the owner to personally maintain
the accounting records and therefore owners resorted to employing someone as an
accountant of the business.
Then, as companies started to dominate the business environment, owners employed
others (managers) to run their companies for them. The owners of the companies
(shareholders) left the running of their businesses to them. This led to the need for some
monitoring of these managers which introduced auditing in business organizations.
Internal auditors were then recruited to keep track of the accountants work and later
external auditors also came into the picture to give an independent view of the accountants
work.

Forms of Business entity

Sole Proprietorship: This is a self-employed individual who operates a trade or business

where all the tax consequences fall to that proprietor, including all liabilities, debts, profits,
and losses.

Partnership: An organization or association of two or more participants who carry on a

trade or business together, and allocate the ownership and profit/loss aspects according to
their contractual terms.

Company: A company is an association of persons formed for the purposes of an

undertaking or business carried on in the name of the association. It must be registered
and is then legally incorporated. The registered company is a legal person, separate from
its individual members and management. Companies are increasingly becoming dominant
institutions in society engaged in the provision of services and goods both in the public and
private sectors. Being an organized form of doing business, companies often compete with
partnerships and sole proprietorships.

Corporation (Statutory Companies): A separate, legal entity formed through a state

charter using articles of incorporation. It is authorized to perform primarily all the business
activities an individual or company can. Examples like NWSC, National Housing, New Vision
Printing and Publishing Company, Insurance Regulatory Authority, Uganda Revenue
Authority etc

Difference between Accounting and Book keeping

Book keeping Accounting

 Is the record-making phase of
accounting It is therefore a subset or
a component of accounting. It
includes the preparation of books of
account such as cash books and
ledgers.
 Book keepers have no authority to
authorize financial transactions
 Encompasses book keeping and its
scope extends to financial reporting,
i.e. preparation of financial reports. It
involves analysis and interpretation
of financial statements.
 Accountants authorize financial
transactions

 The work of the book keeper stops at
the preparation of the trial balance
 Book keepers are normally holders of
lower academic qualifications like
certificates and diplomas
 The work of the accountant starts at
the trial balance and goes ahead to
prepare and interpret financial
reports
 Accountants are normally degree or
professional qualifications holders

Purpose of Accounting
1. The ultimate role or purpose of accounting is to provide information to decision
makers. Decisions concerning finance are very crucial and accountants submit their
figures to the decision makers to enable them make smarter decisions. Preparation of
accounts is part and parcel of a good financial management system.
2. When accounts are prepared and incomes and expenditures recorded, profits/losses
can be ascertained and thus helps in planning the way forward. Every business
organization is formed with the view of making profits.
3. Preparation of accounts helps shareholders to monitor management and other
stakeholders to evaluate the performance of the organization. The relationship between
share holders and management of the organization is that of agency. The shareholders
are principals and managers are agents. The shareholders (principals) should always
monitor management (agents).
4. Accounts make tax assessment easy and advantageous to both the organization and the
tax authority. Over taxation due to estimated assessments will be avoided.
5. Monitoring of debtors and creditors is easy if accounts are prepared. Without a record
of debtors or creditors, it will be difficult to tell who owes you money ant to whom you
owe money.

Regulatory framework of Accounting

As the profession of accounting grew, bodies of accounting were formed to regulate the
operations and activities of accountants. The first national body of accountants was the
Institute of Chartered Accountants of Scotland formed in 1854. Other national bodies began
to emerge gradually throughout the world, with the English Institute of Chartered
Accountants being formed and the first US national accounting body being formed in 1887.
Currently we have a global body for Accountants known as Association of Chartered
Certified Accountants (ACCA).
In Uganda we have the Institute of Certified Public Accountants of Uganda (ICPAU) which
regulates the accounting profession as well as training of accountants in Uganda.
Kenya- Institute of Certified Public Accountants of Kenya (ICPAK) 1977
Tanzania – National Board of Accountants and Auditors 1973
Rwanda – Institute of Certified Public Accountant of Rwanda (ICPAR)

Users of accounting information

Every organization whether profit making or not has people or parties interested in it.
These interested parties (stakeholders) have to make decisions connected with the
organization. Accounting information is very necessary if decisions are to be made
accurately and rationally. Various parties are interested in accounting information to
facilitate their decision making. Accounting information is in form of financial
statements/reports, entries in books of accounts and business documents.
Accounting is user-oriented an accountant therefore needs to identify the user and target
him/her with the relevant information for the decision.
Users or decision makers interested in accounting information are broadly divided into two
groups; internal users and external users.
Internal users
They are involved in the day to day running of the organization. These are management
and employees.
1. Management: These include directors, senior executives and managers at various
levels. These people run the organization on behalf of the owners (shareholders). They
have to make sure that resources of the shareholders are well managed. They are charged
with the duty of increasing the shareholders wealth and making sure that the owners get
dividends from their investments. To be able to run the organization profitably and give
shareholders return on their investment, they have to plan for profits, control
activities/operations and take timely decisions. Key decisions to be made could be what
markets to enter, what prices to charge, how to minimize costs and how to formulate
strategies for beating off competitors. For all these activities, management requires
accounting information. In fact they require services of an accountant all the time if they
are to execute their roles successfully; such an accountant who is relied on by management
is called a management accountant.
Accounting reports or statements also indicate to management whether they are making
profits or losses and whether they are in the right business. Management must also submit
accountability to the owners. The accountability that they submit is in form of financial
statements/reports backed by books of account and underlying documents.

2. Employees: These are also internal users of accounting information. They need
accounting information for the following reasons;
- They want to support their claim or agitation for salary and wage increments using
accounting information. Accounting information shows the profits being made by the
organization. They use these profits to judge whether their remuneration is
commensurate with the profits earned by the organization. Trade union leaders agitate
for better pay for their members after examining financial statements and getting
convinced that the employing organization has capacity to pay.
- Another reason why employees require accounting information is to assess and judge
their job security or continued tenure. If the employing organization is perpetually
 making losses, it is definitely not a going concern and any time it can collapse. If the
organization is not a going concern employees start searching for alternative
employment before they are retrenched or before the organization finally collapses.

External users
These are not involved in the day to day running of the organization but they are
stakeholders or interested parties. These parties make decisions that have a bearing on the
organization. They include shareholders (investors), creditors, donors, government,
competitors and the general public.
1. Shareholders: these are interested in knowing how the business is performing to
know how much in terms of dividend they are going to get.
2. Creditors: these are individual or institutions that extend credit to their customers
or clients. Trade creditors (suppliers) are interested in getting paid for goods and services
that they extend on credit. Financial institutions like banks that extend loans to customers
are interested in making sure that the loans are serviced. Before loans are granted, the
credit worthiness of the applicant is analyzed. Credit analysis can only be possible if
accounting information in form of financial statements exist.
3. Donors: Non-profit making organizations like Non-Governmental organization
(NGO’s) get funding form donor agencies abroad. These agencies are always interested in
making sure that the money they donate achieves the objectives for which it was released.
Donors rigorously monitor utilization of their money by examining accounting
records/financial statements/reports and documents of the organization.

4. Government: Government is another external user of accounting information. Through

tax authorities like URA, government collects tax revenue from companies and individuals for
financing public expenditures. The government of Uganda finances its recurrent budget from tax
revenue. Tax authorities are interested in companies filing income tax returns for tax assessments.
Returns submitted for tax assessments are statements showing operating performance especially
profitability of the business. Failure to file returns to form a basis for tax assessments could result
into more tax liability through estimated assessments or penalties.
In mixed economies like that of Uganda where there are state owned public business enterprises
existing alongside private ones, government monitors the performance of its public enterprises
(parastatals) by examining their accounts.
Furthermore, every government must provide policy ingredients for businesses to thrive.
Government collects accounting data from companies to enable it analyze the effect its policies
have on businesses. This enables formulation of policies that promote private sector development
which is the motor of economic development.

5. Competitors
Competitors are interested in accounting information of firms in the same industry with them so as
to judge whether they are doing badly or fairly in comparison with other players in the same
business. Some competitors also require information for market intelligence purposes. In order to
be able to develop competitive strategies for beating other participants in the market place. For
this reason very few companies will provide detailed information regarding their business
operations to non entitled persons. Students doing research do get considerable difficulty in getting
data from companies.

6. General public
The public includes individuals and organizations which ensure that businesses make their profits
in a socially acceptable manner without damage to the environment and consumers health.
Environmental pressure groups advocate for minimization of pollution which degrades the
environment. Consumer groups or associations try to ensure that businesses offer safe and not
adulterated products to their consumers and should not charge very high prices for poor quality
products in the name of making abnormal profits. This group attempts to mitigate extreme
consumer exploitation. If an organization does not contribute to local developmental initiatives or
efforts by people in the area in which it operates, that organization will not be rated well by that
community. Social responsibility of businesses is gaining attention.

General meaning of accounting/accountability

Majority of people associate accountants with receiving and paying money. This is not
entirely wrong because accountants actually perform those roles as well as others. In order
to understand what accounting is, it is essential to understand what the word “accounting”
means in general use without limiting it to finances.
In general “accounting” means explaining and defending or justifying actions and the
effects or results of those actions. People in responsibility including political leaders are
required to account to their constituents. All those who have been entrusted with safe
custody of others’ resources are usually required to account or submit accountability to the
owners of the resources.
Since accountants deal with money, they together with management must justify and
defend their financial transactions to the owners of the wealth, the shareholders and other
stakeholders. Accountants deal with incomes and expenditures, and are required to
account for both.

Financial accountability methods

Many people do account for their day to day transactions including political leaders.
However accountability of finances is what people are more interested in most. Managers
and accountants are required to show evidence of good financial management by
submitting accountability of money received and spent. The following are methods of
showing accountability.
1. Production of documentary evidence
Accountability of this nature involves documents as evidence of money received and well
spent. This is one of the popular methods of accountability. The key accountability
documents are receipts, vouchers, invoices etc. When an accountant receives money, a
receipt is prepared as evidence of the money received. Receipt books must be carefully
controlled in order to avoid abuse. Before any money is paid out, a payment voucher must
be prepared and properly authorized by the person mandated to do so. The payee should
acknowledge receipt of the money by signing on the payment voucher. A payment voucher
shows details and therefore supports payment. Payment to suppliers must be preceded by
an invoice. An invoice is a document submitted by suppliers demanding payment for goods
that they are to be supply on credit. Other documents such as local purchase orders
(LPO’s), delivery notes, goods received notes (GRN) should be attached and reconciled with
the invoice before payment can be effected to that supplier. If one deposited money into the
company’s account in the bank, he/she must produce bank paying in slips as evidence of
money banked.
 2. Books of account
After documenting transactions, accountants (book keepers) record those transactions into
the books of account. In order to account properly, these transactions must be accurately
recorded into books of account. Examples of these books of account are cash books and
ledgers.
3. Financial statements/reports
When the financial year ends, financial statements/reports also called final accounts are
prepared to show the results of the operations for the year ended. The major end of year
financial statements/reports are the statement of comprehensive income (formerly known
as the income statement or income and expenditure statement), statement of financial
position (formerly balance sheet) and then the statement of Cash flow (formerly known as
the cash flow statement). Accountants and managers should be prepared to defend the
results shown by these statements to shareholders as part of the accountability process.
Some monthly statements such as bank reconciliation statements, budget performance
reports and monthly trial balances are also required for accountability purposes in many
organizations.
4. Outputs/results
In today’s financial management, paper accountabilities are not enough. There is need for
tangible outputs and concrete results to show evidence of money well utilized. Today the
focus is on value for money. For instance if someone is given shs 500,000,000 for building
class room blocks, the first accountability to be looked at are the class rooms themselves.
These are outputs that anyone can clearly see. Paper accountabilities will then be examined
after verifying the physical output/result.
Qualitative characteristics of financial statements

Financial statements should have the following qualitative characteristics

• Understandability
• Reliability
• Comparability
• Relevance

Understandability. The information must be readily understandable to users of the

financial statements. Users cannot use such financial information that they cannot
understand. Problems in understanding may arise due to user’s inabilities or because of the
information itself. Definitely Accountants cannot do anything about users and it’s upon the
user to have at basic level of understanding about financial statements.

However, accountants can present information in such a manner that it helps in

understanding. Also with proper explanation financial statements can be made more
understandable. Therefore, accountants are required to take reasonable measures in order
to make financial statements easy to understand. However, it does not mean that complex
information which is also of material nature should be excluded from the financial
statements on the basis that it is creating problems in overall understandability of financial
statements.

Relevance. The information must be relevant to the needs of the users. Information is
considered relevant when it adds value to the decision making process by providing the
required bits and pieces of past, present and future times. Through relevant information,
users can evaluate whether they are moving along the right path i.e. making correct
decisions. Past information given in financial statements help us in predicting the financial
position and financial performance of the company in upcoming financial periods.

Reliability. Information is reliable when it is dependable and this is possible if it is:

• free from errors, especially material errors
• complete
 • free from bias
Thus, information should faithfully represent transactions and other events, reflect the
underlying substance of events, and prudently represent estimates and uncertainties
through proper disclosure. There are many other factors that contribute towards the
reliability of the financial information.

Comparability. The information must be comparable to the financial information

presented for other accounting periods, so that users can identify trends in the
performance and financial position of the reporting organisation. Users cannot evaluate
different aspects of entity’s financial position and financial performance if they are unable
to compare the financial information of one period with another or financial information of
one entity with another entity’s financial information.

To achieve this comparability of financial statements, entities prepare their reports by

following a uniform pattern of presentation which is usually as instructed by the
International or Local Accounting Standards.

Accounting Concepts and Principles

The role of accounting has already been emphasized in so far as decision taking is concerned. As
observed earlier, there are-several interested parties in accounting information who in fact rely
on that information for decision making. It is therefore pertinent that accounting
information be of good quality, credible and objective. External users of accounts are
vulnerable to mis-reporting by accountants. This therefore presents a case for regulatory
or legal frame work in accounting to ensure that accountants report objectively and do not
window dress or doctor the accounts. Accounting rules are imposed on accountants in
order to make sure that their reporting is free from bias. Accounting legislation requires
that external (financial) accounts be prepared and presented in conformity with Generally
Accepted Accounting Principles (GAAP).
Accounting principles/concepts/conventions
Financial accounting principles are also known as accounting concepts, or accounting
conventions. They are defined as basic ground rules which must be followed when financial
accounts are being prepared and presented. They are also referred to as assumptions that
underlie the preparation and presentation of financial statements. Accountants must
therefore actively ensure that their work is consistent with these accounting concepts and
principles. The following are the major accounting concepts and principles:
• Relevance
• Reliability
• Neutrality
• Faithful Representation
• Substance over Form
• Prudence
• Completeness
• Comparability/Consistency
• Understandability
• Materiality
• Going Concern
• Accruals
• Business Entity

Business Entity
When an organization is set up and is fully incorporated under the law, it becomes a
separate legal person (entity) capable of transacting on its own including the power to
borrow and lend. The business and its owner(s) become two separate entities. This concept
therefore requires recognition and recording of transactions relating to the entity
(organization) in question and excluding private transactions of the owners or those
running it. Any private and personal incomes and expenses of the owner(s) should not be
treated as the incomes and expenses of the business.
In writing or preparation of accounts this concepts is important because it filters
transactions by isolating business from non-business private transactions. For instance if
the owner purchases a suit for himself for Shs.600,000, it is not a business cost and should
therefore not be charged to the business's trading and profit and loss account. If the
resources to buy the suit came from the business, it should be recorded as the owner
borrowing from the business termed as a drawing. Drawings reduce owner's capital. For
this reason private expenses should not be regarded as business expenses and likewise
private incomes should not be recorded as business incomes. The aim is to report accurate
financial performance of the entity.
The limitation of this concept can be appreciated from the perspective of a humble
business man/woman like a sole trader or a family run business. The owner and the
business are actually inseparable. For instance if a sole trader sells but also dwells in the
same premises, rent and utilities paid on those premises will be difficult to apportion
between the owner and the business especially if there are no clear apportionment bases.

Money Measurement
According to this concept, all transactions to be recorded must be quantified in monetary
terms. This provides a common unit of measurement and allows comparison and analysis
of these financial statements. This convention assumes money has stable value over time
and it is a source for one of its criticisms. This concept limits recognition of business
transactions to only those that can be expressed in monetary terms. Even where goods are
exchanged for goods (barter trade), value must be attached to the items in question.
Whatever cannot be monetized is not recorded.
This concept has the following shortcomings;
- It assumes that money has stable value over time and yet it is common knowledge that
money losses value with time a phenomenon referred to as inflation.
- There are certain events or things that cannot be expressed in monetary terms, thus not recorded,
and yet they materially enhance business operations. For instances there are some intangible
assets like brand name, patents etc which lead to increased turnovers and profits but cannot be
recorded as assets because they are difficult to quantify in financial terms.

Going Concern
This concept states that the business entity is assumed to continue in operational existence in the
foreseeable future. The business is not on the verge of collapse unless there are indications to
suggest so. This assumption is very fundamental to preparation of accounts. Accounts are written
on the assumption and understanding that the business will continue in operation. This concept
makes it possible for accountants to project or prepare estimates for a long period into the future
for example preparing budget estimates for many years into the future.
There is almost no challenge against the going concern assumption and it has been embraced and
enshrined in accounting standards of many countries as a fundamental assumption or' concept.
However this assumption is at times farfetched or makes accountants and managers complacent.
The business will be there any way! Good management is necessary for a business to be a going
concern.

Relevance
Financial statements should be prepared to meet the objectives of the users. Relevant
information which can satisfy the needs of most users is selected and recorded in the
financial statement. Accounting statements should contain only information that complies strictly
with the specific requirements of the user. This concept is at times combined with materiality
concept.

Materiality
It requires recognition of only material items and excluding immaterial or trivial items or
matters. Materiality depends on the size and nature of the item as well as business.
Information is material if it is able to influence the decision. For instance if the cost of
recording certain items is not justifiable, then they should be left out. Take an example of
buying a razor blade at Shs.50 for the business from your own money, it is immaterial to
record that amount in the cashbook or as your asset. The concept of materiality has to be
applied with some caution because there is no threshold or quantitative guidelines for
judging whether an asset is material or not. Materiality is a matter of opinion and
judgment, abuses should be guarded against.
Example
Small payments such as postage, stationery and office cleaning expenses should not be
disclosed separately. They should be grouped together as office expense.

Historical Cost
This concept requires accountants to record assets and liabilities at historical costs of their
acquisitions. Assets are recorded at their acquisition (invoice) costs even if the value today is more
than the historical cost. Likewise liabilities are recorded at amounts they were incurred though the
true value of the liability might have changed due to foreign exchange fluctuations and other
macroeconomic issues such as inflation, devaluation, currency reform etc. However the focus of the
historical cost convention is on recording of assets since there is more temptation of over valuing
assets in the balance sheet in order to portray a sound financial stand.
Example: The cost of fixed assets is recorded at the date of acquisition cost. The acquisition
cost includes all expenditure made to prepare the asset for its intended use. It includes the
invoice price of the assets, freight charges, insurance or installation costs

Duality (also called Dual aspect)

It requires a transaction to be recorded twice (dual recording). The dual aspect rule is recognition
that every transaction involves giving and receiving effect. When somebody gives something
another must receive it. This is in effect a requirement for double entry book keeping. Double entry
is a principle rule or principle in accounting and is thoroughly explored in later chapters.

Prudence/Conservatism
Revenues and profits are not anticipated. Only realized profits with reasonable certainty
are recognized in the profit and loss account. However, provision is made for all known
expenses and losses whether the amount is known for certain or just estimation. This
treatment minimizes the reported profits and the valuation of assets.

Preparation of accounts involves estimations, measurements and valuations, according to

the conservatism or prudence concept. It is good practice to follow a procedure that tends
to understate things.' This concept has two principle rules;
a) An accountant should not anticipate revenues and profits until realized but should
provide for all possible losses. Provisions for bad debts are created and written off from
profits for this reason, fixed assets must be depreciated over their useful lives
b) If there are two or more methods of valuing an asset, an accountant should choose a
method or base that leads to a lower value. Rules 'like the lower of cost or market value'
stem from this concept i.e you record an asset either at cost or market value whichever is
lower.

Objectivity
The accounting information should be free from bias and capable of independent
verification. The information should be based upon verifiable evidence such as invoices or
contracts. This principle states that whatever figure is recorded in accounting books and
financial statements must have clear criteria for its measurement. Figures must have a
basis for arriving at them but not simply planted into financial statements. Accountants
must be able to defend figures in financial statements using objective evidence, empirical
or otherwise. This concept aims at eliminating subjectivity and free accounting information from
bias.
Example: The recognition of revenue should be based on verifiable evidence such as the
delivery of goods or the issue of receipts.

Consistency
It states that once a particular accounting method or base has been selected and has
become accounting policy, it must be applied continuously or consistently from year to
year. Changes in accounting methods or policies are permitted only if there are justifiable
reasons for doing so for instance if the old ones have become inappropriate for the present
circumstances. When a change is made, the effect of the change on the reported net profit
and balance sheet position if material must be disclosed in the financial reports
Many accounting bases are allowed for instance in valuing stock, FIFO, LIFO, weighted
average cost etc may be used and in the depreciation of fixed assets, straight line, declining
balance, sum of years digits etc may be applied. What the consistency concept requires is
that once management has chosen one of those methods and has become an accounting
policy, it must be applied on a consistent basis. Switching from one method to another will
cause distortions in financial reporting. This will prevent accurate analysis of a company's
accounts over time. Inter period comparisons and inter company comparisons will be
difficult if some companies keep changing their accounting policies.
Example: If a company adopts straight line method and should not be changed to adopt
reducing balance method in other period.
If a company adopts weight-average method as stock valuation and should not be changed
to other method e.g. first-in-first-out method

Uniformity
Different companies within the same industry should adopt the same accounting methods
and treatments for similar transactions. The practice enables inter-company comparisons
of their financial positions.

Periodicity and disclosure

This concept makes financial reporting mandatory and is enshrined in the Companies Act
of Uganda and of many other countries. At the end of an accounting or financial year (may
not be a calendar year but twelve months), a company must prepare and disclose financial
statements. Financial statements should be prepared to reflect a true and fair view of the
financial position and performance of the enterprise. Disclosure can be made more than
once a year if the accountant so wishes. All material and relevant information must be
disclosed, an accountant must not be seen to be hiding some vital information.

Accruals/Matching
Revenues are recognized when they are earned, but not when cash is received. Expenses
are recognized as they are incurred, but not when cash is paid.

According to this concept, income is recorded as earned even though cash has not yet been
received. The portion of income that has not been received as cash is recorded as an asset
(accrued income or debtors). Likewise expenses or costs should be recorded and
recognized as incurred although cash might have not been paid in respect of those
expenses or costs in case those expenses were not paid cash they should be recorded as
liabilities (accruals or accrued expenses). Accrual concept does bring out the view that
there is no exact coincidence between the right to receive income and the actual receipt of
that income cash and likewise there is no exact coincidence between the obligation to pay
an expense and the actual cash payment. Transactions occur but cash payments or receipts
may be deferred. Accrual is one of the most fundamental ones in many countries
accounting standards. Accrual basis accounting whereby both incomes and expenses are
recognized without cash necessarily changing hands is upheld and prevails over cash basis
accounting where only transactions involving cash movement are recognized and recorded.
Lack of observing the accrual concept will narrow the scope of accounting to preparing the
cashbook. Debtors and creditors ledgers for example will not be prepared and to assume
that only cash and not credit transactions will result is far fetched.

Example: Expenses incurred but not yet paid in current period should be treated as
accrual/accrued expenses under current liabilities.
Expenses incurred in the following period but paid for in advance should be treated as
prepayment expenses under current assets

Substance over form

It states that transactions and other events should be accounted for and presented in accordance
with their substance and financial reality and not merely with their legal form. For instance if you
buy a motor vehicle for your business on hire purchase, when you make a down payment you can be
given the vehicle to use as you continue making installment payments. The log book, which' is
evidence of ownership, will not be released to you until you make the last installment payment. The
lawyers say that title passes on after full payment. The question then is, how do you account for such
a vehicle, should you include it in the list of our assets in the statement of financial position (balance
sheet)? Substance over form gives the answer as follows. The substance and reality is that you are
using the vehicle in your business so it's a business asset and should be recorded in its books and
statements. You should stop worrying about legalities of title passing after all you will complete
installment payments and documents of ownership will be surrendered to you.
BRANCHES and DISCIPLINES IN ACCOUNTING.
Accounting is a broad area of study and practice and has different branches or disciplines within it.
The broad categorizations are;
• Private accounting
• Public accounting
• Government accounting

Private accounting
This type of accounting is one that exists in a particular entity or organization usually a business
firm though non-profit organizations also have some aspects of private accounting. The major
disciplines within private accounting include;
- Financial accounting
- Cost accounting
- Management accounting
- Social responsibility/Environmental/Green accounting.

Financial accounting
It is a branch of accounting that is concerned with classification, measurement and recording of
business transactions of an entity in monetary terms and in accordance with Generally Accepted
Accounting Principles (GAAP). After a specified period of time normally a year but possibly more
frequently accounting information is disclosed/communicated to interested parties through the
vehicles of financial statements. The major financial statements under a financial accounting
system for disclosure purposes are;
- Statement of comprehensive income (Formerly the trading, profit and loss account sometimes
shortened as the profit and loss account (called income and expenditure statement in non-
profit making organisations)
- Statement of financial position (formerly the balance sheet)
- Statement of cash flow (formerly cash flow statement).
The major focus of financial accounting is to provide information to the external users of accounts
whom you will recall are shareholders, creditors, government, general public etc. In order to
protect the external users of accounting information who are vulnerable to manipulated or
doctored accounts by accountants, preparation and presentation of financial accounts is highly
regulated by accounting legislation and bodies and is also subjected to auditing.

Cost accounting
It is primarily concerned with cost determination and allocation of costs to products and services in
accordance with costing principles, methods and techniques. Determining product costs and
assigning costs to products is called costing. In many organizations, cost accounting is concerned with
ascertainment and analysis of product costs. Costs should determine the least price (floor) to be
charged for a product unless the environment is too competitive. Costing products with a view to
setting a selling price is very crucial, a cost accountant will also analyze costs into their behavior
patterns i.e. fixed, variable or semi fixed and semi variable. This analysis will help management on
how to control and minimize costs and plan, for profits. Cost accounting developed and gained
prominence during the industrial revolution when business activity grew and there was need to
control costs. Key costing techniques for cost control are, standard costing and variance analysis,
target costing and budgeting and budgetary control. Key techniques for planning are, marginal
costing also called c-v-p analysis or break even analysis and budgeting. Costing methods such as job
costing, contract costing, process costing, service costing are also major areas of study.

Management accounting
The emphasis of management accounting is providing information to management for execution of
their functions. It was observed earlier that management is in dire need of information for planning,
control and decision making.
Management accounting is primarily concerned with data gathering, processing, analysis,
interpretation and communication of the resulting information to management so that they can more
effectively plan, control operations and make decisions. A management accountant must be
knowledgeable of managerial processes so that he/she can provide relevant information for
facilitation of that process. However, there is no clear dividing line between cost accounting and
management accounting. Cost accounting is an important source of data for management accounting
purposes. Most of the information that management needs is cost related. For this reason the two are
sometimes taught as one course called cost and management accounting. In organizations, there is no
need for both positions of a cost accountant and management accountant because it will lead to
duplication of functions. Though management accounting draws heavily on cost accounting, its scope
is a bit wider it also borrows from other disciplines such as financial. management, financial
accounting, operations research economics etc. as long as the information so generated is relevant for
management decisions. Management accounting uses more advanced techniques than cost
accounting. Management accounting is more recent compared with cost accounting. It arose when
there was need to bring an accountant closer to management i.e. to sit in a table where management's
strategies and various decisions: are being made.

Social responsibility accounting / environmental accounting / green accounting

This is an entirely new phase in accounting development. It widens the scope of accounting
by considering social effects of business activities as well as their economic effects. The
demand for social responsibility accounting stems from an increasing awareness and
concern for undesirable by-products of economic activities that degrade the environment.
There is growing concern that concepts of growth and profit as measured in traditional
profit and loss accounts and balance sheets are too narrow to reflect what many companies
are trying or are supposed to be trying to achieve. It is not adequate to read traditional
financial statements and evaluate whether a business has done better or worse. A Company
might have made huge profits but when you consider the cost to the environment, the
overall effect might be negative. There is need to consider the effects of pollution and other
environmental damage effects. Companies are supposed to pursue, their profit objectives
but leave the environment green. The green revolution has engrossed many disciplines
including accounting. There is a need for a framework of financial reporting which will
include consideration of environmental costs or actions that have been taken by companies
to conserve the environment. Those opposed to inclusion of environmental reporting in
financial statements argue that objective measurement of environmental impacts in
financial terms is impossible. However as of now the subject is still evolving.
Environmental reporting is voluntary, accounting legislation to deal with environmental
reporting is still being worked out and harmonization of reporting approaches world over
has not yet been done.
Public accounting
The Certified Public Accountants usually referred by initials CPA’s offers a variety of
services to the public just like other professionals like lawyers, engineers etc do. CPAs are
professionally qualified/certified and chartered accountants and belong to a governing
body that regulates standards of performance. Practicing members do adhere to code of
ethics. A university degree is usually not considered adequate. A practicing accountant
should possess professional qualifications such as CPA (K), CPA (U), ACCA, CIMA etc before
being accepted to enroll as a public accountant. Public accountants do Auditing work,
provide tax consultancy services, providing management advisory services such as
designing and installing accounting systems and budgetary procedures etc.

Auditing
The most familiar role of a CPA is auditing. In fact many refer public accountants as
auditors but as observed above they provide a variety of services to the public, auditing is
just one of those services. Auditing is the examination of financial statements and the
underlying books of account and documents of an organization with a view to reporting
whether the financial statements and underlying records show a true and fair view of the
financial stand of that organization.
Auditing plays a crucial role of attesting or authenticating financial statements. Unaudited
accounts do not carry credibility. Auditing accounts protects the users from doctored or
manipulated accounts. If the accountants either fictitiously overstate assets in the statement of
financial position (balance sheet) or profits in the statement of comprehensive income (profit and
loss account) meant to deceive the users of the accounts, the auditors will discover such miss-
reporting.
Auditors do check whether the accountants prepared and presented their financial statements in
accordance with the Generally Accepted Accounting Principles (GAAP). One could say that auditors
police accountants so that the latter report objectively and do justice to external users of accounts
'including the general public.
Many people have a misconception about the auditors role, they believe that the role of any auditor
is-to catch thieves. External Auditors role in a normal audit of final accounts is not to unearth every
type of fraud. However if the fraud was material and therefore made financial reports, to be
untrue, they will have to detect such fraud. Their role in a normal audit is to write a report on the
genuineness, of financial statements after carrying out several audit tests. External auditors are
sometimes engaged to investigate fraud as a special assignment. In such a case they have to write a
report on the fraud they investigated.

Auditing is in two dimensions, external and internal audits. What is described above and what
matters to the public is external audit. Professionally qualified auditors carry out such an audit in
conformity with the relevant auditing standards.
The second type of audit is internal auditing. It is geared at preventing and disclosing fraud and
other forms of financial mismanagement. It is internal in the sense that such audits are "in house".
Internal auditors are under management and help them check on frauds, embezzlements etc by
devising and monitoring implementation of strong internal controls. The auditor who actually
catches thieving account staff and controls fraud is the internal auditor. The work of internal
auditors seldom benefits the public and they are therefore not referred to as public accountants.
Requirements for being an internal auditor are not as rigorous as those for being external auditor.
Auditing is one of the core courses taught in the third year for students who major in-accounting.

Government accounting
Every government needs accountants to develop and maintain its accounting system. Government
accounts are quite unique from accounts of other organizations. Government accounting
emphasizes recording and accountability of expenditures. It also emphasizes budget discipline by
spending according to amounts allocated to the different sectors. The types of accounts to be
maintained and reports to be prepared are spelt out in the financial regulations or accounting
manuals. In Uganda, central government accountants have to refer to Treasury Accounting
Instructions while their counterparts in local government refer to local government financial
regulations. Government accounting is not challenging and not involving.