ICMAP – FUNDAMENTALS OF FINANCIAL ACCOUNTING

LECTURE NOTES 03 OCTOBER 2017

Self Introduction

Check students background regarding accountancy

Classes during the week – Tues & Wed

Books to be followed

Protocols: no mobiles, question by raising hands

Learning Objectives:

What is Accounting

Users of Accounting Information

Financial & Management Accounting

Legal Structure of Business Organizations

Sole Proprietorship, Partnership, Limited Liability Companies

Introduction to Accounting [30 minutes]

What is accounting

Accounting can be defined as ‘the process of identifying, measuring, and communicating economic information so as to
make informed judgements and decisions by users of the information’.

Another definition of accounting is: “accounting as: the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof”.

Accounting involves deciding what amounts of money are involved in transactions (often buying and selling transactions)
and then organizing the information obtained and presenting it in a way that is useful for decision making.

The man credited with writing the first book on the subject, Father Luca Pacioli (Italian 1445–1517).

What is Book-Keeping: The part of accounting that is concerned with recording data is often known as bookkeeping.
Until about a decade ago all accounting data was kept by being recorded manually in books, hence the term
‘bookkeeping’.
Recording accounting data

No one can remember all the details so they have to keep records of it. Organisations not only record cash received and
paid out. They will also record goods bought and sold, items bought to use rather than to sell, and so on. This part of
accounting is usually called the recording of data.

Classifying and summarising

When the data is being recorded it has to be organised so as to be most useful to the business. This is known as
classifying and summarising data. Following such classifications and summaries it will be possible to work out how much
profit or loss has been made by the business during a particular period. It will also be possible to show what resources
are owned by the business, and what is owed by it, on the closing date of the period.

Communicating information

From the data, its classification & summarizing – we should be able to tell whether or not the business is performing well
financially. How much is its net worth.

Uses of Accounting Information / Objectives of Accounting [30 minutes]

Accounting has many objectives, including letting people and organizations know:

How much they own – cash / assets

How much they owe

Users of Accounting Information:

Possible users of accounting information include:

Managers. These are the day-to-day decision-makers. They need to know how well things are progressing financially and
about the financial status of the business.

Owner(s) of the business. They want to be able to see whether or not the business is profitable. In addition they want to
know what the financial resources of the business are.

A prospective buyer / Investor. When the owner wants to sell a business the buyer will want to see such information.

The bank. If the owner wants to borrow money for use in the business, then the bank will need such information.

Government / Tax inspectors. They need it to be able to calculate the taxes payable.
Concept & Scope of Financial & Management Accounting [30 minutes]

What is Financial Accounting?

Financial accounting focuses on financial statements which are of interest to shareholders, lenders, financial analysts, and
others outside of the company. Balance sheet, Income statement, statement of cash flows, and statement of changes in
stockholders' equity.

What is Management Accounting?

Managerial accounting focus on providing information within the company so that its management can operate the company
more effectively.  Managerial accounting and cost accounting also provide instructions on computing the cost of products at a
manufacturing enterprise.

Legal Structure of Business Organization [15 minutes]

A business is a commercial institution formed to engage in business activities, usually the sale of a product or a
service. There are many types of business organisations defined in the legal systems of various countries.

Sole Proprietorship

Partnership

Corporation

Limited Liability

Sole Proprietorship
An unincorporated business that is owned by one “individual”

• Compared to other structures it is the simplest to use

• Does not require government approval
• The business has no existence apart from the owner
• The owner is his or her own boss
•The owner owns the business assets
• The owner is personally responsible for all debts of the business
• All liabilities of the business are the owner’s personal liability
• The owner has personal liability for all actions undertaken in the name of the business
• Sole proprietorship does not pay corporate income tax - income and expense are reported on the owner’s personal tax
return
• The owner reaps the benefits of his/her success
• The business ceases upon the death of the owner

PARTNERSHIP

An association of two or more persons to carry on as co-owners a business or other undertaking for profit.

• A partnership is an entity distinct from its partners

• More legal formality than with a sole proprietorship but less than with a corporation or limited liability company
• Property acquired by a partnership is property of the partnership and not the partners individually

• Names and addresses of partners

• Purpose of the partnership

• Location of the partnership

• Amount of money, property or services each partner will contribute

• Compensation to be paid to partners

• The procedure for dissolution of partnership

• Plan for distribution of profits and losses

•Voting rights of the partners

• Each partner is an agent of the partnership for the purpose of its business

• Acts of an individual partner in carrying on partnership business bind the partnership

• Partners are jointly liable for debts of the partnership

• Partners are jointly liable for any civil liability claims against the partnership

Registered Partnership: Partnership is registered with the registrar of firms.

Unregistered Partnership: It is not registered with government or any other statutory institution.

Difference: The main drawback/impact of non registration is that the Firm established is not treated independent of the
Partner and therefore an unregistered Partnership Firm cannot sue or be sued in that no suit will lie against the
unregistered Firm. The implication of the above is that each of the Partner of the Firm would be individually liable for all
deeds of omission and commission of the Firm and without reference to the Firm. 

Limited Company:

An association of individuals, known as shareholders / stockholders, created as a business entity by an act of

government. Companies Ordinance 2016.

Characteristics:

• Significant legal formality compared to sole proprietorship and partnership

• Ownership is signified by shares of stock

• Does not dissolve upon death of one or more owners

•Limited personal liability of owner(s)

• Income/profit of corporation is taxed twice since both the corporation and the owners pay taxes
Wrap-up

What we have covered today:

Accounting

Its Objectives

Difference between Financial & Management Accounting

Legal Structure of Business Organization

Sole Proprietorship / Partnership / Limited Company

Study chapter 1 of William / Haka OR Chapter 1 of Business Accounting Volume – 1