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Chapter 1
Introduction to Accounting Concepts and
Structure
A Brief History of Accounting
Accounting has its root in the verb"account". A standard dictionary meaning of the word
is to give a satisfactory record of money. In pre-industrial revolution feudal societies,
there were landlords who owned huge areas of land in many distant locations which
were far apart. Since a landlord could not be at all these locations for long periods of
time, there arose the need to appoint stewards at these distant locations who would
look after the landlord's interests. This resulted in the separation of ownership from
control, as for most part of the year the landlord (owner) did not get involved in
operations in his lands.

Stewards had to account to the landlord and so were required to keep written records of
transactions and were required to report on all activities. This function laid the
foundation for the accountancy discipline, as we know it today. Early references to the
subject of accounting are found in the works of some ancient oriental writers. However,
the systematic approach to double entry system of bookkeeping and accounting as
known today dates back to the late thirteenth century. In 1494, Luca Pacioli a
Franciscan monk living in Italy, published his well-known work, 'Summa de Arithmetica,
Geometria, Proportione et Proportionalita'. It was primarily a study of mathematics but it
also included a section on bookkeeping procedures. Since then, accountancy has grown
to become a world-renowned activity important to the functioning of the world
economy.

In Tanzania, at the time of independence in 1961, there were very few non-Europeans in
professional fields including accountancy. In recognition of the need to alleviate the
shortage of accountants and to develop an indigenous accountancy profession, the
government undertook a program of training Tanzanians overseas. Later in 1972 it
developed a structure designed to regulate and oversee the development of accounting
in the country. This resulted in the establishment of the National Board of Accountants
and Auditors (NBAA) by an Act of Parliament in 1972 (revised 2000). NBAA has all the
statutory powers to regulate the accounting profession in Tanzania. Its activities relate
to all accounting related disciplines, including government accounting, management
accounting, financial accounting and auditing.

In fulfillment of its functions, NBAA releases Tanzania Financial Accounting Standards

(TFAS) and Tanzania Auditing Standards as well as some guidelines on accounting and
auditing.

NBAA has also developed a Code of Ethics for Accountants and Auditors and ensures
that practitioners comply with it. It conducts examinations at all professional levels,
organizes short term training programs and seminars, and maintains a register of
Certified Public Accountants.

Graduates of all accountancy training institutions must be conversant with standards

and guidelines issued by NBAA. Therefore, in this text reference will be made to

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sections of TFASs and Guidelines whenever relevant to topics in discussion.

Need for accounting information

When a business is relatively small, for example, a small shop the owner can easily
manage the business operations as well as keep record of the day to day transactions.
However, as the business organization grows complex, for example, from a small shop
to a supermarket, the owner will need to hire employees to carry out the different
functions of selling, procuring supplies, record-keeping, etc. The owner may continue to
manage the business personally, but to be able to do this effectively, the owner will need
accounting information. This will enable him to plan and make decisions regarding
business operations. Therefore, periodic statements and reports prepared from the
accounting records are very essential to sound management. In principle therefore,
accounting information is needed to aid decision-making. There a number of people, in
addition to the owner, who make decisions regarding businesses. These are collectively
known as the users of accounting information.

Users of accounting information

Users of accounting information are the various parties who need accounting
information in order to make decisions, which are then communicated to others. It is for
this reason that accounting is often described as the "language of business" because it
is the medium of communication between the various parties interested in operational
and financial activities of a business. Following is a description of information interests
of the different groups of users of accounting information.

Owners/Shareholders

This group's interest in accounting information lies in the fact that it is their money
which is invested in the firm. They would like to ensure that they are getting a good
return on their investment. This is assessed by how much profit the firm is making and
whether their investment is increasing in value. For shareholders in companies this
means they will get good dividends and the market value of their shares will increase
and they can make capital gains if these were sold.

Management

Boards of Directors and Managers use accounting information for making internal
decisions and in planning business operations. They are responsible to the
owners/shareholders in carrying out policies and directives, and in running the business
efficiently and effectively.

Banks/loan companies

This group is interested not only in the firm's profitability but also in its ability to repay
loans. They rely on the financial reports as the basis of assessing the firm's liquidity
position and the firm's long term likelihood of survival.

Employees

They are part of the organization and feel that their efforts contribute to a firm's profits.
Accounting information will be their basis for claiming bonus and salary increases. A

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stable financial position of the firm also gives an indication of job security.

Suppliers

Suppliers usually extend credit to the firm for goods supplied and they want to be
assured of timely payments of accounts due. Their interest in accounting information
will be similar to that of the banks and loan companies, that is, has the firm sufficient
funds to pay its maturing obligations?

Customers

The regular customers of the firm usually rely on it for steady supply of their
merchandise for re-sale or of raw materials in case of manufacturing firms. Therefore,
they are interested to know if the firm is able to continue its operations on a long-term
basis and is capable of meeting its customers' demand for goods.

Prospective Investors/Analysts

These are interested in a firm's profitability and potential for growth. Prospective
investors rely on accounting information in making their investment decisions. In giving
advice to prospective and existing investors, analysts also make use of accounting
information.

Government

Various government ministries and departments have interest in firms' accounting

reports as the basis for taxation, enactment of laws for the industry and provision of
social services to the public. The government may also want to ensure that the firm
complies with laws on for example, wage payments and employee benefits.

Internal and External Users of Accounting Information

Users of accounting information fall into two broad categories; internal users and
external users. External users are those who are external to the day to day operations of
the business. Internal users are, on the other hand, those involved in the day to day
operations of a business. Bankers, Investors and Suppliers are examples of external
users while managers of an entity at all levels are internal users.

External users obtain accounting information on a business through published financial

statements. The principal published financial statements are:

a) Income Statement (Profit and Loss Account) which shows whether the business is
earning profits or sustaining losses.
b) Balance Sheet which shows the value of assets owned by the business, and how the
assets have been financed through debts and owner's equity.
c) Cash Flow Statement which shows the changes that have taken place in the cash
position of the firm, in terms of how cash has been generated and how it has been
utilised during the accounting period.

Internal users receive information in excess to what is contained in published financial

reports. Examples of these are reports on productivity levels, labour turnover, spoilage
and damages, etc. The accounting discipline has evolved specializations along the
information needs of external and internal users. The branch of accounting that focuses
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on information needs of internal users is known as Management Accounting while the

branch that focuses on providing information to external users is known as Financial
Accounting.

Financial Accounting
This field of accounting is primarily concerned with the provision of financial information
about the business firm mainly to external users. As explained in the previous section
these users of financial data have diversity of interests, so that financial accounting
caters to the common rather than the specific information needs of a particular group.
For this reason the financial statements are general purpose in nature, and the
accountant must adhere to prescribed standards and principles in preparing them.

Management Accounting
This branch of accounting is mainly concerned with the provision of accounting
information to internal users, that is, the management of the firm. The kinds of financial
and other reports which management accounting offers are aimed to help management
in planning and controlling business operations, and in decision making. Cost
accounting is a subset of management accounting and has evolved because of the
needs of management for accounting information on the cost of production, pricing of
products, etc. Although used mostly by manufacturing firms, cost accounting is now in
application in businesses which provide services.

Basic accounting principles

Since there are many users of accounting information and their interests are not exactly
similar, it is important that information they are provided with is uniform and contains
figures all can generally agree on. Furthermore, as these users look at information from
different businesses and over different periods of time, they need some assurance that
information provided is, within reason, accurate and comparable. This can be achieved
only if financial statements are prepared using similar approaches across businesses
and over time.

For this purpose, some basic ground rules, more commonly known as accounting
principles, have been developed. Financial statements are prepared on the assumption
that these rules have been complied with.

The important basic accounting principles are as follows:

Business entity

This concept states that the business exists separately and distinct from its owners. Its
books of accounts and records should reflect only those transactions which pertain to
the firm and should not include personal transactions and activities of the owner. If the
owner buys a new pair of dress shoes it is incorrect to record this in a firm's books of
account as a business expense.

Going concern

The business is assumed to continue in its operations indefinitely unless there is

evidence which indicates otherwise. In this context, the business should continue to

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value all its fixed assets at original cost as it is not foreseen that they will be sold.

Accrual

Revenue should be recognized when earned rather than when cash is collected, and
expenses should be recognized when goods and services are consumed regardless of
when they are paid for.
Matching Concept

In determining profit or loss at all times, revenues should be matched against expenses
incurred in the process of generating that revenue in the same period. It is necessary to
recognize all the revenue/income earned during a period regardless of when money is
received. In the same way, all expenses incurred by the business should be included
regardless of when money is paid for them. It is evident that the accrual and matching
principles are closely connected.

Prudence

The business is encouraged to take a conservative approach in reporting its affairs. If

the accountant is faced with a choice of approaches and estimates which are all
acceptable to use in the financial statements he should take a pessimistic rather than an
optimistic approach. This is also known as the conservatism principle. A conservative
view tends to underestimate rather than overestimate assets, revenues and profits;
while it overestimates rather than underestimates liabilities, expenses and losses.

Cost

Assets of a business must be recorded at their original cost. Cost is determined

through an arms-length ‘ansaction with an independent supplier and in most cases this
is the most objective figure to use as long as the going concern assumption holds.

Unit of measure

Also known as the money measurement concept and states a position that accounting
is more concerned with activities capable of being measured in monetary terms.
Therefore, money is used as a unit of measure in recording and reporting all
transactions of the business. Events and attributes that cannot be reliably measured in
monetary terms are therefore, not a major concern of accounting. An example of such
an attribute is being motivation and commitment of employees. Also inherent in this
concept is the assumption that currency will remain stable in value.

Accounting Period

Although a business is assumed to continue to exist indefinitely, its life can be broken
into periods of time, usually twelve months, during which results can be measured. The
significance of this concept is that users do not have to wait until cessation of business
to determine profit or loss.

Consistency

When there are alternative accounting methods or policies which a business may use, it
is important that whichever method or policy is adopted it is used consistently from one
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accounting period to another, as well as within one accounting period. If for some good
reason the method has to be changed, this should be clearly stated so that users are
aware of the reason and impact of the change.

Materiality

Only significant items should be considered when preparing financial statements.

These are items whose omission or non-disclosure will result in a distorted view of the
financial statements and will mislead the users of these financial statements. Items
may be considered significant in amount or importance depending on the nature and
size of the firm. For example, a miscellaneous expense of shs. 100,000/= may be
insignificant for a large insurance company but significant to a sole trader.

Qualitative attributes of accounting information

In addition to complying with the basic accounting principles, accounting information
must have certain qualities for its users to attain maximum benefit from it. These
qualities are Timeliness, Relevance, Quantifiability, Verifiability/Objectivity and
Understandability.

Timeliness

To have the intended benefits, accounting information should be available to the user at
the appropriate desired time so that it is incorporated in decision-making processes.

Relevance

Since the volume of accounting data which can be generated is infinite, it is important
that the provider of accounting information selects from all data available only those
which are most likely to meet needs of users of accounting information. Inclusion of
irrelevant data results in wastage of resources.

Quantifiability

Accounting information should be able to be quantified. Quantification is usually in

monetary terms although quantities other than currency are employed by accountants.
This however, does not mean exclusion of non-quantifiable qualitative factors in
management decision making.

Verifiability/Objectivity

Accounting information should be measured in such a manner that two or more

professional accountants of equal competence should be able to measure the same
data and arrive at approximately similar results. Verifiable, objective information is also
reliable.

Understandability

Accounting information to be useful must be understood by the different users. It has to

be presented concisely and with clarity.

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Definition of accounting
There are many definitions of accounting by a number of professional bodies and
authors. They all however, revolve around the activities of generating and providing
accounting information to users so that they can make informed decisions.

The Committee on Terminology of the American Institute of Certified Public

Accountants (AICPA), defined 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 a financial character, and interpreting the results thereof."

This definition captures the various aspects that make-up the accounting process as
follows:

i. Recording of transactions and events in books of original entry.

ii. Classifying transactions through the process of posting from the books of
original entry to the different accounts in the ledger.
iii. Summarizing the results periodically in financial reports.
iv. Interpreting the results of the business operation through the analysis of
financial statements.

Bookkeeping and accounting

Bookkeeping is an activity within the broader activities of accounting. It is mainly
concerned with the recording of routine business transactions on a day to day basis. It
is the record keeping part of accounting and through this activity a business is able to
determine the results of its operations. The nature of a bookkeeper's work is clerical and
may now be done using electronic equipment. A bookkeeper may be responsible for
keeping all or some of the records of a firm.

Accounting on the other hand, is concerned not only with the recording function but also
with other activities including the designing of the accounting system itself.
Accountants are responsible for preparation of financial reports and statements, as well
as in the analysis and interpretation of the reports. Accountants usually supervise the
work of bookkeepers, and are expected to have acquired a level of training and
qualification commensurate to this position.

The accounting system

A system is defined in the Oxford Advanced Learners Dictionary as simply "a set or
assemblage of things connected, or interdependent, so as to form a complex unity; a
whole composed of parts in orderly arrangement according to some scheme or plan."

An accounting system is, in that context, basically composed of:

i. a set of interrelated activities involving the originating, processing and reporting

of financial and other data,
ii. written records and reports necessary to collect, process, store, and transmit
information,
iii. equipment and devices used in the system to expedite the work and provide
better control, and
iv. personnel directly involved in the accounting activities.
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The above components link to form an accounting system which is also influenced by
variables external to it, for example, professional accountancy organizations' influences,
government directives and new developments in the accounting discipline in other
countries.

Objectives of an Accounting System

Accounting systems are designed to attain the following objectives:

i. To provide a means by which interested parties may be given information on the

financial position and results of operations of a business organization.
ii. To facilitate management planning, control and decision-making.
iii. To comply with various laws and government requirements.
iv. To protect the business and safeguard its assets.

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References
Bassett, P.H (1992)Computerised Accounting , NCC Blackwell, Manchester.
Hornby, A.S (1991)Oxford Advanced Learners Dictionary , Oxford University Press.
Hornsby, C.R (1969) in Private Enterprise and The East Africa Company , ed. Thomas,
P.A, Tanzania Publishing House, 1969.
Pacioli, L (1494)Summa de Arithmetica, Geommetria, Proportione et Proportionalita .
Koontz, H and O'Donnell,C (1974).Essential of Management , McGraw Hill.
Musselman, V.A and Hanna, J.M (1960) Teaching Bookkeeping and Accounting , Mc
Graw-Hill.
NBAA (2000) Tanzania Financial Accounting Standards , National Board of Accountants
and Auditors.

Review questions
1. Define accounting. Why is accounting often called the language of business?

2. Why is the accounting function in a small shop different from a supermarket

complex?

3. Why are financial statements and reports produced periodically?

4. List main groups of users of accounting information.

5. What are the qualities of good accounting information?

6. What is the relationship between bookkeeping and accounting?

7. Why are accounting principles, concepts and standards important to the

accounting function?

8. List any 10 accounting concepts you have read in the chapter.

9. Give a brief description of each of the 10 concepts you have listed above.

10. What is an accounting system and what is it designed to achieve?

Exercises
1. Why is knowledge of accounting terms and concepts useful to persons other
than accountants?

2. Information available from accounting records provide a basis for making many
business decisions. Can you list five examples of such decisions?

3. Comment briefly on each of the following statements. Your comments should

indicate whether you agree or disagree with the statement as well as reasons for
your position.

(a) An accountant is merely another name for a bookkeeper. The only

difference is that an accountant goes through a college while a
bookkeeper learns through experience.
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(b) Accounting information is essentially historic in nature. Thus accounting

data are useful in determining the past, but of little use in projections
concerning the future.
(c) Computers will eventually replace the accountant.

4. Walter Milulu works for Jaribu Enterprises as an accountant. He has to make a

decision as to how stocks will be valued. Several methods are acceptable.
Because one of his friends owns the business, Walter chooses the method
which results in the highest valuation. He thinks that will put the business in a
better position when applying for a loan from the National Bank of Commerce.

Required:

Discuss this situation in terms of accounting standards covered in the chapter.

Problems
1
1. AC 100: Principles of Accounting has been a compulsory course for all Business
and Economics students at the University of Dar es Salaam for many years. The
Economics student representatives are lobbying the Heads of the Accounting
and Economics Departments to eliminate AC 100: Principles of Accounting from
the Economics programme. They have presented the following arguments in
support of their position:

i) Offices are becoming highly specialised, and the majority of economists

are not required to keep any accounting records.

ii) Computerisation is rapidly taking over the accounting function in

business and the need for workers trained in bookkeeping is certain to
decrease.

iii) The time the economics students now spend in the accounting course
could be more profitably spent in an additional econometric course.

iv) The accounting course has proved very difficult for many economics
students. Because of the difficulty they have with the accounting course,
some students have become discouraged and even been discontinued in
their studies.

Required

Assume that you are the Lead Advisor to the Heads of the Accounting and
Economics Departments. What is your reaction to the arguments the
representatives presented? Give reasons to support your point of view.

1
This problem is an adapted version of a case problem fromTeaching Bookkeeping and Accounting ,
Musselman, VA and Hanna, JM, McGraw-Hill, 1960.

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