Introduction to Accounting

and Financial Information

 Accounting can be compared to a specialized
language. It tries to deliver a message to interested
users. Similar to a specialize language, accounting
follows several processes and steps in order to
deliver the message or story.
 Accounting has been conventionally defined as
“the process of identifying, measuring, recording,
and communicating economic information about
an organization or other entity, in order to permit
informed judgments by users of the information.”
(Meyer 2009)
• Based on the definition, accounting consist of inputs,
several processes and an output. The inputs needed by
an accountant are the economic transactions entered into
by the business, evidenced by supporting documents..
• Accounting communicates these transactions to
interested users as useful information provided by
accounting.
 Book keeping is the mechanical
aspect of accounting. As opposed
to accounting, bookkeeping is
only concerned with record
Business
Identification keeping and maintenance of the
Transactions
book of accounts. Accounting
extends its functions to the
INPUT communication and
interpretation of financial
information.
Measurement

Recording Communicating
Useful Financial
Information
PROCESS

OUTPUT
 The end product or output of accounting
is useful financial information. This is the
“story” that accounting tells to the
interested users.
 It is contained and communicated
through the financial statements. These
are like chapters of a novel, telling
different stories of an inter related
subject.
A complete set of financial statements are
composed of the following:

1. Statement of Financial Position (or balance

sheet)
2. Statement of Comprehensive Income (or
income statement)
3. Statement of Changes in Equity
4. Statement of Cash Flow
5. Notes, comprising a summary of significant
accounting policies and other explanatory
information
 One can compare a statement of financial
position to a static picture or portrait.
 This statement literally presents a
company’s “position” when it comes to
the resources it owns (assets), obligations
claimed against it (Liabilities), and the
owner’s residual interest (Equity). The
date of this statement is always “as at” or
“as of” at the end of the period.
 The statement of comprehensive income
is like a moving video clip. This financial
statement tells the reader about the
“performance” and activities of the
company for a certain period. This
statement presents the revenues and
expenses incurred by the company. The
date of the SCI is always “for the period
ended”.
 The statement of changes in equity tells a
specific story about the owner’s stake in
the company. The SCE tells the reader
about the beginning stake of the owners
(beginning capital), any additional
investments, withdrawal of resources
and share in net income or net loss. The
date of SCE is similar to the SCI.
 The statement of Cash flows tells a
specific story about the cash transactions
of the company. Cash is a vital resource
owned and controlled by the business. It
is also the most susceptible to theft and
mismanagement. It can be use or derived
from operating, investing, and/or
financing activities.
 These notes generally provide additional
information needed by the readers but not
captured by the first four statements.
 These information include:
1. Company information
2. Accounting policies used
3. Administrative requirements by regulators
4. Other relevant information
 Not all financial information are
useful. If accounting provides
information that is not useful,
this will mislead and deceive
users of financial information.
 Relevance
Some information are true and yet not
significant for user’s decision making process.
Information is said to be relevant if it can assist a
user in predicting a financial situation or scenario.
 Faithful Representation
Accounting information must “present what is
purpose to present”. To be considered as faithfully
representative, accounting information must be
complete, neutral (unbiased) and free from error.
 Comparability
an entity’s information is said to be
comparable if such information can be
compared to another entity and if it can be
compared with previous year.
 Verifiability
it means that different users can reach an
agreement about the financial information.
Verifiability is about consensus.
 Timeliness
Timely financial information ensures that
such information is available to the users when
they need it. Otherwise, the decisions that they
will make must be misinformed.
 Understandability
In an organizations day to day operations,
information must be clearly and concisely
scaled down in order to be understandable.
Complex yet relevant information, however,
are not to be eliminated.
 The accountant is expected to record and keep
track of the activities of an organization. The
accountant uses the source document and
business transaction as his or her input in the
process.
 The accountant prepares the financial
statement communicates the financial
information to users and readers of financial
statement.
 Accountants always strive to capture and
present useful financial information.