ACC 111-PRINCIPLES OF ACCOUNTS 1 LECTURE NOTE

INTRODUCTION TO ACCOUNTING

ACCOUNTING DEFINITION

Accounting is both a profession and an academic discipline. It is defined by different people in different ways from different perspectives.

American Institute of Certified Public Accountants 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 result thereof ”.

Frank Wood (1995: 181) defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”.

The definition of accounting, therefore, is the process of identifying, recording, analysing, classifying, summarizing, interpreting and communicating financial data of an organization to enable users make assessments and decision.

Accounting acts as the language of business. It communicates in accounting terms, what should be paid to a supplier or by a customer, the prices for a product or service the value of an asset. It looks back at the past to record, analyze and report as a steward and also looks into future and assists management with decision making and control.

BOOK-KEEPING DEFINITION

Book-Keeping is an integral part of accounting. It is defined as the art of recording financial transaction in such a manner that the financial position of a business can be known at any time. What we are saying here, is that whenever a financial transaction takes place, there must be a proper recording of such transaction in order to reflect the dual aspect of a transaction i.e. the giving aspect and the receiving aspect. It is the recording aspect of a transaction that is referred to a double entry book-keeping.

IMPORTANCE OF ACCOUNTING AND BOOK-KEEPING

The following are the importance of Accounting and Book-Keeping:

       i.            It helps to determine the profitability of a business concern.

     ii.            The assets and liabilities of a business are shown.

  iii.            The records show the income and expenditure.

  iv.            The records are used by the tax department for tax assessments.

     v.            The records provide a means by which the finances of a business are controlled.

  vi.            Book-Keeping provides permanent records for all financial transactions.

GREAT EVENTS IN ACCOUNTING AND BUSINESS HISTORY

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NEEDS FOR ACCOUNTING

The needs for Accounting can be seen from the following perspectives:

i. Stewardship Reporting

ii. Performance Review

iii. Business Decision Making

iv. Statutory Compliance

v.  Requirement for Lending

vi. Tax Purposes

i.       Stewardship Reporting: It is necessary for the managers to report to the owners of the business on their activities during the period under review.

ii.     Performance Review: It is natural of human beings to seek enhancement in their businesses. For example, consider the case of  Agbo Ma Biwon Nigeria Limited who has the following data:

Years                         Capital                 Profit            Return on Capital

                                     #                            #                      %

2016                          27,000                  5,400                  20

2017                          40,500                18,225                  45

Here, there is a relative increase in profit in 2017 and as a result of increase in return on capital, this mean high performance of the business under review.

iii.  Business Decision Making: Accounting helps in analyzing complex business decision problems using quantitative techniques to suit the business environment.

iv.  Statutory Compliance: Companies and Allied Matters Decree 1990 requires all Limited Liability Companies to keep accounts of their financial transactions in a specified manner.

v.     Requirement for Lending: Financial statements are usually demanded before banks give loan.

vi.  Tax Purposes: Government relies on audited financial statements for determining the taxes payable on the profits and / or other incomes of an individual or company.

WHO IS AN ACCOUNTANT?

An Accountant is a person who has undergone a formal or professional training in the process of accounting and who belongs to at least one of the recognized professional accountancy bodies such as Association of Certified Chartered Accountants (ACCA), the Institute of Chartered Accountants of Nigeria (ICAN) among others.

ROLES OF ACCOUNTANTS

The following are the roles of Accountants:

i.       Preparation and presentation of timely and accurate financial / accounting reports to management.

ii.     Identification of areas of inefficiency and wastage of resources.

iii.  Treasury functions i.e raising finance, cash management and so on.

iv.  Setting up effective system of internal and accounting controls.

v.     Preparation of feasibility reports i.e.  these reports assist management in assessing the viability / profitability or otherwise of proposed capital expenditure such as the opening of a new factory or branch.

TYPES OF ACCOUNTANTS

The following are the types of Accountants:

A.      Financial Accountant: This is an Accountant who records financial transactions of a business organisation, analyses the financial information and presents reports/ statements to the users of financial information such as management in order to enable them assess the financial performance of the organisation.

B.      Cost Accountant: This is an Accountant who determines cost of goods or services produced or sold. The availability of accurate information on cost of goods/ services will enable management to fix appropriate selling prices. The Cost Accountant also helps the organisation to effectively control costs thereby maximizing profits.

C.      Management Accountant: This is an Accountant who uses his professional know-how and skill to prepare and present accounting information to assist management in decision making for the purpose of formulating policies for the organisation. In performance of his or her duties, the Management Accountant largely compiles futuristic accounting information as opposed to the Financial Accountant who records and presents historical accounting information.

D.      Tax Accountant: This is an Accountant knowledgeable in tax laws. In view of the complexities in the law and practice of taxation, a firm requires a Tax Accountant who will use his knowledge to advice management on how to avoid tax rather than evade tax. It must be mentioned that tax avoidance is legal whereas tax evasion is illegal.

E.       Auditor: This is an Accountant who examine the accounts and underlying financial records and expresses an opinion on the truthfulness and fairness or otherwise of the accounts. The Auditor is required to be independent of the person(s) whose work he is scrutinizing. Where the Auditor is appointed by management to examine and report on the work of the various officials/ sections/ departments in the organisation, he is known as Internal Auditor. Where the Auditor is appointed by the shareholders to report on the financial statement prepared by management, he is known as External Auditor.

REVIEW QUESTIONS

1.       Book-Keeping is an integral part of Accounting. Discuss.

2.       “Book-Keeping is to Accounting, what Nursing is to Medicine”. Discuss

3.       List and explain six needs for Accounting.

4.       Briefly discuss the role of Accountants and types of Accountants you know

5.       Consider the case of  Agbo Ma Biwon Nigeria Limited who has the

           following data:

Years                         Capital                 Profit            Return on Capital

                                     #                            #                      %

2016                                                               5,400                  20

2017                                                             18,225                  45

Required: Prepare the following:

a.       Capital for each of the year.

b.       Return on capital increased by…

c.       Return on capital increased to….

6. Consider the case of  Ajimatanraeje  Nigeria Limited who has the

    following data:

Years                         Capital                 Profit            Return on Capital

                                     #                            #                      %

2016                                                               20,000                  20

2017                                                             56,250                   45

Required: Prepare the following:

a.       Calculate capital for each of the year.

b.       Return on capital increased by…

c.       Return on capital increased to….

7. Consider the case of Foyegbe Nigeria Limited who has the  following data:

Years                         Capital                 Profit            Return on Capital

                                     #                            #                      %

2016                         100,000                         20,000                 

2017                         125,000                       56,250                 

Required: Prepare the following:

a.       Calculate return on capital for each of the year.

b.       Return on capital increased by…

c.       Return on capital increased to….

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