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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