Session 1: Intro to Accounting

Transport Financial Analysis

Page 5 of 43 pages. Chapter: 2: Basic Accounting Principles and Concepts

Session 1: Introduction to Accounting

Learning Objective

Explain to the participants the basic accounting concepts

Important Terms

Accounting
Accounting concept
Accounting period
Book keeping

What is Accounting?

Accounting is an information system for measuring, processing and communicating information that is useful in making economic decision.

Every business is conducted to make profit. Accounting knowledge is there to assist the business man to assess whether the business is making profit or loss. In accounting brings discipline on how to source money, how to spend and how much to save. Accounting ensures consistency in the treatment of various transactions.
Accounting involves gathering of financial data, recording classifying, summarizing and communicate the results to the owners of the business, or to others allowed to receive this information.

Accounting should not be confused with Book keeping as Book keeping is the part of accounting concerned with recording of financial data. Book keeping is the process of recording data relating to accounting transactions in the books of accounts.

Accounting Concepts

The International Accounting Standards Board (IASB) for which Malawi is a member recognized that accounting information needs to be objective and consistent. To achieve this, there must be a set of rules which lay down the way in which transactions of the business are recorded. These set of rules are known asaccounting concept.

There are many concepts applicable in accounting but two are regarded by IASB as the most influential and these are:

Going concern
Implies that the business will continue to operate up to a foreseeable future. Foreseeable future should at least be a period exceeding 12 months. This concept requires that Assets should be measured at their historical cost. If the Management of the entity believes that their business will not operate up to a foreseeable future then the assets should be measured at the Break up basis. i.e. at net selling price.
Accrual
States that accounting transactions should be recognized and recorded in the year of transaction and not necessarily when payment is made or received. Accruals concept also says that the net profit for the year is the difference between revenues and expenses incurred to generate those revenues.

Apart from these two fundamental concepts there are other concepts which should be considered when producing the financial statements and these include;

Business entity
The concept states that the business exists separately and distinct from its owners. This entails that accounting records for the business should be kept separately from the owner’s private transactions. The only time that the personal resources of the proprietor affect the accounting records of a business is when they introduce knew capital in business or they take drawings out of it.
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.
Prudence
Accountants should always exercise caution when dealing with uncertainty but should also maintain neutrality in recording transactions. The business is encouraged to take a conservative approach in reporting its affairs. If the accountant is faced with a choice of figures, which are both, acceptable to use in the financial statements he should take a pessimistic rather than an optimistic approach. This emphasize that it is better for accountants to underestimate any anticipated profits rather than under estimating any anticipated loss
Cost
Accounting transactions (assets) should initially be measured at their historical cost to the business. Cost here should either be the production cost if internally constructed or the purchased cost if acquired externally.
Unit of Measure
Only transactions which can be measured in monetary value should be recognized in the financial statements. This implies that any transaction which can not be quantified in monetary value will not be recognized in the financial statements. This concept further explains that the currency of money used as a unit of measurement should be stable.
Consistency
Transactions which are similar should be subjected to the same accounting treatment. When ever the business has chosen a certain accounting treatment then they should follow such treatment in all accounting years. Change of method should be effected if the aim is to show a better presentation of financial statements or the old method has been outlawed by a new accounting standard or company Act.