Department of Accounting & Finance Financial Accounting 1A (2013) 1.

1 Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers (Elliot, Barry& Elliot, Jamie: Financial accounting and reporting).It is the process of recording, summarizing and reporting the myriad of transactions from a business, so as to provide an accurate picture of its financial position and performance. Role of Accounting Accounting is a very important aspect in any business operation. It involves the measurement and provision of accurate financial information to managers, investors, tax authorities, and other stakeholders to help them make decisions about how they should allocate the resources of a company, organization, or public agency. Due to the nature of the accounting function, accounting firms provide critical support to their clientele. Among the most common financial services accounting firms offer are estate planning, accounting, taxation and investment, and retirement planning. Because what they offer are professional services, it is imperative for accounting firms to identify all factors and issues that would significantly impact their profitability and their reputation. Moreover, to increase their efficiency, management of accounting firms should always be ahead of everyone else when it comes to innovating and updating their knowledge and technology. In addition, there is a need for these companies to invest on their employees or workforce, as these people hold the key towards building lasting relationships with clients. Accounting-Simplified.com Users of Accounting Information Customers and Debtors: Customers and trade debtors require information about the ability of the business to survive and prosper. As customers of the companys products, they have a long term interest in the companys range of products and services. They also use it for

assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Creditors: Suppliers and trade creditors require information that helps them understand and assess the short term liquidity of a business. Is the business able to pay short term debt when it falls due. Terms of credit are set by creditors according to the assessment of their customers financial health. Creditors include suppliers as well as lenders of finance such as banks. Investors: Investors are concerned about risk and return in relation to their investments. They require information to decide whether they should continue to invest in a business. They also need to be able to pay dividends and to measure the performance of the business management overall. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Lenders; Ban and other financial institutions who lend money to a business require information that helps them determine whether loans and interest will be paid when due. Employees: Employees require information about the stability and continuing profitability of the business. They are crucially interested in information about employment prospects and the maintenance of pension funding and retirement benefits Government: To ensure the companys disclosure of information is in accordance with rules and regulations set in order to protect the interests of stakeholders who rely on such information. Management : For analyzing the organizations performance and position and taking appropriate measures to improve the company results.

Accounting Process: This is a sequence of activities involving the recording of how cash is received and paid out in a company or organization. The accounting process is based on four accounting methods which are the accrual method, the consistency method, the prudence method and the going concern method. The accounting process is actually 3 separate types of transactions that are intended to record business transactions into accounting records and then aggregate this information into financial statements. The first step is to ensure that reversing entries from the previous period have in fact been reversed. The second is the steps needed to record individual business transactions in the accounting standards. The third is period end processing required is closing the books and producing financial statements. Financial Accounting vs Management Accounting Management accounting according to wikepidea provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders. Financial accounting is required by the law while management is not. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centres

1.2 The purpose of financial analysis is to determine the viability of business and to determine the behavior of a company in future. There is a need for financial analysis so as to communicate with various managers and even employees to get a better sense of the company as it exists among workers. Also to create a thorough report on a company and to show trend lines showing how all the major rations interact with one another over time. 1.3 The income statement reflects the performance of a company over a period. It explains the movement between the position at the beginning and close of the period, by matching the revenue for the period (e.g. sales of goods) with the expenses for the period in order to

calculate the profit for the periods. The income statement reflects the structure of organization and allows for a specific reporting per profit centre. The balance sheet shows the financial health of a company and its capacity to borrow in order to finance its assets. The balance sheet shows what the company has and what it owes. The balance sheet is subject to interpretation and is only meaningful after analysis. 1.4 Briefly discuss the difference between the cash basis and accrual basis of accounting using the example of rent of $24 000 being paid in advance by Company A for 12 months from 1 September 2012. Company A has a December year end. (4) Accrual basis: Records income items when they are earned and records deductions when expenses are incurred. For a business invoicing for an item sold or work done will appear in the books even though no payment has been received and debts show as they are incurred, even though they may not be paid until much later Cash basis: Records revenue when cash is received and records expenses when cash is paid . For a business invoicing for an item sold or work done will not appear in the books until payment is received and similarly debts owed by the business will not appear until they have been paid 1.5 The accounting equation is: Liabilities = Assets - Equity, an example of the said element are payables, accruals, loan.

DEPARTMENT OF BUSINESS MANAGEMENT

FACULTY OF COMMERCE

NAME OF STUDENT

TAKUDZWA MUKUKU

STUDENT NUMBER

L0130811W

PROGRAM

BACHELOR OF COMMERCE HONOURS DEGREE IN HUMAN RESOURCE MANAGEMENT

COURSE

FINANCIAL ACCOUNTING 1A

LECTURER

NDLOVU T. (MR)