SECTION 1: INTRODUCTION TO PRINCIPLES OF ACCOUNTS

At the end of this section students should be able to:

1. Explain the concept of accounting.
2. State the purpose of accounting.
3. Identify the users of accounting information.
4. Outline the distinguishing features of various types of business organizations.
5. Identify the main financial statements prepared by various business organizations.
6. Outline the concepts and conventions that guide the accounting process.
7. Assess the role and impact of technology on the accounting process.
8. Describe the accounting cycle
Accounting concept and purpose
Accounting is the systematic recording ! reporting and analyzing of the day"to"day financial activities
of a business. #he main purpose of accounting therefore is to provide information for decision"ma$ing
in the %orld of business.
An accountant and the accounting staff must follo% a set of rules and regulations! such as the
&enerally Accepted Accounting 'rinciples.(&AA') or*and the International Accounting Standards
(IAS)
Users of accounting inforation
As stated before the purpose of accounting is to provide information for decision"ma$ing in the %orld
of business. #here are various groups of users of this information. #he table belo% lists the main users
of accounting information and the reason the accounting information is needed. #here are t%o types of
users Internal users (%ith in the business) and external users (outside the business).
Interna! users of accounting inforation inc!ude t"e fo!!o#ing:
Users T"eir need
1$ %anagers & +or analyzing the organization,s performance and position and ta$ing
appropriate measures to improve the company results.
'$Ep!o(ees #o assess the company,s profitability and its conse-uence on their future
remuneration and .ob security.
)$O#ners +or analyzing the viability and profitability of their investment and
determining any future course of action.
E*terna! users of accounting inforation inc!ude t"e fo!!o#ing
Users T"eir need
Lenders+Creditors +or determining the credit %orthiness of the organization. #erms of credit are
set according to the assessment of their customers, financial health.
Ta* Aut"orities +or determining the credibility of the tax returns filed on behalf of the
company.
In,estors Investors %ant to ma$e sure they can earn a reasonable return on their
investment before they invest .
Custoers +or assessing the financial position of its supplier %hich is necessary for a
stable source of supply in the long term.
Regu!ator(
Aut"orities
+or ensuring that the company,s disclosure of accounting information is in
accordance %ith the rules and regulations set in order to protect the interests of
the sta$eholders %ho rely on such information in forming their decisions.
T(pes of -usiness organi.ations
#he main types of businesses are as follo%s:
Sole"#raders" these firms are o%ned by one person! they are responsible for day"to"day running the
business. Sole "traders o%n all the assets of the business and the profits generated by it. #hey also assume
complete responsibility for any of its liabilities or debts.
'artnerships " In a 'artnership! t%o or more people share o%nership of a single business! the 'artners
should have a legal agreement that sets forth ho% decisions %ill be made! profits and losses %ill be shared.
#hey also must decide up front ho% much time and capital each %ill contribute.
/orporations (0imited 0iability companies)" 0imited 0iability companies are o%ned by persons $no%n
as s"are"o!ders %ho purchases share (soc$) in the company! the profit shareholders receive is called
dividends. #he shareholders then appoint Directors to give direction to the business! a corporation has a life of
its o%n and does not dissolve %hen o%nership changes.
/ooperatives " A business organization %hich is o%ned and run .ointly by its members! %ho share the
profits or benefits . /ooperatives include non"profit community organizations and businesses that are o%ned
and managed by the people %ho use its services (consuer cooperati,e/ or by the people %ho %or$ there
0#or1er cooperati,e/
1on"'rofit Organizations (not for profit organization ) " A non"profit organization is a type of
organization that does not earn profits for its o%ners. All of the money earned by or donated is used in
pursuing the organization,s ob.ectives. 1on"profit organization are usually charities or other types of public
service organizations.
A financial statements is a %ritten report of the financial condition of a firm. #he follo%ing is a list financial
statements prepared by various business organizations:"
Income statement*#rading and 'rofit 2 0oss A*/
Income and Expenditure A*/
3alance Sheets
/ash +lo% Statements.
(we would be looking at all of these statements later on)
Accounting concepts and con,entions and Assuptions
Are generally accepted accounting principles %hich guide the accounting process to ensure that
financial statements are correctly prepared some of theses concepts are listed belo%.
Accrua! and atc"ing concept " Accountants attempt to match expenses incurred %hile
earning revenues %ith the related revenues. 4se of accrual accounting procedures assists the
accountant in allocating revenues and expenses properly among the fiscal periods . In other
words income must be accounted for in the year in which it was earned,expenses must be
accounted for in the year in which it was incurred.
Prudence 0conser,atis/ concept2 5hen in doubt! an accountant should choose a solution that
%ill be least li$ely to overstate assets and income. #he conservatism constraint should be
applied only %hen doubt exists. An intentional understatement of assets or income is not
acceptable accounting
Consistenc( concept " accounting methods and practices should not differ from period to
period so as to enable comparisons bet%een periods to be made. For example the same method
of depreciation should be used year after year
Separate entit( concept " al%ays separately record the transactions of a business and its
o%ners. If the owner purchased an asset for person use the asset does not belong to the
business.
3oing2Concern & it is assumed that the business %ould continue to operate in the near future.
In other %ords the people %ho use the company,s information assumes that it %ould not go out
of business in the near future! would you lend money to or invest in a business which would end
in a year or two?
4istorica! Cost Princip!e$ Ac-uisition cost is the most ob.ective and verifiable basis upon %hich to
account for assets and liabilities of a business enterprise. Assets and liabilities should always be
valued at cost price
9. Assess the role and impact of technology on the accounting process.
T"e Accounting C(c!e
6efers to the se-uential steps involved in recording all of the business activities during an accounting period. An
accounting period is a specific period of time ! usually 78 months. As stated earlier the accountant systematically
records financial information ! in special boo$s using particular rules.
Step 7
Source Documents
Step 8
9ournal
Step :
0edger
Step ;
Ad.ustments

Step <
/losing Accounts and
Stoc$ =aluations
Step >
'reparation of
+inal Accounts
Step ?
#rial 3alance
T"e Accounting
C(c!e
Step 1 Co!!ect and Ana!(se Source Docuents
#he very first step in the accounting cycle is the collection and analysis of all the documents that are
related to business transactions and events. #hese documents! called source documents! examples of
source documents are che-ues! invoices! receipts! cash bills! credit and debit notes.
The transactions identifed are then analyzed to determine the accounts afected and the
amounts to be recorded.
Step 8