FA2.1

• The term financial accounting and reporting encompasses the dual role of the financial accountant mainly measuring and recording an entity's economic activities and communicating the recorded data to the external users of financial information
• Financial accounting and reporting provides a continuous history quantified in monetary terms of the economic resources and obligations of a business enterprise and the economic activities that change those resources and obligations
• The main objective of financial accounting and reporting is to provide information needed by current and prospective investors and creditors of a business enterprise in their decision making
• Generally Accepted Accounting Principles (GAAP)

  The accounting and reporting conventions, rules and procedures that a business entity must use in preparing external financial statements
• GAAP


  • They help increase the confidence of financial statements as being representationally faithful
  • They provide companies and accountants with guidance on how to prepare financial statements with guidance on how to report for unreported economic activities
  • They provide independent auditors of financial statements with a basis for evaluating the fairness and completeness of those statements
• The Financial statements and reports require many estimates, assumptions and professional judgment by both management and accountants
• The importance of standards cannot be over emphasized for without them to guide the accounting and reporting practice, all accountants would have to develop their own financial statement theory, practice and procedures
• The environment within which accountants operate is made up of interrelated micro and macro social economic activities
• In developing countries, accounting systems and processes are simple and sometimes obsolete compared to the sophisticated systems and processes in developed economies
• Accounting theory and practice is influenced very strongly by requirements imposed by the companies Act and other regulatory agencies
• The management of the firm has a lot of discretion on the activities that an organization should engage in and the timing of those transactions, which greatly influences the practices of accounting
• Accounting entity assumption


  Establishes boundaries or limits as to what information should be included in the financial statements of a given accounting entity
• Periodicity assumption


  The economic activities undertaken during the life of an accounting entity are assumed to be divisible into various artificial time periods for financial reporting purposes
• Going concern assumption


  The accountant assumes the business entity will continue to exist indefinitely into the foreseeable future, without the likelihood of closing down or significantly curtailing the scale of its operations
• Monetary assumption


  Accountants assume money to be a useful standard measuring unit for reporting the effects of business transactions
• Principles of a good accounting system

  • Control principle
  • Relevance principle
  • Compatibility principle
  • Flexibility principle
  • Cost-Benefit principle
• Accounting system consists of people, records, methods and equipment
• The systems are designed to capture information about a company's transactions and provide output which includes financial, management and tax reports
• Cost-benefit analysis


  Determining whether the benefits from an activity in an accounting information system outweigh the cost of that activity
• Decisions regarding system principles


  Decisions on control, relevance, compatibility and flexibility are affected by cost-benefit analysis
• The nature of the principles put in place in an entity is a reflection of the cost of running the system
• Components of a good accounting system

  • People
  • Records
  • Methods
  • Equipment
• Accounting information system


  Captures information about a company's transactions and provides output which includes financial, management and tax reports
• Basic components of an accounting information system

  • Source documents
  • Input devices
  • Information processors
  • Information storage
  • Output devices
• Source documents


  Identify and describe transactions and events entering the accounting process
• Source documents


  • Provide objective evidence making information more reliable and useful
  • Help in preventing mistakes and theft therefore acting as an internal control
  • Crucial to an accounting information system
• Inputting faulty or incomplete information seriously impairs the reliability and relevance of the information system
• Information systems are set up with special attention on control procedures to limit the possibility of entering faulty data in the system
• Input devices


  Capture information from source documents and enable its transfer to the information processing component of the system
• Input devices


  • Encourage accuracy by using consistent methods
  • Controls are used to ensure only authorized individuals can input data
• Information processors


  Interpret, transform and summarize information for use in analysis and reporting
• Information storage


  Keeps data in a form accessible to the information processors
• Information storage technologies


  • Compact disc (CD)
  • Hard drives (internal and external)
  • Flash disks
  • Other electronic storage devices
• Information storage


  • Allows managers to access data for planning and controlling business activities
  • Can be on-line (data accessible whenever needed) or off-line (data only accessible with authorization)
• Output devices


  Ensure the information stored in the system can be accessed by the various users who need it to make management and other decisions
• All accounting systems have a common purpose and internal workings regardless of whether they depend on technology
• Types of ledgers


  • General (Impersonal or Nominal) ledger
  • Purchases (Creditors/Payables) ledger
  • Sales (Debtors/Receivables) ledger
  • Private ledger
  • Other ledgers
  • Memorandum ledgers
• General (Impersonal or Nominal) ledger


  Contains all the accounts in the system, apart from the bank and cash accounts
• Purchases (Creditors/Payables) ledger


  Records all the accounts relating to trade and other creditors
• Sales (Debtors/Receivables) ledger


  Records accounts relating to trade and other debtors