PATRIOT ODUNARO BABATUNDE JIMOH (08038454008)
MODULE 1:
NATURE OF ACCOUNTING
Accounting refers to the mechanism of maintaining and keeping the records of the transactions and events and also its analysis and interpretation. It also includes the preparation of final accounts i.e. Trading and Profit or Loss Account and Balance Sheet (Statement of Financial Position) at the end of the financial year. It is associated with communicating the interpreted results of the financial information to its users.
Accounting is both a profession and an academic discipline. It is defined by different people in different ways from different perspectives.
According to OBJ (Odunaro Babatunde Jimoh) “Accounting is the process of identifying, recording, analysing, classifying, summarizing, interpreting and communicating financial data of an organization to enable users make assessments and decision”.
According to AICPA (American Institute of Certified Public Accountants)
“Accounting is art of recording, classifying, summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”
According to AAA (American Accounting Association)
“Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.”
According to APB (Accounting Principles Board)
“It is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”
According to RN Anthony
“Accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms the information of business.”
According to Bierman and Derbin
“It may be defined as the identifying, measuring, recording and communicating of financial information.”
According to Smith and Ashburne
“Accounting is the science of recording and classifying business transactions and events, primarily of financial character, and the art of making significant summaries, analysis and interpretation of those transactions and events and communicating the results to the persons who must make decisions to form judgments.”
Thus, Accounting is a system which involves the identification of transactions and events which are financial in nature; ensuring measurement of transactions in the monetary terms; recording the transactions in the journal; classifying the entries in ledger; summarizing the entries in final accounts i.e. Trading Account and Profit or Loss Account and Balance Sheet (Statement of Financial Position) analyzing and interpreting the results and communicating the results to the users of the information of accounts. “
The Nature of Accounting can be defined in two ways:
(A) Qualitative Attributes of Accounting
(B) Quantitative Attributes of Accounting
(A) QUALITATIVE ATTRIBUTES OF ACCOUNTING
The fundamental nature of financial statements is to provide true and fair view of the state of affairs and profit or loss for the period.
Qualitative attributes simplifies and expands on the financial figures to ensure easy understanding and comparability of results.
The Qualitative Attributes that describe the Nature of Accounting are as follows:
(i) Reliability: Reliability implies that the information must be factual and verifiable. The accounting information has said to have verifiability if such information can be verified from source documents such as cash memos, purchase invoices, sales invoices, correspondence, agreement, property deeds and other similar documents.
In order to be relied upon, the financial information requires the following attributes:
(a) Neutrality
(b) Substance over form i.e. accounting should be based on financial reality and not merely on legal form.
(c) Prudence
(d) Completeness
(ii) Relevance: Accounting information depicted by financial statements must be relevant to the objectives of enterprise. Unnecessary and irrelevant information should not be included in financial statements.
The International Accounting Standards Board (IASB) says that information is relevant “When it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations.”
The relevance of information is affected by its nature and materiality. If an item or event is material, it is probably relevant to the users of financial statements.
For Example: The information regarding the rate of dividend paid by a company in previous years is relevant information for the investors since it provides a basis for forecasting future dividends.
(iii) Understandability: This can be done by giving relevant explanatory notes to explain the information given in financial statements. General topics which can be included in the explanatory notes are method of depreciation, method of valuation of inventory, description of contingent liabilities, explanation of reserves, disclosure of events occurring after balance sheet date and so on. These explanatory notes make the financial statements more useful and understandable.
(iv) Comparability: Comparability is very useful quality of the accounting. The financial statements should contain the figures of previous year along with the figures of current year so that the current performance can be compared with the past performance.
Similarly, the financial statements should be prepared in such a way that the profitability and financial position of the concern may be compared with the other concerns of the similar type.
Comparison reveals the strong and weak points of the business entity. Comparison is possible when the different firms in the same industry adopt the same accounting principles from year to year.
For Example: If diminishing balance method of charging depreciation is selected, it should not be changed from year to year. Similarly, the method of valuation of stock should also be consistently the same from year to year.
(v) Faithful Representation: Accounting aims at preparing those financial statements that depict the true and fair view of profitability, liquidity and solvency position of an enterprise. Application of appropriate Accounting Standards normally results in financial statements portraying true and fair view of information of an enterprise.
(B) QUANTITATIVE ATTRIBUTES OF ACCOUNTING
The Quantitative attributes explaining Nature of Accounting are as follows:
(i) Accounting is an Art as well as Science: Accounting is an Art of recording, classifying, summarizing, analyzing and interpreting the accounting records with a view to ascertain the net profit/ loss and financial position of the business.
Accounting as a Science is an organized body of knowledge that contains some underlying principles and rules that are followed while maintaining accounts. However, Accounting is not a pure science as it does not establish cause and effect relationship.
(ii) Recording of Financial Transactions Only: Accounting records only those transactions and events that are expressed in monetary terms or in quantitative form. For instance, the transactions like sale of goods for N6,000 will be recorded in the books of accounts.
However, there are so many events which are very important for business but cannot be recorded in the books of accounts because such events cannot be expressed in quantitative or monetary form. For example: Loyalty of Employees, Resignation by an able and experienced manager, Strike by employees, Quarrel between employee and employer and so on but these events have a large impact and direct bearing on the business of the firm.
(iii) Recording in Terms of Money: The accounting records only those transactions which can be expressed in terms of money only. It implies that a business man will not record the purchase of 7 chairs and 5 tables, he will record the purchase of 7 chairs costing N3,500 and 7 tables costing N7,000.
Also the recording is done in the book of the journal which is the primary book of recording the transactions in the chronological order.
In small business houses, the recording of transactions is generally done in the book of Journal whereas in big business houses the recording of transactions is done in the subsidiary books such as: Cash Book, Purchase Book, Sales Book, Purchase Return Book, Sale Return Book, Bills Receivable Book, Bills Payable Book and Journal Proper.
The number of subsidiary books to be maintained depends upon the nature, size and needs or requirements of the business.
(iv) Classifying the Transactions One of the features of Accounting is that it classifies all the transactions recorded in the book of the Journal. Classification refers to grouping the transactions of same nature at one place, in a separate account. Classification of transactions is done in the books of ‘Ledger’. All the accounts related to creditors, debtors, capital, assets, liabilities, incomes and expenses are separately opened in the Ledger Book. For example: Wages Account, Insurance Account, Advertisement Account, Cash Account, Bank Overdraft Account and so on
(v) Summarising the Transactions: Summarizing is the art of presenting the classified data in a manner which is understandable and useful to management and other users of such data. It involves:
(a) Balancing of Ledger Accounts
(b) Preparation of Trial Balance
(c) Preparation of Trading and Profit or Loss Account
(d) Preparation of Balance Sheet or Statement of Financial Position
Trial Balance is a summary of all the ledger accounts and is maintained to check the arithmetical accuracy of accounts.
Trading Account is prepared to find out the Gross Profit or Gross Loss while Profit or Loss Account helps in knowing Net Profit or Net Loss.
Balance Sheet or Statement of Financial Position prepared at the end of accounting year helps in knowing the financial position of the concern. It shows the Profitability, Solvency as well as Liquidity position of the business.
(vi) Analysing: Analyzing is concerned with the establishment of relationship between the various items or groups of items taken from Income Statement or Balance Sheet (Statement of Financial Position) or both.
Purpose of analysis is to identify the financial strengths and weaknesses of the enterprise. It provides the base for analysis.
(vii) Interpretation of Results: Another feature of accounting is interpretation of results. Interpretation of results is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation of results requires high degree of knowledge and skills.
The accountant should answer:
(a) What has happened?
(b) Why is happened?
(c) What is likely to happen under specified conditions?
(viii) Communicating the Results: Accounting is so featured that it will provide the analyzed and interpreted results to its users such as Management, Employees, Creditors, Research Scholars, Debtors, Financial Institutions, Competitors, Bankers, Income Tax Authorities and so on.
The results are communicated by preparing final accounts, ratios, graphs, diagrams, charts, fund flow statement, cash flow statement and so on.
Accounting acts as the language of business, it involves:
i. Recording transactions
ii. Classifying transactions
iii. Summarising transactions
iv. Interpreting and analysing transactions
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, analyse and report as a steward and also looks into future and assists management with decision making and control.
BOOK-KEEPING
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.
THE 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.
Book-Keeping provides permanent records for all financial transactions
ASSIGNMENT 1
“Book-Keeping is to Accounting, as Nursing is to Medicine”. Discuss
MODULE 2:
FUNCTIONS OF ACCOUNTING.
Yorston, Smyth, and Brown have divided functions of Accounting in two groups:
(A) Historical or Stewardship functions of Accounting
(B) Managerial Functions of Accounting
Let us put more light on the above functions mentioned by Yorston, Smyth, and Brown as discussed below.
(A) Historical or Stewardship Functions of Accounting
Historical or Stewardship functions of accounting are:
i. Recording of financial transactions: The primary function of Accounting is to record the transactions in the journal as soon as they occur.
If the transactions are journalized it becomes easier to transfer them in ledger accounts.
ii. Classifying: After journalizing the transactions these are classified and recorded in the ledger separately.
iii. Summarizing: After recording the transactions in the ledger these are closed by drawing balances.
A brief statement is prepared with the balances of the ledger which is called trial balance.
iv. Finding net results: The main function of Accounting is not only to record the transactions in books of accounts but also to determine the net results of a business for a particular period at the end of that period.
v. Exhibiting financial affairs: Preparation of balance sheet (now known as Statement of Financial Position) is one of the functions of the special importance of Accounting.
The balance sheet (now known as Statement of Financial Position) is prepared to exhibit the financial position of an organization at a particular date.
A picture of assets and liabilities is reflected in the balance sheet (now known as Statement of Financial Position), and a clear conception can be achieved regarding the financial stability of an organization through it.
Let us put light on what balance sheet (now known as Statement of Financial Position) is?
The financial statement prepared for the end day of the accounting period to show the financial position of a business concern is called a balance sheet.
In other word, the balance sheet (now known as Statement of Financial Position) is a statement of assets and liabilities including the owner’s equity at a particular date of a business concern. Its main task is to exhibit the financial position of a business concern at a particular date.
The income statement is prepared with the help of revenue incomes and expenses mentioned as ledger balances in the trial balance to find out the operating results of a business organization for a particular period.
So preparation of income statement is treated as one of the important functions of Accounting.
vi. Analyzing financial data: The financial data derived from financial statements are interpreted and analyzed for different purposes.
From this information, a clear conception is achieved regarding the capability of repayment of debts, the capability of earning a profit, work efficiency and transparency, etc. of an organization.
This can be ascertained through ratio- analysis. For example, the debt-paying capability is measured by the current ratio.
vii. Communicating financial information: Interested parties related to the business organization such as owners, employees, suppliers, investors, researchers, government, etc. remain eager to know various details regarding the financial positions of that organization.
One of the primary functions of Accounting is to provide them with information regularly through various reports.
(B) Managerial Functions of Accounting
Managerial Functions of Accounting are:
i. Control of financial policy and formation of planning: Various financial information is presented before the management so that the management can control financial policies and formulates planning regarding future activities and course of action.
ii. Preparation of the budget: The preparation of estimated statements of income and expenditure on the basis of future activities is also one of the important managerial functions. Accounting provides the necessary financial information required for the preparation of this budget. Later on executed activities are compared with budgetary elements.
iii. Cost control: A standard cost is estimated ahead of each cost. For this purpose, the necessary financial information is available from accounting records. Actual cost and standard cost are compared for evaluating the efficiency of work. In this way cost control is possible.
iv. Evaluation of employees' performance: Assigned tasks of employees of every, department of an organization are to be evaluated. For this, Accounting provides the necessary information.
v. Prevention of errors and frauds: Through the accounting system, the activities of employees are checked to prevent errors and fraud.
ASSIGNMENT 2
Yorston, Smyth, and Brown have divided functions of Accounting in two groups:
(a) Historical or Stewardship functions of Accounting
(b) Managerial Functions of Accounting
Discuss.the above functions of accounting.
