day1
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Introduction to Accounting
Rasika Dayarathna
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Learning Outcomes
At the end of this module, students will be able to describe terms in financial accounting describe key financial accounting concepts prepare the important financial statements:
profit and loss account, balance sheet, and cash flow statement
prepare financial statements using computer-assisted accounting system
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NOTES
Software: TurboCash open source accounting tool
Lecture materials: available at http://www.dwmbeancounter.com/moodle/ - students must create an online account.
Assessment: Assessment: 50% on final examination and 50% on assignments
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Business
• What is a business ?
• What are the objective of a business entity?
• What are the different types of businesses ?
• Who are the parties involved?
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Business – objectives/types/forms
Objective is making profit
Types of business –
Service
Manufacturing
Trading
Forms of business organization
Sole proprietorship
Partnership
Company
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Sole proprietorship
One person
Many professional services – lawyers, doctors,
Retail and small business entities
Accounting point of view – business entity is separated from the owner
Legal point of view- owner is personally liable for the debts of the business
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Partnership
Two or more persons
Partnership agreement
Accounting point of view – business entity is separated from the owners
Legal point of view- owners are personally liable for the debts of the business
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Company
An artificial person
Owners are known as shareholders
Liability is limited – unpaid share capital
Limited – Ltd
Private limited company
Public limited company
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Accounting
Accounting is the process of designing and operating an information system for collecting, analyzing, and recording of business transactions and summarizing and communicating the results of these transactions to users to facilitate the making of economic decisions.
Accounting is also known as language of business.
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Accounting
Accounting - the process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information.
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Economic/financial information
Examples-
• What are economic events ? Examples ?
• What are economic information ? Examples?
• Who are the interested parties and why?
• External parties
• Internal parties
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External Parties
• Investors – good investment ?
• Creditors – creditworthiness ? Safe to give loans ? How much and how long ?
• Government – Tax liability ?
• Customers – Entering into contracts?
• General public – performance ?
• Other users – who and why?
• Regulators – e.g. CSE (Colombo Stock Exchange)
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Internal parties
• Senior mangers – managing business
• Employees – profitability and profit sharing
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Book keeping
Book keeping – Collecting, analyzing, and recording business transactions.
• Mechanical and Repetitive
Accounting is more than book keeping. It involves analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information
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Accounting
Financial accounting - focuses on the specific
needs of decision makers external to the
organization, such as stockholders, suppliers,
banks, and government agencies.
Management accounting – concerned with the
preparation and presentation of information to
assist managers.
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Financial accounting
Basically outsiders
Historical information
Format
Mainly for taxation and profit sharing
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Management accounting
For insiders
Planning, organizing, performance evaluation
Historical and planned data
No specific format
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Role of an accountant
Auditing –
• Express the true and fair view of financial statements
• Independent examiner
Taxation – various types of taxes including excise and custom duty
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Role of an accountant
Management advisory services-
• Investigate problems
• Suggest corrective actions (quality control, acquisitions of and merging with)
Cost accounting – allocating and controlling cost of production for a product or service
Budgeting – forecast of future operations
Internal auditing – comply with the established procedures and policies
Information security auditors -
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Auditor General's Department - http://www.auditorgeneral.gov.lk/
Examination question – 5 marks
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Regulations
Company registration act
Stock exchange listing
Accounting standards
Buy 10 units @15 = 150
Buy 10 units @ 18 = 180
Sell 5 units @ 20 = 100
What is the profit ?
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Procedures
Sri Lanka Accounting Standards (SLAS) Sri Lanka Auditing Standards (SLAuS) International Accounting Standards (IAS) Generally Accepted Accounting Principles
(GAAP) Why standards ? Advantages ?
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Some concepts
Matching principle- matching revenues against all expenses incurred in earning those revenues.
Going concern principle- business entity will continue to operate in the near future.
Historical cost principle- cost are recorded at actual cost or price paid.
Accounting period- prepared for each financial yea.
Accounting entity- clearly defined accounting entity.