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Introduction to
Financial Accounting
Accounting Unit 1

Purpose of Accounting

▪ Accounting is a system meant for measuring business activities,

processing of information into reports and making findings available
to decision-makers.
▪ The documents used to communicate those findings are called
financial statements. They report a business performance in
monetary terms.

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The Development of Accounting

According to some the very art of writing originated in order to record

accounting information.
Accounting can be traced back to ancient China, Babylonia, Greece and
Egypt. Accounting was said to be used to record the cost of labour and
materials used in building great structures like the pyramids.
The first known description of double entry book-keeping was
published by Luca Pacioli, a mathematician in 1494.

Accounting Conceptual Framework

The accounting conceptual framework sets out concepts and ideas that underlie the
preparation and presentation of financial statements for external users. It includes
discussion of:

 The objectives of financial reporting

 The qualitative characteristics of useful financial information
 The definition, recognition and measurement of the elements from which the
financial statements are constructed
 The assumptions, principles and convention on which accounting information is
based.

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Accounting Conceptual Framework

Objectives of Financial Reporting

The main objective of financial reporting is to provide financial
information about the reporting entity to users of financial statements.
Financial statements provide information on which investment, credit
and similar decisions need to be made. Therefore, the objectives of
financial reporting is focused on the use of accounting information in
decision making.

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Users of Accounting Information

 Creditors
 Governments
 Investors
 Employees
 Suppliers
▪ Research the purpose for which each group uses the financial
information

FUNDAMENTAL CHARACTERISTICS OF FINANCIAL

INFORMATION

The usefulness of financial information is very

important. For financial information to be useful, it
must be
Relevant and;
Reliable (Faithful Representation)
These are the fundamental qualitative characteristics
of financial information. Without these characteristics
accounting information is rendered useless.

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Relevance
For accounting information to be relevant to investors, creditors and
others, it must be capable of making a difference in a decision. Relevant
information also has the following qualities:
 It should assist users to form predictions (predictive value) about
outcomes of past, present and future events.
 It should also provide feedback that confirms or correct expectations
about events (feedback value).
 It should also be timely, in that, it is available to decision makers before
it loses its capacity to influence a decision. This quality is referred to as
timeliness.

Reliable
Accounting information is reliable to the extent that the users can depend on it to
represent the economic conditions or events that it claims to represent. This is called
faithful representation. In addition the information should have the following qualities:
▪ It must be neutral. In other words, free from bias. Financial statements are not
neutral if, by selection or presentation of information, they influence the making of a
decision or judgement in order to achieve a predetermined outcome.
▪ It should be complete information must contain all the necessary descriptions and
explanations.
▪ information must be free from error. An error or an omission can cause the financial
statements to be false or misleading and thus unreliable and deficient in terms of
their relevance

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ENHANCING QUALITATIVE CHARACTERISTICS OT

ACCOUNTING INFORMATION

Accounting information should also possess other qualities that can enhance the
relevance and reliability of accounting information, thus improving its usefulness.
These qualities are:
Understandability
Verifiability
Comparability

Understandability

This is the degree to which information is easily understood by persons

with reasonable knowledge of accounting and economic policies.

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Verifiability

The extent to which information is reproducible given the same data

and assumptions. In other words, there should be consensus among
independent measurers who are using the same measurement
methods.

Comparability

The degree to which accounting standards, policies and procedures are

consistently applied from period to another. Financial statements are
comparable is users are able to draw conclusions about trends in the
performance of the entity over time. It also enables easy comparison of
the company’s financial statements with those of other companies.

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Constraints on the presentation of

accounting information.

Cost vs Benefit
The benefits derived from the accounting information must exceed the
cost of acquiring such information.

Materiality
The magnitude of a omission or misstatement of accounting
information, that in light of surrounding circumstances, it makes it
probable that the judgement of a person relying on the information
would have been changes or influenced by that omission or
misstatement. Some information may be immaterial.