Accounting for Decision Making - Week 1 Notes

Introduction to Accounting

Overview

  • Economic history is crucial for decision-making.

  • Accounting records the economic history, facilitating business dealings.

  • Accounting: the common language of businesses.

  • This session introduces the nature and purpose of accounting.

Learning Objectives

  • Define and explain the meaning and purpose of accounting.

  • Understand the accounting process.

  • Identify accounting sub-fields and their provided information.

  • Explain types of business organizations and their characteristics.

  • Identify users of accounting information and their needs.

  • Explain types of financial statements and their purposes.

Reading List

  • Chapter 1 of Marfo-Yiadom, Asante & Tackie (2015).

  • Chapter 1 of Frank Wood’s Business Accounting 1 by Wood, F. & Sangster, A. (2008).

  • Other financial accounting textbooks are also recommended.

What is Accounting?

  • Process: identifying, measuring, and communicating financial information.

  • Purpose: To enable informed judgments and decisions by users.

  • Includes:

    • Identification

    • Measurement

    • Communication

The Purpose of Accounting

  • To provide useful financial information about economic entities to decision-makers.

Bookkeeping and Accounting

  • Bookkeeping: Recording daily transactions consistently.

  • Comprises:

    • Recording transactions.

    • Posting.

    • Producing invoices.

    • Maintaining ledgers.

Accounting Process

  • Journals (Sales, Purchases, Returns, Cashbook, General).

  • Ledgers (Sales, Purchases, General).

  • Trial Balance (Adjusted Trial Balance).

  • Financial Statements (Income Statement, Statement of Financial Position, Cash Flow Statements).

Subfields of Accounting

  • Financial Accounting:

    • Serves external decision-makers.

    • Prepares financial statements.

  • Management Accounting:

    • Provides information to internal decision-makers.

  • Cost Accounting:

    • Deals with cost collection, allocation, and control for production/service.

  • Taxation:

    • Accounting for incomes and expenditures of taxable entities.

  • Auditing:

    • Provides independent assurance on financial report's truth and fairness.

  • Public Sector Accounting:

    • Identifies resources sources and uses for government entities.

Business Organizations

  • Organization: assembles and processes basic resources (inputs) to provide goods/services (outputs).

  • Key aspects:

    • Profit Motive

    • Ownership

    • Activities

Types of Business – Profit Motive

  • Profit-Oriented Organizations:

    • Set up to make profits.

  • Governmental Organizations:

    • Public sector entities providing public goods/services.

  • Non-Governmental Organizations:

    • Set up for societal objectives, not profit.

Types of Business - Activities

  • Manufacturing Business:

    • Changes basic inputs into goods for sale.

  • Merchandising Business:

    • Purchases goods to sell to customers (wholesale or retail).

  • Service Business:

    • Provides services to customers.

Types of Business - Ownership

  • Sole Proprietorship:

    • Owned by a single individual.

    • Least regulated; requires registration.

  • Partnership:

    • Formed by 2+ individuals.

    • Operates with partnership agreements.

    • Regulated by the Private Incorporated Partnership Act (Act 152) of 1962.

    • Partners: active or dormant.

  • Company:

    • Owned by shareholders.

    • Regulated by Companies Code and statutes.

    • Requires at least 2 directors.

    • Can be public or private, limited (by shares or guarantee) or unlimited.

Characteristics of Sole Proprietor

  • All profits and losses belong to the owner.

  • Unlimited Liabilities.

  • Lacks Perpetual Succession.

  • Limited Source of Funds.

  • Difficulty in ownership transfer.

  • Quick Decision Making.

  • Easy Formation.

  • Less Expensive to Operate.

Characteristics of Partnership

  • Share Profits and losses.

  • Unlimited Liabilities.

  • Lacks Perpetual Succession.

  • Limited Source of Funds.

  • Difficulty in ownership transfer.

  • Possible disagreement between partners.

  • Pooling of Skills and Resources.

  • Severally and jointly liable.

Characteristics of Companies

  • Share (dividends) /re- invest profits.

  • Limited Liabilities.

  • Perpetual Succession.

  • Wide access to raising funds.

  • Ease in ownership transfer.

  • Delayed Decision Making.

  • Legal separate entity.

  • Separation of ownership and Management.

Why Businesses Need Accounting Information

  • Sole Proprietorship:

    • Tax collection.

    • Lending.

    • Business valuation.

  • Partnership:

    • Fair profit sharing.

    • Tax purposes.

    • Lending/financing.

    • Admitting new partners.

  • Companies

Users of Accounting Information

  • Internal Users: (e.g., management, employees).

  • External Users:

    • Direct Interest: (e.g., owners, creditors).

    • Indirect Interest: (e.g., government, customers, public, trade unions).

Informational Needs of Users

  • Shareholders / Investors:

    • Investment decisions.

    • Assess future profitability, risk, cash generation, and management stewardship.

  • Management:

    • Operating and strategic decisions.

    • Financing, investing, and managing employees.

  • Employees:

    • Stability and profitability of the company.

    • Ability to provide remuneration, working conditions, retirement benefits, pensions, and job security.

Informational Needs of Users

  • Creditors / Lenders:

    • Assess ability to pay interest and principal, default risk, and future prospects.

  • Government / Regulatory Agencies:

    • Supervisory functions.

    • Reveal economic trends.

    • Check tax liabilities.

  • Suppliers:

    • Determine creditworthiness and credit terms.

  • Customers:

    • Evaluate supplier's staying power, price, product details, and sale conditions.

Financial Statements

  • Statements providing information on financial performance, position, and cash flows.

  • Types:

    • Income Statement

    • Statement of Financial Position (Balance Sheet)

    • Cash Flow Statement

    • Statement of Changes in Equity

    • Notes to the Accounts

Financial Statements

  • Statement of Financial Position:

    • Shows financial position at a point in time.

    • Position statement.

    • Summarizes assets, liabilities, and equity.

  • Income Statement:

    • Shows financial performance over a period.

    • Periodic statement.

    • Summarizes revenue and expenses.

  • Cash Flow Statement:

    • Shows actual cash inflows and outflows.

Financial Statements

  • Statement of Changes in Equity:

    • Shows changes in owner's equity over a period.

    • Includes net profit/loss, changes in share capital reserves, dividend payments, gains/losses recognized in equity.

  • Notes to the Accounts:

    • Supplemental information about the financial condition.

    • Types:

      • Description of accounting rules and policies.

      • Additional detail about financial statement items.

      • Additional information about items not on the statements.

End of Session Questions

  • Distinguish between Cost Accounting and Management Accounting.

  • Distinguish between Bookkeeping and Accounting.

  • What are the information needs of Financial Analysts, Auditors, and the Public as accounting information users?