UNIT 1& 2

Core Concepts

• Business Entity: Imagine your business is a separate person. This concept means we only look at the business's financial activities, not the owner's personal ones.

• Going Concern: We assume the business will keep operating in the future, unless there's strong evidence otherwise. This helps with long-term planning.

• Accrual: We record transactions when they happen, not necessarily when cash changes hands. Think of it like ordering a pizza: you "spend" the money when you order, even if you pay later.

• Duality: Every transaction has two sides, like a coin. If you buy a car, you gain a car but lose cash. This keeps the accounting equation (Assets = Liabilities + Equity) balanced.

• Substance over form: An accounting principle that requires the financial statements of a company to reflect the true economic substance of transactions, rather than just their legal form.

Accounting equation: Assets=Liabilities + Equity

Principles

• Historical Cost: We record assets at their original purchase price. This is simple and reliable, but doesn't show current value.

• Consistency: We use the same accounting methods over time. This makes it easier to compare financial statements from different periods.

• Materiality: On-going accounts are only maintained for those items or activities that by themselves will make a significant impact on the business. These are called assets or liabilities. Immaterial items or activities are written off as expense or revenue at the end of each accounting period.

• Prudence: We're cautious and realistic. We don't overestimate profits or underestimate losses. Accounting systems should allow for the reporting of the minimum value of income. Thus, total expenses include non-cash items such as depreciation, bad debts, provisions, etc.

• The Realization Concept: Income is regarded as being earned at the point when the legal property, or the claim, in goods has passed from the seller to the buyer. This may be different from the point when the order was received, the delivery was made, or payment completed. This, however, is determined by the terms of the contract

• The money measurement concept: Means that only transactions that can be expressed in money terms are recorded. This means that non-monetary items, such as employee satisfaction or the quality of management, are not recorded in the financial statements.

Definition & Functions

• Book-Keeping -is the posting and recording of financial data.

• Accounting -is the process of classifying, summarizing, analyzing, interpreting, and communicating information for decision making purpose.

Functions

1. To keep accurate accounting records

2. To keep track of business finances

3. To assist in decision making

Users of Accounting Information

• Owners for decision making purpose

• Prospective Investors – for interest purposes

• Bankers/Creditors – for credit purposes

• Government - for taxation purposes

• Employees and Trade Unions – for wage negotiation purposes

Business Organizations and Structures

Formal- The formal organization will show clearly how work is divided up and how communication must flow within the organization.

Informal- The informal organization is the network of relationships that exist within an organization.

Financial Accounting and Cost & Management Accounting

Difference Between Financial Accounting and Cost and Management Accounting

Financial accounting is like a company's official record keeper. They track all the money coming in and going out, and then create reports that show how the company is doing financially. These reports are used by people outside the company, like investors and banks, to make decisions about the company.

Cost and management accounting is like a company's internal advisor. They use financial data to help the company make decisions about things like pricing, production, and budgeting. This information is used by people inside the company, like managers and executives, to help the company run smoothly and efficiently.