Summary FAC1503-Summarized-Study-Notes-Latest.

STUDY UNIT 1- THE NATURE AND FUNCTION OF ACCOUNTING The aim of this study unit is to enable learners to understand the nature and the function of accounting in an organisation. This study unit builds the understanding of accounting knowledge for the learner in relation to financial management. The nature of Accounting Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. In addition Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of nonfinancial aspect accounting. The difference between financial and management accounting Financial accounting It is a system that accumulates, processes and reports information about an entity's performance (i.e. profit or loss), its financial position (i.e. assets, liabilities and shareholders' equity) and changes in financial position. The primary objective of financial accounting is the preparation of financial statements - including the balance sheet, income statement and cash flow statement - that encapsulates the company's operating performance over a particular period, and financial position at a specific point in time. These statements - which are generally FAC1503-Summarized-Study-Notes-Latest. prepared quarterly and annually, and in accordance with Generally Accepted Accounting Principles (GAAP) - are aimed at external parties including investors, creditors, regulators and tax authorities. Management accounting The process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions. Unlike financial accounting, which produces annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports for an organization's internal audiences such as department managers and the chief executive officer. These reports typically show the amount of available cash, sales revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding debts, raw material and inventory, and may also include trend charts, variance analysis and other statistics Elements by which the financial position is measured: 1. Assets 2. Liabilities 3. Equity Elements that measure profitability (Profit or loss) 1. Income 2. Expenses Assets Resources controlled - as a result of past events - future economic benefits expected to flow to the entity Liabilities Present obligations - from past events - settlement result in an outflow of resources from the entity The financial position Net asset value is the difference between the value of assets owned by an entity and the liabilities it has incurred Basic equation: A = E + L The double entry principle  Every transaction affects two or more items in the basic account ting equation.  Transaction must be recorded in such a way that the equation remains in balance.  The dual effect which each transaction has on the elements of the basic accounting equation is the fundamental principle on which all entries in an accounting system are based To make a double-entry you must:  Think about the effect of the transaction on the basic accounting equation, thus how it is going to affect the financial position of the entity.  Identify the components (accounts) which are involved.  Determine the account(s) to be debited and credited.  The amount(s) debited must be equal to the amount(s) credited.  Indicate the date of the transaction.  Indicate the contra ledger account.  Indicate the folio number of the subsidiary journal.