INTRODUCTION TO FINANCIAL ACCOUNTING
Nature and Scope of Accounting
Accounting
It refers to the following:
1. The process of collecting, recording, summarizing, classifying, interpreting and communicating financial
information to permit informed decisions.
2. The Art of communicating financial information about a business to users.
3. The field of accountancy concerned with preparation of financial statements
4. Reporting information in financial statements about firm’s financial performance and financial position to
internal and external users of financial statements and decision makers
Branches of Accounting
Accounting, in all its broadness, can be sub-divided into areas of specialization;
a. Financial accounting; concerns itself with the collection and processing of accounting data and reporting to
interested parties inside and outside the firm.
b. Tax accounting; deals with the determination of the firm’s tax liability which could be, Value added tax
(VAT), customs duty, pay as you earn (PAYE), corporation tax etc.
c. Cost accounting; helps establish costs relating to the production of a good or service and allocating it to the
various factors that contributed to the cost of production.
d. Managerial accounting; deals with the generation of accounting information to be used categorically by the
firm’s internal management in their day-to-day decision making.
e. Auditing; concerns itself with the vouching and verification of transactions from the financial accounting to
determine that they are a true representation of the business’ activity i.e. the true and fair view of the company’s
state of affairs.
Purpose of financial Accounting
1. Reporting information about firm’s financial performance, position, liquidity and profitability to users.
2. Necessary in decision making as it enables managers make optimum decision about a firm. (An optimum
decision is a decision that maximizes benefits and reduces cost).
3. Used for comparison purpose as follows
• Comparison between financial periods e.g. different years.
• Comparison between different businesses in the same industry.
4. Financial Accounts can be used as a reference point to show how the business used to perform in the past.
5. Summarizes a business financial aspect in a way that is understandable.
6. Satisfy the requirement of law especially for listed firms that are required to publish their accounts.
7. Internal control: this may include the safeguarding of organization’s money and other property, regular
collection and payment of sum of money owing to and by it and prevention of inefficiency, dishonesty, and
wastage.
Limitations of financial Accounting
1. Requires one to be trained in financial accounts so as to understand financial statements.
2. Financial Accounts represent only the financial aspect of a business thus ignore other critical areas in
business like social or environmental aspects. Examples include firm reputation and employee morale
3. Financial Accounting is dynamic thus items in financial statements need to be adjusted regularly in the ever
changing economy. E.g. inflations results in change of prices of commodities.
4. Accounting process may differ between firms because it is influenced by accounting concept or judgement
of the accountant
5. Use of historical information: in financial statements reporting past information is used.
6. Snap-shot information: financial statements are reported as at a given date. This provides information of
financial state which is a ‘static picture’ on that particular day.
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, Qualities of Good Accounting Information
• The accounting information must be accurate to enable the users make appropriate and correct business
decisions.
• The accounting information should be up-to-date and comprehensive.
• It should be relevant enough to influence the decision-making of users, that is, capable of making a
difference if it has predictive as well as confirmatory value.
• It should be objective i.e. based on accounting principles and standards.
• Reliable: It refers to the credibility of information to users. Good financial information should be one that
the user can trust and rely on.
• Comparable: It arises if information can be compared with similar information of another entity or the
same entity in different accounting periods.
• Verifiability: It helps assure users that information represents faithfully the economic phenomena it
purports to represent.
• Timeliness: Information is available to decision makers in time to be able to influence their decisions.
• Understandable: Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports should be prepared by those with reasonable knowledge of business
because they can present information in an understandable way. Users also require having knowledge of
financial reports.
Users of financial information
Users of financial information can be classified into two main categories:
• Internal users
• External users
Internal users
1. Management: Information is used by the firm’s management in decision making of financial issues related
to the firm
2. Internal auditors review, scrutinize and analyze financial records while developing an opinion about
financial statements.
3. Employees: Guides employees on the remuneration they should get based on company’s financial
performance.
External users
1. The general public: public is able to get an idea of firm’s financial performance and its position.
2. Potential investors and shareholders: they are able to know if a firm is worth investing in depending on its
performance and liquidity.
3. The government: Enables the government identify tax it should collect from a business.
4. Financial Lenders: these are able to identify whether a business is credit worthy. That is the firm’s solvency
in its ability to settle the interest payments and the principal.
5. Shareholders are able to identify dividends and other benefits they should receive depending firm’s
performance.
6. External auditors: they normally scrutinize and review the books of accounts in order to find out if they
reflect true and fair information.
7. Suppliers or creditors: these wish to know the liquidity position of the firms. i.e. the ability to meet its
obligations as and when they fall due.
8. Customers: they require to be assured that the business is a steady source of supply in the delivering of
services and goods in times of demand.
9. Research Scholars: they require such information in order to fill the existing gaps of information and further
provide a better incite to existing information.
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Nature and Scope of Accounting
Accounting
It refers to the following:
1. The process of collecting, recording, summarizing, classifying, interpreting and communicating financial
information to permit informed decisions.
2. The Art of communicating financial information about a business to users.
3. The field of accountancy concerned with preparation of financial statements
4. Reporting information in financial statements about firm’s financial performance and financial position to
internal and external users of financial statements and decision makers
Branches of Accounting
Accounting, in all its broadness, can be sub-divided into areas of specialization;
a. Financial accounting; concerns itself with the collection and processing of accounting data and reporting to
interested parties inside and outside the firm.
b. Tax accounting; deals with the determination of the firm’s tax liability which could be, Value added tax
(VAT), customs duty, pay as you earn (PAYE), corporation tax etc.
c. Cost accounting; helps establish costs relating to the production of a good or service and allocating it to the
various factors that contributed to the cost of production.
d. Managerial accounting; deals with the generation of accounting information to be used categorically by the
firm’s internal management in their day-to-day decision making.
e. Auditing; concerns itself with the vouching and verification of transactions from the financial accounting to
determine that they are a true representation of the business’ activity i.e. the true and fair view of the company’s
state of affairs.
Purpose of financial Accounting
1. Reporting information about firm’s financial performance, position, liquidity and profitability to users.
2. Necessary in decision making as it enables managers make optimum decision about a firm. (An optimum
decision is a decision that maximizes benefits and reduces cost).
3. Used for comparison purpose as follows
• Comparison between financial periods e.g. different years.
• Comparison between different businesses in the same industry.
4. Financial Accounts can be used as a reference point to show how the business used to perform in the past.
5. Summarizes a business financial aspect in a way that is understandable.
6. Satisfy the requirement of law especially for listed firms that are required to publish their accounts.
7. Internal control: this may include the safeguarding of organization’s money and other property, regular
collection and payment of sum of money owing to and by it and prevention of inefficiency, dishonesty, and
wastage.
Limitations of financial Accounting
1. Requires one to be trained in financial accounts so as to understand financial statements.
2. Financial Accounts represent only the financial aspect of a business thus ignore other critical areas in
business like social or environmental aspects. Examples include firm reputation and employee morale
3. Financial Accounting is dynamic thus items in financial statements need to be adjusted regularly in the ever
changing economy. E.g. inflations results in change of prices of commodities.
4. Accounting process may differ between firms because it is influenced by accounting concept or judgement
of the accountant
5. Use of historical information: in financial statements reporting past information is used.
6. Snap-shot information: financial statements are reported as at a given date. This provides information of
financial state which is a ‘static picture’ on that particular day.
1
, Qualities of Good Accounting Information
• The accounting information must be accurate to enable the users make appropriate and correct business
decisions.
• The accounting information should be up-to-date and comprehensive.
• It should be relevant enough to influence the decision-making of users, that is, capable of making a
difference if it has predictive as well as confirmatory value.
• It should be objective i.e. based on accounting principles and standards.
• Reliable: It refers to the credibility of information to users. Good financial information should be one that
the user can trust and rely on.
• Comparable: It arises if information can be compared with similar information of another entity or the
same entity in different accounting periods.
• Verifiability: It helps assure users that information represents faithfully the economic phenomena it
purports to represent.
• Timeliness: Information is available to decision makers in time to be able to influence their decisions.
• Understandable: Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports should be prepared by those with reasonable knowledge of business
because they can present information in an understandable way. Users also require having knowledge of
financial reports.
Users of financial information
Users of financial information can be classified into two main categories:
• Internal users
• External users
Internal users
1. Management: Information is used by the firm’s management in decision making of financial issues related
to the firm
2. Internal auditors review, scrutinize and analyze financial records while developing an opinion about
financial statements.
3. Employees: Guides employees on the remuneration they should get based on company’s financial
performance.
External users
1. The general public: public is able to get an idea of firm’s financial performance and its position.
2. Potential investors and shareholders: they are able to know if a firm is worth investing in depending on its
performance and liquidity.
3. The government: Enables the government identify tax it should collect from a business.
4. Financial Lenders: these are able to identify whether a business is credit worthy. That is the firm’s solvency
in its ability to settle the interest payments and the principal.
5. Shareholders are able to identify dividends and other benefits they should receive depending firm’s
performance.
6. External auditors: they normally scrutinize and review the books of accounts in order to find out if they
reflect true and fair information.
7. Suppliers or creditors: these wish to know the liquidity position of the firms. i.e. the ability to meet its
obligations as and when they fall due.
8. Customers: they require to be assured that the business is a steady source of supply in the delivering of
services and goods in times of demand.
9. Research Scholars: they require such information in order to fill the existing gaps of information and further
provide a better incite to existing information.
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