Chapter 01:

Accounting Environment

Learning Outcomes

At the end of this chapter you should be able to:

Explain the meaning and purpose of accounting;

Describe the role of accounting as an information system;

Describe how ethics and governance relate to accounting; and

Assess the impact of external environmental factors on accounting.

Lesson Outline

What is accounting

The accounting process

Accounting as an information system

Accounting as the language of business

The users of accounting

External environmental factors influencing accounting

Accounting as a profession

Role of ethics and governance in Accounting

What is Accounting?

Definitions on AccountingWhat accounting does.

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof. (AICPA,1941).

Purpose and functions of accounting.Accounting is the process of identifying, measuring and

communicating economic information to permit informed judgments and decisions by users of the information. (AAA,1961).

Definitions on Accounting (Contd.)Define with reference to the concept of

information.Accounting is a service activity. Its function is

to provide quantitative information, primarily financial in nature, about economic activities that is intended to be useful in making economic decisions. (AICPA, 1970). The term ‘quantitative information’ is wider in

scope than financial or economic information of previous definitions.

Definitions on Accounting (Contd.)In general, accounting can be defined as a process

of identifying, measuring, recording and communicating information to facilitate decision making of users of information.

Responsibility of the management of an entity to prepare and present financial statements to meet the information needs of users.

Accounting Process

First

Stage

• The identification of transactions and events (economic events of an organization)

Second Stage

• Expression of these transactions and events in a common denominator- usually in money

Third

Stage

• Recording, classifying and summarizing transactions and events in the accounting records

Fourth stage

• Presenting of the information generated through the processing of transactions and events in the financial reports.

Accounting as an Information System

Accounting Information System

Transactions and Events (Input)

Accounting Process

Financial and other reports (Output)

Accounting as the language of business

Symbols

Numerals and words, debits and

credits

Unique to the

accounting discipline

Rules

General set of

procedures followed in

creating financial

information of an entity

Activity 1.1

A business entity applies to a bank to

obtain a loan to purchase a motor vehicle.

Identify the items of information that a

loan officer of the bank would consider in

deciding whether to approve the loan.

Users of Accounting Information

Internal Users

Parties that make decisions directly

affecting its internal operations.

The Management

External Users

Parties other than management that make

decisions concerning their relationship to the

organization.

Diverse groups

Management Accounting

Financial Accounting

Activity 1.2

State the differences between financial

accounting and management accounting in

terms of users of reports, types of reports,

frequency of reports and content and

format of reports.

Accounting Environment

External Environmental Factors influencing Accounting

Political environment

Economic environment

Social environment

Technological environment

Legal environment

Activity 1.3Identify the environmental factors that would

influence a software development company.

Accounting as a Profession

Accounting Profession: Different Roles

Offer their professional services to the public for a fee

e.g. Auditing and assurance services Taxation servicesAdvisory services

Public Accounting(Accountant in public practice)

Employed in business entities

e.g. Financial accounting, Management accounting Development of accounting information systems

Business Accounting (Accountan

t in business)

Activity 1.3

Identify the fields or career paths in Accounting

Ethics and Governance in Accounting

What is ethics?

How we act in order to make the ‘right’ choice and produce ‘good’ behavior.

The ethics and its importance

Principles of professional conduct

Integrity

Objectivity

Professional Competence and Due care

Confidentiality

Professional Behavior

International Ethics Standards Board of International

Federation of Accountants (2013)

What is Corporate Governance?

The term ‘corporate governance’ is usually

defined as the system by which companies are

directed and controlled (Cadbury Report, 1992).

Corporate Governance

Controlling &

Directing the

Directors

Role of shareholders

and stake holders

Transparency &

Accountability

Thank you