Title: Accounting Concepts
1Accounting Concepts
Andrew Graham Queens University School of Policy
Studies http//post.queensu.ca/grahama/
2Accounting is the fairest invention of the human
mind. - Goethe
3"It's not the economy anymore, stupid. It's the
accounting."
Source Browning, E.S. and Jonathan Weil.
"Burden of DoubtfulStocks Take a Beating As
Accounting Worries Spread Beyond Enron." The
Wall Street Journal, January 30, 2002, pp. A1.
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5The Accounting Module
- The module will focus on
- A set of principles for the creation of
accounting practice - What is accounting
- Users of accounting information
- Financial accounting and Managerial accounting
- Generally Accepted Accounting Principles
- Accrual Accounting and Budgeting
- A set of financial statements
- Understanding financial statements
- Using financial statements
6A History of Accounting
- Some scholars claim that writing arose in order
to record accounting information. - Account records date back to the ancient
civilizations of China, Babylonia, Greece, and
Egypt. - The rulers of these civilizations used accounting
to keep track of the cost of labour and materials
used in building structures like the great
pyramids. - The need for accounting has existed as long as
there has been activity involving money or
resources.
7Accounts Table with Cuneiform Script, circa
2400 BC by Mesopotamian Bookkeeper
8A History of Accounting
- Accounting developed further as a result of the
information needs of merchants in the city-states
of Italy during the 1400s. - The monk Luca Pacioli, a mathematician and friend
of Leonardo da Vinci, published the first known
description of double-entry bookkeeping in 1494.
9Double-Entry Accounting
- Each financial event is called a transaction
- The effect of a transaction is recorded in the
accounts by an entry - Each entry will affect at least two parts of the
accounting record to balance the record - This does not mean that the financial event is
recorded twice rather it is balanced against
either costs, increased or reduced liability,
changes in inventory, etc.
10Double Entry Accounting
- The double-entry system provides checks and
balances to ensure that your books are always in
balance. - In double-entry accounting, every transaction has
two journal entries a debit and a credit. Debits
must always equal credits. - Because debits equal credits, double-entry
accounting prevents some common bookkeeping
errors. Errors that aren't prevented are easier
to find. Double-entry accounting is the basis of
a true accounting system.
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12A History of Accounting
- In the Industrial Revolution of the nineteenth
century, the growth of corporations spurred the
development of accounting. - The corporation ownersthe shareholderswere no
longer necessarily the managers of their
business. - Managers had to create accounting systems to
report to the owners how well the company was
performing
13What is Accounting?
- Accounting and its boundaries are dynamic in
nature, always responding to new needs as they
arise. - The boundaries of accounting are fuzzy and
changeable as a result - Accounting is both an art and a science that
involves judgement and molding information to the
demands of the situation while being to claim
objectivity and independence.
14What is Accounting?
- Identifies, measures and communicates financial
information - Focuses on economic entities
- Provides this information to interested parties,
these being the users of financial information - Provides this information with the purpose to
assist the organization in reaching its stated
goals - Enhances the understanding of what is being
measured as well as providing information for
decision making.
15Managerial and Financial Accounting
- Managerial Accounting Internal Focus.
- Plan
- Implement
- Control
- Financial Accounting External Focus.
- Record events or transactions.
- Report financial position and results of
operations.
16Managerial and Financial Accounting
- Financial accounting has tended to concentrate on
ensuring that their legislative and stakeholders
interests of external users are met through
reporting at clearly defined frequencies, with
high level information oriented toward meeting
their general information needs. - Management accounting will be highly flexible in
format
17Managerial and Financial Accounting
- Management accounting information is designed to
meet the needs as they emerge within the
organization. - Financial accounting will be considerably less
flexible in format, often conforming to
government-wide reporting formats.
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20Managerial and Financial Accounting
- Both forms of accounting information have to
derive from the same basic financial information,
- They use the same chart of accounts and the same
financial accounting technology that is in use in
the organizations. - At times, internally reported information has to
be reconciled with external reporting.
21Chart of Accounts An example
- Budgetary Accounts
- Expenditures
- Economic
- Compensation of Employees
- Use of Goods and Services
- Consumption of Fixed Capital
- Interest
- Subsidies
- Grants
- Social Benefits
- All Others
22Chart of Accounts - Continued
- Expenditures (continued)
- Functional (10 major classes)
- General Public Services
- Defense
- Public Order and Safety
- Economic Affairs
- Environmental Protection
- Housing and Community Amenities
- Health
- Recreation, culture, and religion
- Education
- Social Protection
23Chart of Accounts - continued
- Revenues (4 major classes)
- Taxes
- Social Contribution
- Grants
- All Others
- Assets
- Liabilities
- Net Assets
24Managerial and Financial Accounting
- External financial reporting requirements by law
and generally set as a matter of governmental
policy, even for the voluntary sector - Highly unlikely that it will be used actively
within the organization why timeliness, level
of generality, gathered for differing purposes - Senior levels of management, however, and also at
the political level, the organization has to be
able to explain and defend the financial reports
as they are made public
25The Financial Statements More to Follow
- Balance Sheet - a snapshot of the resources,
obligations, and - worth of an organization at a specific point in
time ( think stock). - Income Statement - measures the cumulative
resource inflows - and outflows for an organization over some
specified period of - time. It is the reporting equivalent of an
operating budget (think flow). - Cash Flow Statement - measures the cumulative
cash inflows - and outflows for an organization over some
specified period of - time. It is the reporting equivalent of a cash
budget (think flow).
26Users of Public Sector Financial Statements
- The public who cares and why?
- The opposition
- Legislative auditors
- Interest groups
- Other governments in the country
- Foreign governments
- Foreign firms
- International monitoring agencies
- Credit rating organizations
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28Users of Public Sector Financial Statements
- Internal and external users of accounting
information that is generated for an organization
differ in their use of it in the following areas
- Access
- Frequency
- Detail
- Timing
- Required expertise and understanding, and
- Response
29Users of Public Sector Financial Statements
- Access
- for internal users, it is direct, unlimited and
detailed - for outsiders, it is summary, higher level
30Users of Public Sector Financial Statements
- Frequency
- for internal users, as needed, depending on level
of focus - for outside users, it is generally on a quarterly
or annual basis - Detail
- for internal users, as micro as needed,
- for external users, higher level and generally
summarized
31Users of Public Sector Financial Statements
- Timing
- for internal users, the information is current or
recent and focused on decision making and
short-term adjustments - For external users, the information is
retrospective and applicable for assessing
performance against plans
32Users of Public Sector Financial Statements
- Required expertise
- For internal users, the financial information is
complex, requiring a detailed appreciation of its
significance for operations, performance and
results - For external users, it requires an understanding
of the organization, but not in detail
33Users of Public Sector Financial Statements
- Response
- Internally, the information will lead to action
and decisions - Externally, it will depend on the perspective of
the user, but it will generally be associated
with forming a view of the performance of the
organization
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35GAAP
36 Generally Accepted Accounting Principles (GAAP)
- Provide guidance on the creation of financial
reports - Set out by the Canadian Institute of Chartered
Accountants CICA Handbook - American and International equivalents
- Originally focused on private sector accounting
but now there are separate public and
not-for-profit handbooks
37Governments and GAAP
- Does not have the force of law (in Canada
recent American legislation imposes a form)
created on basis of general acceptance - For senior governments in Canada, these standards
are generally accepted in the true sense of
that phrase. The federal, provincial and
territorial governments are sovereign
governments. They cant be forced to follow the
standards. Yet, there is a very high voluntary
compliance with the standards in the CICA PSA
Handbook.
38GAAP Principles
- Entity Concept
- Requires that you define the organizational
component for which you are trying to account - The unit standards apart from other organization
and individuals as a separate economic nut - From an accounting perspective, sharp boundaries
are drawn around each entity so as not to confuse
its affairs with those of other entities
39GAAP Principles
- Money Denominator/Stable Monetary Unit Concept
- Requires that all items included on the
financial statements be measurable in dollar
(yen, Euro) terms - Generally ignores effect of inflation on value of
currency unit within a specific time period
unless it is material
40GAAP Principles
- Objective Evidence/ Reliability Principle
- Require that values be based on an objective
valuation of resources - Reliable data are verifiable
- Verifiable by an independent observer
41GAAP Principles
- Cost Convention
- When there is a dispute over value, cost is used
- Acquired assets and services should be recorded
at their actual or historical cost - Accounting records should maintain the historical
cost of an asset for as long as the business
holds the asset
42GAAP Principles
- Conservatism
- Says that you should anticipate losses but not
gains - Need to give due regard for risk and risk
management - Role of prudence in predicting and reporting
43GAAP Principles
- Going Concern Concept
- Assumes that the organization will continue in
operation - Assume the business will remain in operation long
enough to use existing assets for their intended
purpose - Bankruptcy values may be lower
44GAAP Principles
- Materiality
- Reporting only needs to contain the level of
detail necessary for decision making - Don't need to be accurate to the penny or even
the nearest 1,000 in some cases - A piece of information is material if it would
affect a decision makers decision
45GAAP Principles
- Accrual Concept
- Revenues are recorded when the organization is
entitled to them - Expenses are recorded when resources are used to
generate revenues
46GAAP Principles Constraints on Providing
Financial Information
- Benefits must exceed costs
- Benefits of the information produced should
exceed the costs of producing the information - Financial (and all managerial) information is not
costless
47What to look for to assure GAAP Compliance
A clean audit report on the financial
statements. This means that an external auditor
has expressed no reservations or concerns about
the information reported in the financial
statements, how the information is reported or
whether any information appears to be missing.
A note to the financial statements (generally
Note 1) outlines the accounting policies a
government has used in preparing the statements.
This note may also tell you if a governments
financial statements are prepared in accordance
with GAAP.