Financial Accounting · Lesson 1

Nature and significance of accounting, users, concepts and ethics

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 1 Nature and significance of bookkeeping and accounting (development, branches, objectives, users and characteristics, principles/concepts/conventions, role of records, careers); Topic 3 Ethics in accounting

WAEC: Introduction to Financial Accounting (history, nature, functions, users, stages of the accounting process, characteristics of information); Accounting Concepts (meaning, types, significance, limitations)

NECO: Introduction to Financial Accounting (history, nature, functions, users, stages of the accounting process, characteristics of information); Accounting Concepts (meaning, types, significance, limitations)

What you will learn

Distinguish bookkeeping from accounting.
Outline the historical development of accounting, internationally and in Nigeria.
Name and describe the branches of accounting.
State the objectives and stages of the accounting process.
Identify users of accounting information and what each needs.
Explain the qualitative characteristics of useful information.
Apply the accounting equation to simple transactions.
Explain accounting concepts and conventions, their significance and their limitations.
State the ethical qualities of an accountant and career paths in accounting.

Key points

Accounting identifies, records, classifies, summarises, interprets and communicates financial information; bookkeeping is the recording part.
Pacioli (1494) printed the first account of double entry; ICAN (1965), ANAN (1993) and the FRC (2011) shape the profession in Nigeria.
Branches: financial, cost, management, auditing, tax, public sector, forensic, social/environmental.
Process: source documents → books of original entry → ledger → trial balance → adjustments → financial statements → interpretation.
Users: owners, managers, investors, lenders, suppliers, customers, employees, government, public.
Fundamental qualities: relevance and faithful representation; enhancing: comparability, verifiability, timeliness, understandability.
Assets = Capital + Liabilities; profit raises capital, drawings reduce it.
Concepts: entity, going concern, money measurement, duality, periodicity, accruals, realisation, historical cost, consistency.
Conventions: prudence, materiality, objectivity, full disclosure.
Ethics: integrity, objectivity, competence and due care, confidentiality, professional behaviour.

Start here: What accounting is: bookkeeping and accounting

Mama Nkechi sells provisions from a kiosk in Ariaria Market, Aba. Each day she buys cartons of noodles, sugar and tinned tomatoes from a wholesaler, sells to customers for cash or on credit, pays her shop boy, and takes some money home for school fees. At the end of the year she asks: Did I really make a profit? How much do my customers owe me? How much do I owe the wholesaler? Is the business growing? Answering these questions is the work of accounting.

Accounting is the process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information about an organisation so that users can make informed decisions. The key idea is decision-usefulness: records are kept because someone needs to act on them.

Bookkeeping versus accounting

Bookkeeping	Accounting
Recording of day-to-day transactions in books	Wider: includes bookkeeping plus summarising, analysing and interpreting
Mainly clerical and routine	Requires judgement and professional skill
Ends with balanced ledger accounts (and the trial balance)	Produces financial statements, reports and advice
Done by bookkeepers, accounts clerks	Done by accountants (e.g. chartered accountants)
Answers “what happened?”	Answers “what does it mean and what should we do?”

Bookkeeping is therefore the foundation of accounting. Without accurate records, no amount of analysis can produce reliable conclusions; the computing proverb “garbage in, garbage out” applies fully.

What counts as a transaction?

Accounting records only events that can be measured in money and that affect the business. Paying ₦25 000 rent for the shop is recorded; the shop boy being cheerful is not, even though it may help sales. This is the money measurement concept, which we shall meet again in 1.8.

Worked example 1.1

Which of the following would Mama Nkechi record? (a) She sells goods worth ₦8 000 on credit to Mr Obi. (b) A new competitor opens next door. (c) She pays ₦3 000 for transport of goods. (d) Her shop boy resigns.

Solution: (a) and (c) are transactions measurable in money, so they are recorded. (b) and (d) may affect future profits but cannot be measured reliably in money at the time, so they are not recorded in the books.

The purposes of accounting

To keep a permanent, orderly record of transactions.
To calculate profit or loss for a period.
To show the financial position (what is owned and owed) at a date.
To help control assets and detect fraud or errors.
To provide information for planning, borrowing, taxation and decision-making.
To show stewardship: managers account to owners for resources entrusted to them.

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Practice questions

1. Bookkeeping is best described as the

recording of financial transactions in the books
interpretation of financial statements
auditing of company accounts
preparation of tax returns

Show answer

A: recording of financial transactions in the books
Bookkeeping is the recording stage; accounting goes further to summarise and interpret.

2. Which user of accounting information is an INTERNAL user?

Bank lenders
Tax authorities
Trade suppliers
Management

Show answer

D: Management
Managers run the business from inside; the others are external.

3. Which user is most interested in a company’s ability to pay dividends?

Government statisticians
Competitors
Shareholders (investors)
Employees

Show answer

C: Shareholders (investors)
Investors want returns on their shares.

4. The going concern concept assumes that a business will

have only one owner
continue in operation for the foreseeable future
be sold at the end of the year
make a profit every year

Show answer

B: continue in operation for the foreseeable future
Assets are therefore valued at cost less depreciation, not at break-up value.

5. Recording a ₦500 waste-paper basket as an expense rather than an asset applies the

materiality concept
going concern concept
entity concept
dual aspect concept

Show answer

A: materiality concept
Immaterial items need not be capitalised.

Key words

Accounting: The process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information to users.
Bookkeeping: The systematic recording of financial transactions in books of account.
Transaction: A business event that can be measured in money, e.g. a sale, a purchase, a payment.
Source document: The original paper or electronic evidence of a transaction, e.g. invoice, receipt.
Asset: A resource controlled by the business from which future benefits are expected, e.g. cash, inventory, a delivery van.
Liability: An amount the business owes to outsiders, e.g. trade payables, a bank loan.
Capital (equity): The owner’s interest in the business: assets minus liabilities.
Drawings: Cash or goods taken out of the business by the owner for private use.
Accounting concept: A basic assumption underlying the preparation of accounts, e.g. going concern.
Accounting convention: A generally accepted practice that guides how concepts are applied, e.g. prudence.
Going concern: The assumption that the business will continue operating for the foreseeable future.
Accruals (matching) concept: Income and expenses are recognised when earned or incurred, not when cash is received or paid, and expenses are matched with the revenue they help earn.

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