Acc 101
Acc 101
Acc 101
ON
BY
DECEMBER, 2023
1
INTRODUCTION AND DEVELOPMENT OF ACCOUNTING
Evolution of Accounting
The origin of accounting can be traced to Europe in the middle age when a great-land owners
appointed a person called stewards to manage the land. Stewardship is the name given to the
practice by which productive resources belonging to one person or group of persons are managed
by other person or group of persons. Today a lot of business is operated as limited liability
companies which are owned by the shareholders and managed by the directors appointed by
them. Stewardship accounting is the process whereby manager of business accounts or reports
the activities of business to the owner of business. The history of accounting as a separate
discipline is fairly recent, dating back to the end of the World War IL. Until then, accounting was
not a discipline on its own but was rather treated as an integral part of economics, under its
previous status as a branch of economics, accounting was taught in a very narrative and
descriptive form and the accountants of the time were trained to handle only basic clerical jobs.
After the world war, both the status of the subject and the approach to its teaching underwent a
dramatic change.
It is generally believed that Luca Pacioli, an Italian Clergyman and Mathematician, is the father
of modern day accounting. In 1494, he introduced the double entry system. The double entry
principle which is otherwise called 'Golden Rule of Accounting' states that "for any debit entry
there must be a corresponding credit entry that is, for every receiver of value there must be a
corresponding giver of the value.
In the earliest times, the individual trader owned all the resources used and was completely
involved in all transactions. He therefore, knew all that seemed important about the business
venture. The emergence of employer and employee relations brought about the need for a
2
steward to account for his/her stewardship to higher authority. Records at this stage were merely
rudimentary because there was no recognized monetary system.
The first early work to be documented was done by Luca Pacioli, a mathematician in his book
"Treatise of Book Keeping" published in 1494. During the industrial revolution in Great Britain,
professional accounting bodies, such as the Institute of Chartered Accountants of England and
Wales (1CAEW) improved the development of counting theories, methods and practice.
However, the basic rules of double entry remain unchanged. The spillover of the activities of
ICAEW and other recognized foreign professional accounting bodies necessitated the
establishment of the Institute of Chartered Accountants of Nigeria (CAN) by the Act of
Parliament No 15 of 1965. The Institute set professional codes of ethics and practice for its
members. Another accounting body known as the Association of National Accountants of
Nigeria (ANAN) was established in Nigeria. The two bodies now regulate the accounting
profession in Nigeria. The ICAN observes the need to standardize accounting practice in Nigeria
to comply with the global practices. This gave rise to the establishment of the Nigerian
Accounting Standards Board (NASB) in 1982. The body is now referred to as Financial
Reporting Council of Nigeria (FRCN) establishment vide FRCN Act 2011.
Definition of Accounting
Accounting, as a result of its wide coverage which rose from its continued development, has
many definitions. The one that is most useful for our purpose in this lecture was the one given by
late Professor C.S. Ola: "Accounting can be defined as the art of recording, classifying and
summarizing in a significant manner, or way, and in monetary terms, any business transactions
of events and interpreting the results thereof. The operating words such as recording, classifying,
summarising, monetary terms, transactions and interpreting the results thereof”go a long way to
explain the mission of Accounting.
Accounting can also be defined as the collection and recording of financial data about an
organization whether in the private or in the public sector and analysing the data so collected to
suit the decision that needs to be taken and reporting the relevant information in a summary form
to the user in a form that is meaningful to him or her (Omolehinwa, 2000).
The American Institute of Certified of Public Accountants defined accounting as "The art of
recording, classifying and summarising in a significant manner and in terms of money,
transactions and events which are, in part or at least, of a financial character, and interpreting the
result thereof" (AlCPA, 1961).
3
Accounting may be regarded as a science if science is viewed as any branch of knowledge that
applies the scientific method of observation, experiment and measurement. Hence, science may
be defined as any body of knowledge organised in a systematic manner.
Accounting as an art, employs a great deal of human skill and judgment in the creation of
aesthetic subjects, in dealing with practical reality of human endeavours.
The history of accounting cannot be complete without the mention of Francisan Monk, Luca
Paciolo who published his work in 1491 entitled "Sunma de Arithematica, Geometrica,
Proportionni, Proportionalita". This book expounded the principles of the double entry system of
Accounting.
Book-Keeping
This is the act of keeping records of business transactions which enables the owner to monitor
expense and income on business transactions. The person that keeps these books of account is
the book-keeper. Book-keeping is an art of applying the principles of the science of accountancy
in the keeping of books of account. From a record of books that is properly kept, the following
salient events can be observed at a glance:-
The book-keeper has the responsibilities of keeping the accurate records of every item
purchased, taking into consideration the data of purchases, quantity and their prices. In the same
vein, he has to keep accurate records of items sold or owed, including data, quantity and prices.
He also has to keep accounts of debtors and creditors of the company.
4
Essentially, a book-keeper has to possess some sterling attributes which include:-
a. Honesty
Classification of Accounts
Personal accounts are the accounts in the name of a persons, or corporate bodies that have
business transactions with the business. Examples of personal accounts are debtor's accounts,
creditor's accounts, Aade's accounts and Lola's accounts.
This accounts sub-divided into (a) Real accounts; and (b) Nominal accounts. Real accounts relate
to tangible assets such as buildings, motor vehicles, furniture and inventory (stock). Nominal
accounts are accounts that deal with items like revenue or income, expenses, intangible assets
e.t.c.
In order to be able to make an informed decision by the users of accounting information, the
financial statement must be outstandingly prepared and has some of the framework qualities
enumerated below and they are:
Timelines: Accounting information meant to be useful must be prepared and made available to
the users on time
Accuracy: The information prepared and presented must be exact and devoid of any errors and
misstatement.
5
Relevance: The accounting information that is to be used for useful purpose must be relevant for
intended purpose.
Completion: Any good accounting information must be adequate and comprehensive enough so
that the user can make decision about it.
Comparability: Any useful accounting information must be capable of being compared from
time to time and the information must be so adequate to be compared with other entity within the
same industry.
Clarity: Any good accounting information must be free from all ambiguity and obscurity of
whatsoever. It must be so clear to every level of information users.
Objectivity: Any good financial information must not be basely prepared. It must be free from
every material misstatement of the person that has prepared it.
Flexibility: The financial information must be adaptable to every need of every user.
Reliability: financial statement information is reliable if it is not misleading as it is free from all
material misstatement so that user can depend on it absolutely in making decisions.
Financial Statements
A financial statement (or financial report) is a formal record of the financial activities of a
business, person, or other entity. In British English - including United Kingdom
Company Law - A financial statement is often referred to as accounts, although the term
financial statement is also used, particularly by accountants. The relevance of stewardship
account.ng provides a basis for every corporate bodies or entities including private limited and
public limited liability companies to prepare financial statement that is suitable for various users
to make informed decisions about the business enterprise concerned.
The major objective of financial statement is to provide information about the financial position,
performance and changes in financial position of an entity useful for diverse users and their
needs. For a business enterprise, all the relevant financial information presented in a structured
manner and in a form easy to understand, are called the financial statements. IFRS typically
financial statement includes four basic financial statements.
6
Statement of Financial Reporting: also referred to as Statement of Financial Position" reports
on a company assets, 1iabilities and ownership equity'" at a given point in time.
Income statement: also referred to as profit or loss statement (or a P/L) reports on a company's
income, expenses and profits over a period of time. Profit and loss account provides information
on the operation of the enterprise. These include sale and the various expenses incurred during
the processing state.
Comprehensive income statement: all items of income and expense recognized in a period
must be included in profit or loss unless a standard or an interpretation requires otherwise. IFRS
requires or permits that some items to be excluded from profit or loss account be included in
Other Comprehensive Income.
2. Actuarial gains and losses on defined benefit plans recognized (LAS 19)
3. Gains and losses arising from translating the financial statements of a foreign operation
(IAS21)
4. Gains or losses on re-measuring available for sale financial assets (IAS 39)
5. The effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS
38)
ii. Statement of comprehensive income that begins with profit or loss and displays components
of other comprehensive income (IAS 1.81)
Statement of Retained Earnings: This explains the changes in a company's retained earnings
over the reporting period.
Statement of Cash Flows: this report on a company's cash flow activities, particularly the
operating, investing and financing activities.
7
For large corporation, these statements are often complex and may include an extensive set of
notes to the financial statement and management discussion and analysis. The notes typically
describe each item on the balance sheet, income statement and cash flow statement in further
detail. Notes to financial statements are considered as an integral part of the financial statement.
The intent of financial statements is to provide information useful for economic decision making.
In particular, the data should be useful in making investment and credit decisions. Financial
statements should provide a reliable indication of a company's financial position, operating
results, and changes in financial position.
Also financial statement components and categories should aid in decisions. Financial statements
may provide information in addition to that specified by authoritative requirements and
regulatory groups. In as much as management knows more about the business, it is encouraged
to identify certain circumstances and explain their financial effects on the enterprise.
ii. To provide other needed information about changes in economic resources and obligations.
iii. To provide reliable information about changes in the net profit and loss.
The people who might be interested in the financial information coupled with their informational
needs are classified as follows:
i. Shareholders of the company: These are owners of the company: they will want to know
how profitable the management runs the affairs of the company and their share of profit or
dividends.
ii. Management of the company: - These are the stewards appointed by the owners to supervise
the day-to-day activities of the business.
iii. Employees: - Employees would have a basis to negotiate for higher wage and better
condition of services.
iv. Provider of funds/finance to the company: - These include bank, financial houses which
permit the company to operate on overdrafts or the debenture holders.
v. Creditors: - These groups normally supply the resources required by the company in form of
raw materials and goods and collect their money in the future. The financial information will
8
give the creditors the financial position of the business and the ability of the business to pay for
the goods collected on credits.
vi. Government: - The Federal Board of Inland Revenue (FBIR) would want to know about the
business profit in order to impose tax on the business taxable income.
vii. Investors: - Investors normally require adequate returns on their investment. Investors would
want to see the financial statement of the company to be able to make investment decisions.
viii. Business competitors: - These are interested in knowing the performance of the company
in the same industry to be able to appraise such company's performance.
ix. The general public: - This comprises, those interested in consumer protection,
environmental protection, political and other pressure groups.
ii. Management Accounting: This is the application of professional knowledge and skill of the
accountant in the preparation and presentation of accounting information so as to assist the
management in the formulation of policies and in planning and controlling the activities of an
enterprise. Management 1s the sole user of the management accounting information.
iii. Cost Accounting: This is the process of measuring, analyzing and reporting to the
management the cost and benefit of the actions of the management.
iv. Taxation: - This is science and concept of interpreting and application of the provisions of
the tax law of the land in order to determine the tax payable by individual or company.
Statement of Accounting Standard 1 (SAS 1) deals with the disclosure of accounting policies.
The purpose of this statement is to assist any reader in the understanding and interpretation of
9
financial statements and the information disclosed therein. The framework sets out the
underlying assumptions of financial statements;
Accrual concept: In determining the profit of a business for a particular period, information to
be used should not be restricted to income and expenditure that have been paid for or received
but should include those benefits received but have not been paid for. That is, the service has
been enjoyed or rendered during the period. It means that revenue has to be recognized and
recorded immediately it is earned while expenses are recognized when they are incurred, but not
when the money is received or paid.
Going concern concept: When recording the account of a business, it should be assumed that
the business will be in existence for a very long period of time without any intention to close
down the company or curtail the activities of the business later.
Accounting method: This is the medium through which accounting concepts are applied to
financial transactions and to the preparation of financial statements.
Accounting basis: This is the totality of method adopted by an enterprise for applying
fundamental accounting concepts to financial transactions. There are two distinctive accounting
bases (i) Accrual basis and (ii) cash basis.
Accounting policies: These are bases, rules, principles, conventions and procedures adopted in
the preparation and presentation of financial statements.
Accounting principles: - These are employed in applying accounting concepts e.g substance
over form, objectivity, fairness, materiality, prudence.
Accounting concepts: These are principles upon which preparation of accounting records are
based, which are universally acceptable. Accounting concepts can be seen as the rules that lay
down the way for recording business activities. The preparation of accounting records for any
organization must follow the principles set out in the accounting concepts. The common
concepts are:-
i. Entity concept: - The concept takes an organization as a legal being different and separate
from the owner of the business. It goes further to say that, the business can sue and be sued in its
own name and its records are distinct from that of the owner of the business. The only attempt to
show any records about the owners is when there is a transaction between the company and the
owner e.g. the owners increase the capital in the company and where the owner withdraws
money from the business. In any of these cases, the records of the company will only show how
the action of the owner i.e. capital or drawings affect the business but it will not extend to the
personal resources of the owners.
10
ii. Money measurement concept: Many things do happen in an organization on a daily basis;
however, for an event to be recorded in the accounting books of a business, they must be those
events or transactions that can be measured in terms of money. For instance, the accounting
records do not show if a company has a good or bad management team or if the owner is ill or
healthy. However, anything that can be quantified in monetary terms like payment of salary of
N500 will be recorded in the book of accounts.
iii. Cost concept: - In recording the value of the company's assets, it should be stated or recorded
at cost price or the original cost as this will ensure that all transactions are objectively recorded
as against using their current values, which is different from the cost price.
iv. Matching concept: - This states that revenues and expenses for any accounting period should
be matched with each other so as to bring them into the accounting period to which they relate so
that the profit for the period can be ascertained. The concept brought about adjustments in the
final accounts at the year end.
v. Dual Aspect concept: Normally, an organization has a transaction business with other parties
and when a transaction occurs, it will give rise to having two records, one for the business, then
the other for the other party. Dual concept ascertains the fact that for every transaction there is
always a receiver of value and a giver of value.
vi. Prudence concepts: - This principle demands exercising great caution in the recognition of
profits while all known losses are adequately provided for.
vii. Materiality concepts: The principle holds that only item that are of material value are
accorded strict accounting treatment.
viii. Substance over form: - All business transactions are usually governed by legal principles.
They are however accounted for and presented in accordance with their substance and financial
reality and not merely on their legal form.
Accounting standards are set of rules that prescribe the methods by which financial statements
are to be prepared and presented. Hence, standards are laid down rules and regulations guiding
the preparation of financial statements. It is a pronouncement produced by recognized
accounting bodies with the objective of ensuring a high degree of standardization in the
presentation and presentation of published financial statements.
11
International Financial Reporting Standard
In other to strengthen the quality, independence and legitimatize accounting standards, the
International Accounting Standard Committee (IASC) was replaced by the International
Accounting Standard Board. (IASB) in 2001. This was also done to enhance the quality of
financial reporting standards. The interpretative body of the international accounting standard
committees was also replaced by International Reporting Interpretations Committee (IRIC) in
2002. The recent name of this interpretative arm of the IASB is IFRS interpretations committee
which was named International Financial Reporting Interpretations Committee (IFRIC) in 2010.
iv. It gives room to disclosure of departure or deviation from normal accounting practices
Before the emergence of IFRS in Nigeria, there was the application of SAS provisions to the
preparation of financial statement of both sole traders, partnership, companies both published
and unpublished, incorporated and non-incorporated companies. It is important to remember that
SAS provisions were not applicable to accounts meant for internal consumption by the
management. In addition, where the SAS conflicts with the IAS provisions, the SAS prevails
simply because of local peculiarities and local environmental factors. With the introduction of
IFRS the consideration for peculiarities of the environment is removed and now specifically
12
from January, 2012 all registered companies in Nigeria have to prepare accounts in accordance
with IFRS provisions and Financial Reporting Council of Nigeria (FRCN) has the responsibility
to ensure compliance with IFRS among the companies.
2. To improve the quality of preparation of financial statement for easy comparison among
companies all over the world
3. Inadequate financial reporting templates to incorporate IFRS into Nigerian financial reporting
system
Standard-Setting Procedures
In setting the accounting standards, there is a need to plan for the project either to conduct the
project alone or jointly with another standard setting body. The IASB may at this point consider
the establishment of working group at this stage.
Another stage is at which to develop and publish the discussion paper which is not compulsory
once the IASB often publishes it as its first publication on any major new topic to explain the
issue and solicit early comments from constituents.
At this juncture, the board publishes and exposure draft of the proposed standards for public
comments and consultations. The exposure draft sets out a specific proposal m the form of a
proposed standard or (an amendment to existing standards).
Furthermore, the next stage is the development and publication of IFRS which is done during the
IASB meeting after it might have considered the comments received on the exposure draft. After
all the necessary consideration the board may publish the revised proposals for public comments
by publishing a second exposure draft.
13
Finally after an IFRS issued, the staff and the IASB members hold regular meetings with
interested parties, including other standards setting bodies to consider oversight issues related to
the practical implementation and potential impact of the proposal.
The following standards and interpretations were adopted by the International Accounting
Standards Boards (IASB) as at 2013:
IAS 9: Accounting for esearch and development activities (superseded by IAS 38)
IAS 15: Information reflecting effects of changing prices (withdrawn in Dec. 2003)
LAS 20: accounting for government grants and disclosure of government assistance
IAS 25: Accounting for investments (superseded by IAS 39 and IAS 40)
IAS 29: Financial reporting of hyper inflationary economies and similar financial institutions
(superseded by IFRS 7)
15
IAS 30: Disclosures in the financial statements of banks and similar financial institutions
(Superseded by IFRS 7)
Present fairly' is one of the fundamental attributes of financial statement. The financial position,
financial performance and cash flow of an entity must be presented fairly. "air presentation'
requires a faithful representation of the effects of transactions, other events, and conditions in
line with the definitions and recognitions criteria for assets, liabilities, income, and expenses set
out in the framework. The adoption of IFRS coupled with disclosure when necessary is
presumed to result m financial statements that depict fair presentation. It is essentially important
to note that financial statement will not be regarded as complying with IFRS until it complies
with all the requirements of International Financial Reporting Standards (IFRS) including
interpretations
However, in an extreme rare circumstance where the management fecls that complying with
IFRS will be misleading and possibly conflict with the objective of financial statement, it is
permitted for such management to depart from the adoption of such standard but with detailed
disclosure of the nature, reasons and impact of the departure on the reporting system.
16
Items on Financial Statement based on IFRS and IAS
3. Equity and liabilities classified together formally titled as financed by: capital employed;
ordinary share and reserves 5
4. Income statement and statement of comprehensive income classified by nature and function as
against profit and loss account which included two format i.e trading and manufacturing
13. Statement of value added (not compulsory) but can be shown under financial review
formally called five-year financial summary
The following must be noted about IFRS when preparing financial statement
1. Assets and liabilities are measured using fair value as against historical cost concepts in
valuing fixed assets with regards to depreciation.
3. Exceptional items not defined but separate disclosure may be made to some items
4. There are recognition standards for sales of goods, rendering of services and other assets
revenues transactions
5. Completed contract method is not allowed; rather long term contract should be accounted
for using percentage of completion method.
17
6. The use of FIFO and Weighted average method to determine cost is allowed while the
use of LIFO is disallowed.
The main roles of the International Accounting Standards Board (1ASB) include:
(i) To develop, in the public interest a single high quality, understandable and enforceable set of
global accounting standards that require high quality, transparent and comparable information in
financial statements and other financial reporting.
(ii) To help participants in the worlds capital market and other users to make economic decision.
(iv) Bring about convergence of the National accounting standards and International accounting
standards to high quality solutions
(v) To take account of the financial reporting needs of emerging economies and small and
medium-sized entities (SME).
iv. Developing and publishing the exposure draft for the public to comment
v. Developing and publishing the Standard, provided 8 of 14 members of the IASB agree to
do so
18