Business Studies Year 1

SECTION

5 FINANCIAL
ACCOUNTING

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SECTION 5 FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING
Conceptual Framework

Introduction
In this section, we will focus on the conceptual framework of accounting. We will
delve into the fundamental aspects of accounting by showing its importance in both
personal life and business contexts. The central objective is to equip you with the
ability to use personal financial activities as a lens to understand the essence, purpose
and application of accounting. Consequently, by the end of this section, you will
gain a holistic understanding of financial aspects in diverse fields and the capacity
to articulate the conceptual framework of accounting so that you can apply it to
personal financial scenarios and exhibit proficiency in discussing the various facets of
accounting, including standards and financial statement components.

At the end of this section, you will be able to

• Explain accounting as a system and its purpose in daily life.

• Examine the major steps in processing accounting information and its characteristics.
• Examine the informational needs of users of accounting information.
• Discuss the need for Accounting Standards.

Key Ideas
• Accounting is the systematic process of recording, summarising, analysing, and
reporting financial transactions of a business or organisation.
• Accounting System is a structured set of processes and tools used to manage and
record an organisation’s financial transactions.
• Accounting Process refers to the systematic series of steps followed to collect, process,
and communicate financial information about an organisation.
• Accounting information refers to the financial statements or records generated
through the process of book-keeping and accounting.
• Users of accounting information are those persons or businesses who use the
financial statements to make decisions.
• Accounting standards are set of principles, rules, guidelines and procedures that
define the basis of financial accounting policies and practices.

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ACCOUNTING AS A SYSTEM

Definition /Introduction of Accounting

Accounting is the art of recording, classifying, summarising, analysing and interpreting
financial data to aid users in decision making.

Accounting as a system
It is a system that a business uses to collect, store, manage, process, retrieve and report
its financial data.

Purpose of accounting
The purpose of accounting in a business is to gather and report on financial information
about the business’s performance, financial position and cash flow. This information is
then used to make decisions about how to manage or invest in a business. Also, to record
financial transaction in the books of accounts, to identify, measure and communicate
economic information.
As an individual, the principles of accounting serve as a useful tool for you to organise
or record your own finances and improve your financial literacy.

Careers in accounting
Accounting provides varied career opportunities. These include;
1. Teaching/ Lecturing
2. Auditors – in public and private practice
3. Tax consultants/ Advisors
4. Financial Analyst/ Consultants
5. Accountants in both public and private organisations
6. Insurance brokers

The importance of accounting

1. It serves as a tool for planning by managers and provides management with the
right information for decision- making.
2. It helps companies and the government in calculating the tax of organisations.
3. It helps to evaluate the performance of managers of a business.
4. It is used to compare the performance of a company over a number of years.
5. It helps in comparing the performance of two or more organisations.

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SECTION 5 FINANCIAL ACCOUNTING

Activity 5.1

1. Write a list of items you buy and the cost or price of these items on sticky-
pads or pieces of paper.
2. Exchange your list with a colleague for observation and discussion.
3. Ask your colleague whether they keep records of items they purchase.
4. Discuss with your colleague whether they would be able to account for the
money they spend on items they purchased within a month without keeping
records

Activity 5.2

1. Copy the diagram below into your book.

a. Fill in the empty boxes with the sequence of activities that define
accounting.
b. Share and discuss your answer with a colleague for feedback.

ACCOUNTING

Recording

2. In groups, discuss and make a PowerPoint presentation on the purpose of the

study of accounting and its related career pathways.

THE ACCOUNTING PROCESS

The accounting process is the series of steps followed by a business entity to record the
business’s financial transactions. This process includes steps for collecting, identifying,
classifying, summarising and recording business transactions in the account books of a
company so that the financial statements can be prepared. These are explained in more
detail below.

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Major steps in processing accounting information

1. Identify and analyse transactions
The first step in the accounting cycle, is to identify and analyse all transactions
made during the accounting period. These include expenses, debt payments,
sales revenue and cash received from customers.

2. Record transactions in a journal

The next step is to record the details of all financial transactions in chronological
order as journal entries (whether in an actual book or in an accounting
programme). With double entry system, each transaction is recorded as a debit
and a corresponding credit in two ledger accounts.

3. Post transactions to a general ledger

Once a transaction is recorded as a journal entry, using double entry system, it
should post to an account in the general ledger. The general ledger provides a
breakdown of all accounting activities by accounts.

4. Determine the trial balance

The closing balances of all the accounts in the general ledger at the end of an
accounting period are reflected in a trial balance. The trial balance is used to
check for errors and ensure that all transactions are recorded in the general
ledger.

5. Analyse the workbooks

The fifth step is to identify errors and anomalies that may have occurred in the
books of accounts. This involves analysing the books of accounts to identify
entries that need to be adjusted. Any error corrected and non-cash transaction
can be recorded as an adjusting journal entry. As every transaction is recorded
as a credit or debit, it ensures that the total credit balance and debit balance are
equal.

6. Prepare financial statements

Once account balances have been corrected and adjustments made, financial
statements can be prepared. Financial statements are accounting reports that
summarise a business’ activities and performance for a defined period of time,
such as monthly, quarterly or annually. The three key financial statements that
businesses prepare are the income statement, the balance sheet and the cash
flow statement.

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SECTION 5 FINANCIAL ACCOUNTING

7. Close the books

Finally, a business ends the accounting cycle by closing its books at the end of a
financial year. The closing statements provide a report for analysis of performance
over the period. The accounting cycle starts over again from the beginning of a
new reporting period.
Below is a diagram showing the major steps in accounting:

Identify and Record Post transactions

Determine the
analyse transaction in to the general
trial balance
transaction journal ledger

Prepare the
Analyse the work
Close the books financial
book
statement

[a
Fig. 5.1: The major steps in accounting

Activity 5.3

1. Copy the diagram below into your book and draw lines to match each
description of accounting processes to the correct step or sequence on the
right.
2. Share your answer with a colleague for discussion

DESCRIPTION

Post transactions to the ledger

Analyse the workbook

Close the books

Determine the trial balance

Identify and analyse transaction

Record transaction in journal

Prepare the financial statement

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SECTION 5 FINANCIAL ACCOUNTING

Characteristics of Accounting Information

In order to be considered useful, accounting information should have the following
characteristics:

1. Understandability
This indicates the need for clarity in the expression of accounting information
– it should be understandable to users who are generally expected to have a
practical knowledge of business and economic activities.

2. Relevance
This implies that, to be useful, accounting information must assist a user to form,
confirm or maybe revise a view or opinion - mostly in the context of making a
decision.

3. Consistency
This implies the same treatment of similar items and consistent application of
accounting policies. It seeks to ensure that transactions or events are recorded
in the same way, from one accounting year to the next in order to prevent
manipulation of financial statements, so that business reports are accurate and
depict comparable information.

4. Comparability
The ability for users to be able to compare similar companies in the same
industry group and to make comparisons of performance over time. Much of
the work that goes into setting accounting standards is based around the need
for comparability. Financial statements of one accounting period must be
comparable to another in order for the users to derive meaningful conclusions
about the trends in an entity’s financial performance and position over time.

5. Reliability
Reliability requires that the accounting information be free from errors and bias
and that this information can be depended upon by users to represent what they
claim to or could reasonably be expected to represent.

6. Objectivity
This implies that accounting information is prepared and reported in a “neutral”
way. In other words, the financial information should be unbiased and free from
any kind of internal and external influence.

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7. Timeliness
To be of maximum benefit, accounting information must be presented at the
appropriate time. That is, accounting information should be available when it is
needed and should not be out of date or presented in arrears.
Below is a diagram showing the characteristics of accounting information.

Fig 2: The characteristics of accounting information

Activity 5.4

1. Copy and complete the table below. State the accounting characteristic that
applies to each description.
2. Share your answer with a colleague for discussion.

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SECTION 5 FINANCIAL ACCOUNTING

Description Characteristic

a. Application of accounting policies as well as the treatment of Consistency

similar items should be the same

b. Accounting information should be free from material

misstatement and bias so that users can depend on it

c. It should be possible for users of accounting information to

compare the performance of similar companies in the same
industry over time

d. There should be clarity in the expression of accounting

information such that it will be understandable to users

e. Accounting information should be unbiased and free from any

kind of internal and external influence

f. Accounting information should be useful and assist a user to

make informed decision

g. Accounting information must be presented at the appropriate

time when it is needed

ACCOUNTING INFORMATION

Users of accounting information

Users of accounting information are those persons or businesses who use financial
statements to make decisions. Basically, there are two types of users of accounting
information – internal and external users.

Internal Users External Users

Shareholders/ Suppliers
Owners

Managers Customers

Bankers/Lenders
Workers
/Employees
Govement Agencies

Financial Analyst

Fig 5.3: Users of accounting information

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SECTION 5 FINANCIAL ACCOUNTING

Informational needs of users of accounting

information
Internal Users
1. Shareholders/Owners:
These are people who have invested capital into a business and are the owners of
the business. The shareholders need the following:
a. Timely information regarding the financial performance, economic position
and changes in financial position of their organisation.
b. Accounting information to assess the level of stability of the business over
the years and the extent to which changes in economic factors have affected
profits.
c. Information on whether to invest more capital into the business or withdraw
existing capital from the business.

2. Employees:
Employees are people who work in a business and are interested in the following:
a. Information on their job security and income. They are interested in the
profitability of the business to ensure payment of their salary, health benefits,
other allowances and continuous employment.
b. Employees use the accounting information to check payment of statutory
obligations by the business. They need to check payment of their SSNIT
contributions and PAYE to government agencies.
c. Moreover, potential employees may also be interested to learn about the
financial health of the organisation they aspire to join in the future.

3. Managers:
Managers are people who plan, organise, direct and control the activities of the
business. Managers need accounting information to:
a. Monitor the performance of business. They need to compare current
performance against past performance. By this, they monitor sales, expenses
and profits and compare them against the set targets / budgeted plans.
b. Access or evaluate the business’ performance and manage risks. Preparing
and monitoring budgets effectively requires reliable accounting data
relating to the various activities, processes, products, services, segments and
departments of the business.
c. Assess their performance against industrial benchmarks. They need to
compare their performance with competitors in the industry.

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SECTION 5 FINANCIAL ACCOUNTING

External users
1. Suppliers:
Suppliers are the parties who supply the business with products or services, for
example raw materials, finished goods and other services.
a. Suppliers need to assess the ability of a business to repay goods/services
supplied on credit.
b. They need the assurance that a business will continue to buy their goods.

2. Customers:
Customers are the parties who buy goods and services produced by a business.
a. Customers need assurance that a business will continue to produce goods/
services for them to buy.
b. Customers need assurance that a business will produce quality and
standardised goods for them.

3. Lenders/Banks:
Lenders and banks are parties who have provided funds to a business and
expect repayment of their monies with interest. Lenders want to know about
the financial stability of a business to determine the debt servicing and interest
service coverage.

4. Government /Regulatory Agencies:

It is a statutory requirement for businesses to send copies of their financial
statements to government agencies. Government agencies and departments use
accounting information for various reasons.
a. The Registrar of Companies need a business’s financial statements to ensure
its existence.
b. Ghana Revenue Authority (GRA) needs financial information to assess the
tax liability of a business.
c. SSNIT needs financial statements to ensure the payment of workers’ SSNIT
contributions.

5. Financial Analyst and Advisors:

Financial analysts are persons who study the financial statements of various
businesses. Financial analysts go through the available statements in accordance
with accounting principles and industrial standards. Financial analysts;
a. measure the financial stability of a business to determine its continuous
existence.
b. establish industrial indicators which help to measure performances of
businesses in the same industry.

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SECTION 5 FINANCIAL ACCOUNTING

Activity 5.5

1. Identify and describe seven users of accounting information.

2. Categorise each user as either an internal or external user of accounting
information.
3. Identify the reason why they need accounting information.
4. Share with your answers with a colleague for discussion and feedback.
You may use the table below to support your work

User Description Category Reason For Information

Financial They are persons External 1) To measure the

Analysts or who study the User financial stability of a
Advisors financial statements business to determine
of various its continuous
businesses existence.
2) To establish industrial
indicators which
help to measure
performances of
businesses in the same
industry.

a.
b.
c.
d.
e.
f.
g.

Activity 5.6

1. In groups, discuss the importance of accounting information.

a. Write down your points and share your thoughts to another group.
b. Use charts, maps or diagrams to summarise your points and make a poster
presentation to other learners.
2. Explain the impact of presenting accounting information that does not meet
the characteristics of accounting principles to users of this information.

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SECTION 5 FINANCIAL ACCOUNTING

ACCOUNTING STANDARDS

Definition/Introduction
An accounting standard is a set of principles, rules, guidelines and procedures that
define the basis of financial accounting policies and practices.
Accounting standards ensure the financial statements from multiple companies are
comparable, consistent and transparent. Accounting standards ensure that all entities
follow the same rules, which will make the financial statements credible and allow for
more economic decisions based on accurate and consistent information.

Types of Accounting Standards

Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) is the primary set of accounting
standards that public and private organisations use within the United States of America.
GAAP compliance is mandatory for all publicly traded companies. These standards
help create clarity in financial reporting and allow for comparison between the financial
situations of different companies. GAAP standards also ensure that regulatory bodies
can effectively monitor private companies and that investors and banks can make
informed decisions about their business interactions.

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards is the primary set of accounting standards
that international companies use. They aim to provide consistency in accounting and
reporting processes throughout various countries.
If you are interested in finding out more about accounting standards then additional
examples are included below:

1. International Public Sector Accounting Standards (IPSAS)

IPSAS are accounting standards for public sector entities, developed by the
International Public Sector Accounting Standards Board (IPSASB). They are
designed to improve the quality of financial reporting by public sector entities,
leading to better informed assessments of resource allocation decisions made by
governments.
Examples:
o IPSAS 1: Presentation of Financial Statements
o IPSAS 17: Property, Plant, and Equipment
o IPSAS 24: Presentation of Budget Information in Financial Statements

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2. Accounting Standards for Private Enterprises (ASPE)

ASPE are standards developed by the Canadian Accounting Standards Board
(AcSB) specifically for private enterprises. They provide an alternative to IFRS
for Canadian private companies.
Examples:
o Section 1000: Financial Statement Concepts
o Section 3061: Property, Plant, and Equipment
o Section 3856: Financial Instruments

3. National Accounting Standards

Many countries have their own national accounting standards, which are often
aligned with or influenced by IFRS or GAAP but tailored to specific legal,
economic, or cultural circumstances.
Examples:
o UK GAAP: Financial Reporting Standard (FRS) 102
o Indian Accounting Standards (Ind AS): Ind AS 115 - Revenue from
Contracts with Customers
o Japanese GAAP: Business Accounting Standard No. 29 - Revenue
Recognition

4. Industry-Specific Standards
Certain industries have specific accounting standards due to the unique nature
of their operations. These standards ensure that financial reporting reflects the
true financial position and performance of entities within these industries.
Examples:
o Oil and Gas Industry: Successful Efforts Method and Full Cost Method
o Banking Industry: Basel III Framework
o Insurance Industry: IFRS 17 - Insurance Contracts
Understanding these various types of accounting standards is crucial for professionals
in accounting and finance, as they ensure that financial statements are prepared
accurately and consistently. This, in turn, helps stakeholders make informed decisions
based on reliable financial information.

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Importance of Accounting Standards

Accounting standards allow multiple companies and institutions to operate as part of
the same financial system. These are some of the most important benefits of accounting
standards:
1. Clarity: Accounting standards help to rule out ambiguities in recording of
transactions. Accounting standards provide common ways for all organisations
to record their transactions. By this, transactions are treated in the same manner
by all organisations. This provides transparency to accountants, banks, investors,
government regulators and the public.
2. Comparability: Any investor would essentially want the financial statements
to be comparable with others. Without any standardised regulation, it becomes
difficult to compare financial statements of businesses within the same industry.
Accounting standards ensures the use of one standard for treating similar
transactions in different organisations.
3. Guidance: Accounting standards are very helpful in providing daily guidance
to accountants in the recording of transactions. It is the responsibility of an
accountant to provide financial information which is reliable, relevant, neutral
and comparable. These characteristics achieved through the use of accounting
standards.
4. Uniformity: Accounting standards provide a means of achieving uniformity
within the accounting profession. The use of accounting standards provides a
uniform method of recording and reporting for all institutions. This can facilitate
transactions between businesses and allow comparisons between companies
nationally or internationally.
5. Reliability: Accounting standards help ensure that companies, non-profit
organisations and government agencies provide accurate analysis of their
financial operations. Any business concern has a large number of stakeholders
and they rely on the information to make an informed decision on the company.
Many stakeholders determine their next course of action based on the information
provided by these financial statements. Moreover, potential investors rely on the
financial statements to make decisions.
6. Reducing Fraud: Accounting standards provides the accounting principles,
procedures and methods that every entity must use. With the use of common
principles, the manipulation of data is minimised or eliminated. By this, it
becomes difficult to commit any fraud.
7. Assist Auditors: The accounting standards lays down all the necessary policies,
regulations and guidelines pertaining to recording of transactions to be followed
by businesses. This helps auditors to check and follow prescribed procedures.
Thus, all the financial statements presented are true and justified.

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Activity 5.7

1. In groups, discuss at least three reasons why rules and regulation are
important in the school.
2. Using the importance of school rules and regulation as a basis, identify the
importance of accounting standards.
3. Share your thoughts and responses with other learners.
4. Summarise your points on manila cards for a presentation to the larger class.

Activity 5.8

1. In pairs, discuss the meaning and types of accounting standards.

a. Write down your thoughts on flash cards and share with another pair for
feedback.
2. Write a short report summarising the class discussion on accounting
standards (using examples) and their importance.

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Review Questions

1. Explain the concept of financial accounting as a system.

2. As the accountant for a company, explain the processes you would follow to
prepare financial statements for decision makers.
3. Evaluate the implications of poor financial accounting information on business
activities.
4. Assess the need for accounting standards in a business, in accordance with the
IFRS.

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EXTENDED READING
• Adomako, R. K. (2019). Contemporary Financial Accounting. Tamale: Zeal
Publishing. pp. 62-68, pp. 200-215
• Andoh, C. A. (2020). Principles of Financial Accounting. Accra: Best Books Ltd.
pp 25-30, 45-53
• Boateng, A. A. (2018). Essentials of Financial Accounting. Tamale: Northern
Publications. Pp 42-50, 65-70
• Owusu, P. Y. (2021). Financial Accounting Made Simple. Cape Coast: Coastal
Press pp 10-15, 55-60
• Tetteh, M. A. (2020). Financial Reporting and Analysis. Accra: Bloom
Publications. pp. 40-47, pp. 110-125
• Any Financial Accounting book approved by NaCCA

REFERENCES
1. ACCA Manual:(2005) Accounting Framework, AT Foulk Lynch,2005.
2. ICAG (2019), Study Text - Financial Accounting.
3. NaCCa (2023), Business Studies Curriculum.
4. Oduro E. (2011), Financial Accounting for Senior High Schools and Tertiary
Institutions in West Africa (3rd Edition), Accra: Terror Publications.
5. Wood, F (1993) Business Accounting, London: Pitman Publishing

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GLOSSARY
General Ledger This is the master account that includes all subsidiary ledgers
and holds a complete record of transactions within an accounting
period.
Trial balance This is the report of the balances of all general ledger accounts at a
given point in time.
Double entry system Double entry systems record all transactions twice: once as a debit
and once as a credit.
Income statement This document specifies the total revenue earned by a business
within an accounting period, minus all expenses incurred during
the same period.
Balance sheet shows a business’s current position regarding its assets, liabilities
and equity.
Cash flow statement Cash flow is the cash that moves in and out of a business during
an accounting period. This can be tracked using a cash flow
statement.

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ACKNOWLEDGEMENTS

List of Contributors
Name Institution

Sittu Ahmed Bolgatanga Technical University

Harriet Oduraa Idun Sagoe Nsaba Presby SHS, Agona Nsaba

Emmanuel Asante Koree St. Francis SHS, Akim Oda

Sakinatu Issifu Gambaga Girls’ SHS, Gambaga

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