Introduction to

Accounting
Basic Accounting for Business
What is Accounting ?
Communication of economic information related
to an organization to the interested parties
What is Accounting
Economic information
a) Sources of economic resources : Equity Capital,
debt Capital

b) Uses of economic resources : Building ,

machines, stocks , cash

c) How effectively and efficiently use the resources

: Income, Cost, profit by selling goods/service
Definitions
"Accountancy may be defined as 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 financial character, and interpreting the results
thereof“

A.I.C.P.A-American Institute Of Certified

Public Accountants
Functions of Accounting
➢ Recording : All transactions and events in orderly maner
➢ Classifying : grouping similar transactions
➢ Summarising : Preaparing meaningful summarized
statements
➢ Analysis and interpretation : recorded financial data is
analyzed and interpreted in a manner that the end-users
can make a meaningful judgment
➢ Communicating : Communicate to the users
Interested Parties over an
organization (Stake holders)

⚫ Owners/Shareholders (Stockholders)
⚫ Potential investors
⚫ Managers
⚫ Employees
⚫ Suppliers/Creditors
⚫ Customers/Debtors
⚫ Government (Inland Revenue/Central Bank,etc)
⚫ Public
Interested Parties (Stakeholders)
Internal parties External parties
⚫ Managers Owners/Shareholders
(Stockholders)
⚫ Employees
Potential investors
Customers/debtors
Suppliers/Creditors
Government
Public
Branches of Accounting
⚫ Financial Accounting
Communication of economic information related to an organization to the
external parties

⚫ Management Accounting
Communication of economic information related to an organization to the
internal parties specially to the managers
 Branches of Accounting
Financial Accounting Cost & Management
Accounting

⚫ Economic information is ⚫ Economic information is

mainly provided to the provided to the internal
external parties parties
⚫ Historical information is ⚫ Both historical and forecast
provided information is provided
⚫ Subject to the Rules , ⚫ Prepared according to
Regulations and Standards management requirement
⚫ Information is provided ⚫ Adhoc basis
periodically. Ex Annually ,
quarterly
⚫ Legal requirement ⚫ Not a legal requirement
Branches of Accounting
⚫ Cost Accounting
Cost accounting is an area under the broader scope of
Management Accounting. Cost accounting deals with
ascertaining the cost of a unit, department or processes,
establishing standards and variance analysis

MA
Financial
Accounting Costing
Financial Accounting
Communication of economic information related to an organization to the
external parties

Medium of Communication :
Financial Statements
Financial Reporting
Objective of Financial Reporting ( As per conceptual
framework of CA Sri Lanka)

➢ Objective is to provide financial information

about the reporting entity that is useful to
existing and potential investors, lenders and
other creditors in making decisions about
providing resources to the entity.
➢ Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of
credit.
Financial Statements
1. Statement of Financial Position
2. Statement of Comprehensive income
3. Statement of Changes in Equity
4. Statement of Cash flows
5. Notes, comprising a summary of significant accounting policies and other
explanatory information
Annual report
Financial statements are usually provided in an
annual report which contains both;

Quantitative information

– Financial Information-Profit, Assets value

– Non Financial information-Number of employees
and
Qualitative information- Objectives of the firm,
strategies, Management team
How we get Financial Statements?
Input Process Output

Transactions & Collecting Financial

Events Classifying Statements
Recording
Summarising
Interpreting
Communicating
Transactions and events
Transactions : as a result of management
decision

Events : Incidences other than transactions

– Internal events :Rs 500,000 worth stock
damaged due to fire

– External events : A debtor worth of Rs

200,000 got bankrupt
 What would be Decisions to
the return ? invest or
(Dividends, provide credit
Interest, capital
gains, etc

Information

Need to assess
amount, timing, General
and uncertainty
purpose
of future net financial reports
cash flows Investors, lenders
& other creditors

Need information about Primary

resources of the entity, users
Claims against the entity,
and how effectively and
efficiently the management
use the resources
Qualitative Characteristics of useful
financial information
Qualitative
Characteristics

Fundamental Enhancing
Qualitative Qualitative
Characteristics Characteristics

Relevance; Materiality Comparability

Verifiability

Faithful representation Timeliness

Understandability
 Relevant financial information is
capable of making a difference in
Relevance the decisions made by users

Materiality comes under relevance

Information is material if its omission or

Materiality misstatement could influence decisions that
users make on the basis of financial
information about a specific reporting entity

Materiality level depends on the entity

 Faithful
representation

Complete Neutral Free from error

No errors or omissions in the

All information necessary for description of the phenomenon and
user to understand the the process of producing
phenomenon being depicted information.
including all descriptions & Does not mean perfectly accurate
explanations in all aspects

Without bias in the selection

or presentation of financial
information
 Enhancing Qualitative
Characteristics
Comparability :
✓Can be compared with another entities, with another period or date
✓Consistency; use of same methods for same items helps to achieve comparability
Verifiability :
Different knowledgeable and independent observers could reach consensus on
faithful representations
Timeliness :
✓Having information available to decision makers in time to be capable of influencing
their decisions
Understandability :
Classifying, Characterizing, and presenting information clearly and concisely makes it
understandable
Underlying Assumption
Underlying assumption is the GOING CONCERN
Financial statements are prepared on the assumption that entity is
going concern and will continue in operation for the foreseeable future
Hence assumed that entity has neither intension nor the need to
liquidate or of operations curtail materially the scale
Elements of financial
statements
Elements directly Elements directly
related to the related to
measurement of performance (usually
Financial Position profit)

Assets Income

Liabilities Expenses

Equity
 Assets
An Asset is a resource controlled by the entity as a
result of past events and from which future
Definition
economic benefits are expected to flow to the
entity

Examples: Building, Machineries, Stocks, Cash, Debtors,etc

 Liabilities

A present obligation of the entity arising from past

Definition events, the settlement of which is expected to
result in an outflow from the entity of resources
embodying economic benefits

Examples : Bank loans, Creditors, Payables,etc

 Equity

Equity is the residual interest in the assets of the

Definition entity after deducting all its liabilities
i.e Equity = Assets -Liabilities
 Income
Income is increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases
of liabilities that result in increases in equity, other than those
relating to contributions from equity participants
Ex: Sales, Interest income, dividends received,etc
Expenses
Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases
in equity, other than those relating to distributions to
equity participants

Expenses include losses as well.

Ex: Salaries, Rent, Electricity bills, etc
Environment of Accounting

Setting under which the overall accounting function is performed.

Components are,

➢ Business environment
➢ Regulatory environment
➢ International environment
Business Environment
Types of businesses

a. Service: Banks, Insurance companies, hotels, educational

institutes, construction
b. Manufacturing: Household items, capital goods
c. Trading : Retailers, Wholesalers
Business Environment
Forms of businesses
a. Sole proprietorship
b. Partnerships
c. Company
d. Association
e. Co-operatives
Business Environment
Business objectives
a. Profit
b. Non profit
 Sole Proprietorship
➢ A separate organization with a single owner
➢ Tend to be small retail establishments and individual professional
or service business - for example, a single dentist, attorney, or
public accountant
➢ The sole proprietorship is an individual entity that is separate and
distinct from the owner.
➢ Management: The owner is an active manager in day-to-day
operation of the business
 Partnership
➢ An organization that joins two or more individuals who act as co-
owners
➢ Dentists, doctors, attorneys, and accountants tend to conduct their
activities as partnerships. Some can be large international firms.
➢ The partnership is an individual entity that is separate and distinct
from each of the partners.
➢ Management : Partners are usually active managers in day-to-day
operations of the business.
 Company

➢ Owners are called shareholders or stockholders.

➢ Publicly owned vs. privately owned companies/corporations
◦ Public - Shares in the ownership are sold to the public on a stock
exchange; the corporation can have many thousands of shareholders.
◦ Private - Shares in the ownership are owned by families, small groups of
shareholders, and shares are not sold to the public.

➢ Management: Shareholders usually do not participate in the day-to-day

operations of the business.
Organization Structure of a company
Board of
Directors

CEO

Human Procure
Marketing Finance
Resource ment

Treasury Controlling

Financial Management
Accounting Accounting
Regulatory environment
➢ Requirements of company Act
➢ Requirements of Security Exchange Commission
➢ Requirements of Institute of Chartered Accountants of Sri Lanka
➢ Requirements of Inland Revenue Department
Requirements of company Act no
07 of 2007

Definition of an entity; the accounting requirements of

an entity; exemptions by act; a small business guide;
the basic features of a company; registering a
company; company powers; annual financial reporting
to members and the appointment of an auditor; and
specific offence, including false or misleading
statements, and obstructing hindering regulators.
s.150 : the obligation to prepare annual financial reports and
director’s reports; and
s. 151: the contents & form of financial reports
Requirements of Security Exchange
Commission
Listed companies in the Colombo Stock Exchange (CSE) is governed by
the Security Exchange Commission in Sri Lanka(SEC).
SEC specifies several accounting related regulations such as the
form/time intervals of financial information, appointment of audit
committees, etc.
Requirements of Institute of
Chartered Accountants of Sri Lanka

ICASL specifies the frame work of accounting, Accounting standards

and Auditing standards and code of ethics for professional accountants.
Accounting Standards
Depends on the type of the entity

Entity Acc. Stds

Small & Medium- SLFRS for SMEs
Sized Entities

Other Entities SLFRS & LKAS

Accounting Standards
What are SMEs?
◦ Entities do not have public accountability
◦ But publish general purpose f/s

(Owners who are not involved in managing the business,

existing and potential creditors, and credit rating
agencies)
Requirements of Inland Revenue
Department
Inland Revenue Department imposes taxes on individuals, companies,
etc. Its regulations include the sections which outline the requirement
and period of accounting.

Example
Sec. 28 (2): A person who carries on any trade business, profession or
vocation is required to make up accounts of that trade, business,
profession or vocation for each successive period of 12 months ending
on 31st March.
International environment
➢ Globalization
➢ Worldwide investors
➢ Accounting profession should be under one platform
➢ International Accounting Standards
 Professional Accounting Institutes
1.The Institute of Chartered Accountants of Sri Lanka (ICASL)
2.The Institute of Certified Management Accountants (ICMA)
3.The Association of Accounting Technicians of Sri Lanka (AAT SL)
4.The Charted Institute of Management Accountant ( CIMA – UK)
5.The Association of Chartered Certified Accountants ( ACCA – UK)
THANK YOU………