Introduction to Accounting and its History – SS1 Financial Accounting Lesson Note (First Term)

Accounting is the process of recording, classifying, analysing, summarising, interpreting and communicating the financial information of an organisation to the people who use it.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define accounting and bookkeeping;
2. list the users of accounting information and say why each needs it;
3. state the differences between bookkeeping and accounting;
4. give reasons why accounting records are kept;
5. outline the history of accounting, including the key dates in Nigeria.

What is accounting?

Accounting is the act of recording, classifying, analysing, summarising, interpreting and communicating financial information to the end-users of that information.

What are the functions of accounting?

Accounting has six main functions, which follow one another in order.

1. Recording: writing down each financial transaction in the books when it happens.
2. Classifying: grouping similar transactions together, for example all sales in one place.
3. Analysing: studying the grouped figures to see what they show.
4. Summarising: presenting the figures briefly, as in financial statements.
5. Interpreting: explaining what the summarised figures mean for the business.
6. Communicating: passing the information to the people who need it.

What are the branches of accounting?

Accounting has several branches, each serving a different purpose.

• Financial accounting: records transactions and prepares financial statements for owners and outsiders.
• Cost accounting: works out the cost of producing goods or services.
• Management accounting: supplies information that managers use for planning and decisions.
• Auditing: an independent check that the records and statements are true and fair.
• Taxation: works out the tax a business or person must pay.

Who uses accounting information?

Users of accounting information are the people and bodies that need financial statements to make decisions, and they fall into internal and external groups.

• Internal users: people inside the business, such as owners, managers and employees.
• External users: people outside the day-to-day running of the business, such as lenders, suppliers, customers and government.

Internal users

1. Owners of businesses: they use it to:
   • determine the profitability of the business;
   • assess the competence of the managers of the business;
   • make important business and investment decisions.
2. Managers: they use it to plan, control the business and make day-to-day decisions.
3. Employees of the business: they use it to:
   • know the profitability of the business;
   • know the extent of job security and the prospects of their future careers;
   • negotiate for better conditions of service and improved wages and salaries.

External users

1. Shareholders of a company: they use it to:
   • determine the profitability of the business;
   • assess the ability of the company to pay its expected dividends;
   • project the future growth of the company.
2. Loan creditors (lenders to the business): they use it to:
   • assess the ability of the business to repay loans;
   • assess the ability of the business to pay the interest when due;
   • assess the possibility of the borrower defaulting on repayments;
   • know whether adequate assets are available as security;
   • determine the level of credit to grant.
3. Trade creditors or suppliers (those who supply goods on credit): they use it to:
   • assess the creditworthiness of the business;
   • assess the ability of the business to pay back its debts;
   • determine their level of exposure to the business.
4. Competitors: they use it to:
   • fix their prices relative to the prices of similar products made by the business;
   • determine their position in the market, such as market share in sales, profits and number of employees.
5. Customers: they use it to:
   • know if the business is a guaranteed and secure source of supply;
   • assess the financial position of the business.
6. Tax authorities: they use it to determine the amount of tax the business must pay. Examples are the Lagos State Internal Revenue Service (LIRS, formerly LSBIR) and the Federal Inland Revenue Service (FIRS, formerly FBIR).
7. The government: it uses it to:
   • compute statistics about businesses operating in the country;
   • help in forming government policies, such as those on industrialisation;
   • regulate business activities through agencies such as the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), Corporate Affairs Commission (CAC) and Nigerian Exchange (NSE).
8. The public: they use it:
   • for employment and economic considerations;
   • to know whether to invest in the enterprise.

What is bookkeeping?

Bookkeeping is the systematic recording of the daily financial transactions of an organisation so that its financial position can be found at any time.

• Bookkeeper: the person who records the transactions in the books.
• Transaction: any event with a money value, such as a sale, a purchase or a payment of wages.
• Link to accounting: bookkeeping supplies the records that accountants use for later work.

What are the differences between bookkeeping and accounting?

Bookkeeping is the recording of transactions, while accounting covers recording and also classifying, analysing, summarising and interpreting them.

Why are bookkeeping and accounting records kept?

Records are kept so that a business knows its results, its position and its obligations at any time.

1. Profit or loss: to determine the profit or loss made during a particular trading period.
2. Decision making: records help managers of the business to make decisions.
3. Fraud prevention: properly kept records make theft and cheating easier to detect and prevent.
4. Financial position: to find the position of the business as at a particular date.
5. Solvency and liquidity: to determine whether the business can pay its debts (solvency) and meet short-term debts as they fall due (liquidity).
6. Tax: they serve as a basis for assessing the tax to be paid by the business.
7. Assets and liabilities: to ascertain what the business owns and what it owes.
8. Comparison: they help to compare one business with another, and recent results with past results.
9. Planning: they are used to set targets and decide the best ways to achieve them.

What is the history of accounting?

Accounting is very old, because there is no accurate record of when it started, but record keeping seems to be as old as man.

Development of accounting worldwide

• Early record keeping: traders and farmers kept simple records of goods, animals and debts long before modern books.
• Double-entry bookkeeping: each transaction is recorded twice, as a debit in one account and a credit in another.
• Luca Pacioli: an Italian mathematician who described the double-entry system in a book published in 1494.

Development of accounting in Nigeria

• 1886: the Royal Niger Company received a royal charter, and this brought the earliest formal records of business transactions in Nigeria.
• 1st September 1965: the Institute of Chartered Accountants of Nigeria (ICAN) was established.
• 31st July 1979: the Association of National Accountants of Nigeria (ANAN) was established as the second professional accounting body in Nigeria.

Timeline of key dates

Evaluation

1. Define accounting.
2. State four differences between bookkeeping and accounting.
3. Give three reasons why a business keeps accounting records.
4. Why would a loan creditor want to see the financial statements of a business?
5. Who described the double-entry system of bookkeeping in a book, and in which year was it published?

Assignment

Write short notes on the Institute of Chartered Accountants of Nigeria and the Association of National Accountants of Nigeria, stating when each was established.