ATSWA Study Pack - Basic Accounting Processes & Systems

428 Pages·2012·4.07 MB·English

NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

ACCOUNTING TECHNICIANS
SCHEME
(WEST AFRICA)

BASIC ACCOUNTING PROCESSES & SYSTEMS
(BAPS)

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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

CHAPTER ONE

THE ROLE OF ACCOUNTING

1.0 Learning Objectives
At the end of this chapter, candidates should be able to:
 narrate the historical development of accounting
 explain the purpose and scope of accounting
 identify users of accounting information and the need for such
information
 explain the qualities of accounting information
 describe the range of services provided by accountants

1.1 Introduction
Accounting is concerned basically with „accountability‟. The
underlying purpose of accounting is to provide financial information
about an economic entity. The information is provided, periodically,
to shareholders and others connected with the organization to
enable them decide the extent to which they want to continue to
associate with the organization. The need for accounting is more
pronounced in a business where a lot of finance, risk, and energy
have been involved. Financial information is needed to plan and
control the finance and operation of a business.

Every other person such as the owner, creditor, government,
employee and other parties need financial information of a business
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

for one purpose or the other, details of which would be discussed
later in this chapter.

1.2 The Historical Development of Accounting
Rudimentary form of accounting started with bookkeeping by Lucia
Pacioli, an Italian monk. In his book titled “Summa de Arithmetical,
Geometrica, proportioni et proportionalita,” published in 1494 on
Arithmetic, Geometry and Proportion, he devoted a chapter to
expound the principles of the double entry system. It became
necessary for managers to report to the owners of their business
activities during the period under review. Such report would include
mainly the following:
 How the financial resources of the business have been
invested during the period,
 The profit earned or loss incurred during the period, and
 The assets, liabilities and the owner‟s equity at the end of the
period under review.
After this initial development, a lot of changes have been witnessed
in accounting. These changes were informed by sophistication and
complexity of businesses and industrial and political environments
which placed more responsibilities on management of business to
disclose more information to owners and other interested parties.

For instance a lot of Generally Accepted Accounting Principles
(GAAPs) have been developed to be followed in the preparation of
financial statements. Also, accounts have to be „audited‟ and
reported on as presenting a „true and fair‟ position. Accounting has
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

also gone beyond mere reporting for managerial decisions, to
include tax management, government accounting and social
responsibility accounting.
The GAAPs are developed from time to time to keep pace with
changes in the economic and political environment. The GAAPs are
also codified into what is known as Accounting Standards.
Therefore, accounting is not a fixed set of rules but a constantly
evolving body of knowledge.

Most countries have their own Local Accounting Standards Board
but the body responsible for developing and issuing International
Accounting Standards is the International Accounting Standards
Board (IASB) based in the United Kingdom. In Nigeria, the Nigerian
Accounting Standards Board (NASB) is charged with the
responsibility of developing and issuing local accounting standards
for use by all preparers and users of financial statements in Nigeria.
Accounting has also changed from manual records alone; it now
also makes use of computer and video displays.

1.2.1 Regulatory Framework
Due to the increasing changes in the economic and political
environment, statutory and other regulations have been put in place
to ensure the reliability, relevance and comprehensiveness of
financial information, and to narrow areas of differences.

The main statutory document for the regulation of business in
Nigeria is the Companies and Allied Matters Act 1990 (as amended
in 2004). The company laws are enforceable in the court of law.
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

Other legislations relate directly to specific industry such as:
 Banks and Other Financial Institutions Act of 1991 (BOFIA
1991)
 Insurance Act 2003
Other regulations consist of the following accounting standards:
 Statements of Accounting Standards (SAS) issued by NASB
from time to time
 International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS) issued by IASB from
time to time

1.3 The Purpose of Accounting
Accounting is the art of recording, classifying, summarizing and
analyzing financial transactions of a business.

Accounting transactions are classified into related groups or
categories. The transactions are then recorded in the books of
original entry. Thereafter, the transactions are analyzed and posted
to accounts in the ledger. Then, the accounts are summarized into
financial statements. Finally, the financial statements are
interpreted through the development of significant relationship and
by way of explanations.

The accounts of companies contained in their Annual Reports and
Accounts are examples of the product of accounting and they are
called financial statements.
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
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1.3.1 Financial Transactions
Financial transactions are those on which monetary values can be
placed and that can be measured objectively. They consist of cash
transactions, credit transactions or contra. A financial transaction
must be able to cause a change to assets or liabilities or capital; or
a combination of them. It is the exchange of goods and services for
cash or a promise to pay in future for goods or services.

1.3.2 Types of Business
A business is a commercial outfit which sells goods or provides
services. There are three main types of business enterprises; the
sole traders, the partnerships and the limited liability companies.

The commonest form of business entity is the sole trader who owns
and manages his business though he may have employees.

Partnerships are formed by two or more persons who contribute
finance and technical knowledge in order to share the risks and
rewards of the business together. Limited liability companies are
those that are incorporated under the company laws of a country.
The owners take advantage of the fact that their liability is limited to
the amount payable on their shares.

Details, characteristics, and operations of these various business
enterprises shall be dealt with progressively in this study pack.

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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
Thanks.

1.4 Bookkeeping and Accounting
Bookkeeping is the recording phase of accounting. It is the
classification and recording of business transactions in the books of
account. The recording of the transactions is a routine task,
therefore it tends to be repetitive. Accounting on the other hand
includes not only the keeping of accounting records, but also the
design of efficient accounting systems, the interpretation of
accounts and the development of forecast.
The processes involved in bookkeeping are as follows:
(a) The classification of business transactions using source
documents;
(b) Recording of classified transactions in appropriate subsidiary
books or books of prime entry;
(c) Posting of entries from subsidiary books to the ledger; and
(d) Extraction of the Trial Balance .

1.5 Scope of Accounting
The starting point in the study of accounting is financial accounting;
others are cost accounting, management accounting, auditing,
government accounting, and tax management.

1.5.1 Financial Accounting
Financial accounting involves an accounting process that starts
with bookkeeping and ends with the preparation and interpretation
of financial statements. The components of financial statements are
the statement of financial position, the Income statement or the
income statement.
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
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For limited liability companies other statements required by the
company laws or standards are; Chairman’s Report, Directors
Report, Auditors Report, Group Financial Statements, Statement of
Accounting Policies, Notes on the Accounts, Value Added
Statement, Cash flow Statement and a Five year Financial
Summary.

The financial statements enable owners of the business to assess
how efficiently management has run the business. The information
needs of other parties who are interested in the business are
satisfied to a large extent by the financial statements.

For instance, the Statement of Accounting Standard (SAS 2) states
that „all accounting information that will assist users to assess the
financial liquidity, profitability and viability of a reporting entity
should be disclosed and presented in a logical, clear and
understandable manner.

You shall come across the details of each of these issues as you
progress in the study of accounting.

1.5.2 Cost Accounting
Cost accounting is the procedure for accumulating data to provide
information for managerial action. Cost accumulation is the
collection of cost data in some organised ways by means of
accounting systems. The cost accumulated will be related to
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
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specific products and departments for planning, control and
decision making by management.

1.5.3 Management Accounting
Management accounting provides information to management of a
business to help them take better decision and to improve upon the
efficiency and effectiveness of existing operations (Drudry, 2004). It
is concerned with providing accounting information to management
for the purpose of planning, decision making and control.
Management accounting uses various quantitative analysis tools to
forecast the future. It is sometimes referred to as “managerial
accounting”.

1.5.4 Auditing
Only complete and reliable financial statements can be of any use
to the creditors, investors, government agents and other interested
parties. To guarantee these, the accounts must be audited by an
independent person called an Auditor. Auditing is the independent
examination of the books of accounts and records of the company.
The professional accountant will gather various forms of audit
evidence before he forms an opinion on the financial statements. At
the end of the audit exercise he will write a report on the „true and
fair view‟ of the financial statements and the scope of work he
carried out before arriving at his opinion.

1.5.5 Government Accounting
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NOTE: This is a work in progress. All topics in the syllabus are covered but
editing for necessary corrections is in progress.
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Government accounting is the process of recognising and reflecting
in the appropriate books of accounts and records government
generated revenue and disbursed expenditure in such a way as to
extract with ease relevant financial information vital for appropriate
decision making from time to time, and in compliance with the laws
regulating government finances.

It is a class of Accounting in the Public Sector where government
has some executive responsibility. Public sector consists of the
ministries and parastatals.

Government accounting is concerned with planning, control and
appraisal of government activities and in effect, accountability.

1.5.6 Accounting for Taxation
The accounting profits generated in the financial statements
provide the basis for determining the taxable profits of a company.
The taxable profits are different from the accounting profits because
certain expenses and income are allowable for accounting purpose
but disallowable for tax purpose. A good understanding of the
knowledge of these taxable incomes and expenses and non-
taxable incomes and expenses would help a business in its tax
management.

1.6 The Need for Accounting Information
The need for accounting information can be summarized as follows:
 It provides information useful for making economic decisions.
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