1

NATIONAL DIPLOMA IN ACCOUNTING

NVQ-05 SEMESTER –I

UNIT 01.1
INTRODUCTION TO ACCOUNTING

SLTES
MBA,BBA,HNDA,PGDE,MAAT,CMA,NDTTE
HOD- Commerce Technical College Akkaraipattu
 2 INTRODUCTION
❑ Accounting is a well established formal process which basically
analyzes both financial & non-financial information of the
particular entity/organization and present them in a formal
manner in order to take (economic) decision(s).
❑ Accounting is a structured system which entails series of
activities including identifying, measuring, recording,
summarizing & presenting (communicating) the various business
transactions/events.
❑ Accounting is a business language which essentially
communicates financial performance & position of an entity to
all stakeholders (existing and prospective).

❑ Accounting is a dynamic scope which evolve rapidly around the

globe in recent past
 3 Identify the Business
transactions

Measure the identified

transactions

Record the measured

transactions

Summarize & Present the

recorded transactions

Discussion: Every entity essentially includes an accounting system

as a key component/element of its internal control system. (level of
importance)
❑ Control environment
❑ Control procedures
❑ Accounting system
ACCOUNTING INFORMATION AND DECISION MAKING
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As we have already identified, main duty of an Accountant is to
produce information for the existing & prospective
users/stakeholders to make their (economic) decisions.

Types of users
Internal External
Internal - Key management/owners
Inter Related
Inter-related - Financial Institutions (Banks)
- Key customers
- Key suppliers
- Employees (Unions)

External - Shareholders (sometimes internal)

- Government
- Public at large
Discussion: All of the above parties are commonly identified as “Stakeholders” and Stakeholders are
the Individuals/group of people/parties who are basically interested in company’s
affairs/results/position and get affected on their economic decisions accordingly.
 Stakeholder Group Expected Information and Type of Decision Making
Information to determine the future profitability of the entity, to
Investors assess the future cash flows for dividends and the possibility of
5 capital growth of the investment.
Information to determine whether an entity has the ability to
Banks
repay its loan along
with interests.
Information to determine the entity’s ability to repay debt
Suppliers
associated with purchases.
Information concerning job security, the potential to pay or
Employees awards, bonuses and
promotional opportunities down the track.
Information regarding the continuity of the entity and the ability
Customers to provide the
appropriate goods and services.
Information to determine the amount of tax that should be paid
Government
and any future tax liabilities or tax assets.
authorities
Information to determine the conformity of an entity to
Regulatory bodies
regulations such as the Companies act and Inland Revenue act.
Information to determine whether an entity contributes
Community
positively to the general welfare and economic growth of the
local community.
Information to determine whether the entity has considered
Special interest environmental,
groups
social or industrial aspects during its business operations.
 6 BOOKKEEPER VS. ACCOUNTANT

❑ Conceptually, no significant difference of job duties between

bookkeeper and accountant.
❑ Some entities attempt to place both bookkeeper and accountant
in a same job category and some organization use these two
interchangeably.
❑ Practically, Bookkeeper is doing routine calculation (task) without
using much of judgmental skills while accountant use his/her
judgmental skills and analytical skills in order to present financial
information more meaningful manner which are already
prepared by the bookkeeper.

❑ Organization must use blend of both bookkeeping and

accounting function in attaining success rather than functioning
separately.
 Calculation
7

Bookkeeper Input Analysis

Accountant

RELATIONSHIP BETWEEN ACCOUNTING & AUDITING

Auditing (external) is basically provides an assurance (reliability) on
financial statement prepared by the entity. (not 100%, but true & fair
view)

Discussion: External Audit is not a mandatory requirement except

for public corporations. But tend to conduct annually for various
reasons/purposes.

Discussion: Difference(s) between external & internal auditing.

 FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING

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Scope of the Financial accounting defines from the view point of the external
(third) party while management accounting analyzes information from the view point
of the entity’s key management
Management Accounting
Financial Accounting

Key Mgt./Board of Directors Investor/shareholder

Financial Accounting Management Accounting

Bound by GAAP, accounting standards, the Companies Act, Much less formal and without any
Regulations and relevant rules of the accounting association and other prescribed rules. The reports are
organizations such as the SEC. constructed to be use of the internal
management.
Information is often outdated by the time the report is Management reports can be both
Timeliness distributed to the users. The financial reports present a historical historical record and a
picture of the past operations of the entity. projections(mostly). e.g. A budget.

Most financial reports are of a quantitative nature. There ports Much more detailed and can be
Level of detail represent the entity as a whole, consolidating income and expenses tailored to suit the needs of the
from different segments of the business. management. Both quantitative and
qualitative in nature.

Prepared to suit a variety of users including investors and Main users are the key management
Main users prospective investors, management, suppliers, consumers, of the entity. Hence it called as
employees, banks, taxation authorities and interested groups. management accounting.
 LIMITATIONS OF ACCOUNTING INFORMATION

 9A particular user should consider the limitations surrounding

accounting information prior to use and make decision on such
information.

❑ Time lag
❑ Use of historical information
❑ Subjectivity of information

❑ Potential costs - Information compilation cost

- Release information to competitors

Apart from above, the profession of accounting is widely broadened

with the concepts of Corporate Governance, Code of Ethics and
Corporate Social Responsibility.
With rapid changes in the recent past, following new career opportunities are also
emerged within the profession.
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❑ Fund Accountant
❑ Internal Auditor (along with accounting function)
❑ Forensic Accountant
❑ Payroll Manager/Accountant

Profession of accounting (as a whole) in each country governed by rules,

regulations, acts, customs. Most of the rules & regulations are established by the
government authorities.

❑ CA Sri Lanka

Profession of accounting and some of its key attributes are evolving due to
following factors.

❑ Globalization
❑ Technological changes
❑ Demographic changes
❑ Social impact
11

ENVIRONMENT OF ACCOUNTING
 INTRODUCTION
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❑ The environment of accounting is the overall SCOPE within
which the entire accounting function/activities will be carried
out by an entity/organization.
❑ Recent episodes in corporate collapses and insider
trading/dealing re-iterate the importance of having well
established and strictly monitored environment to carry out
accounting function smoothly.
❑ Strictly monitored environment is essentially help to protect
interest of different stakeholders along with promoting more
investment avenues which in turn contributes economic growth
of the country.
❑ Government itself carries more responsibility to establish strong
accounting environment with the assistance of other regulatory
bodies such as CA Sri Lanka. This can be implemented by
introducing rules/regulations and other kinds of mechanisms
such as introduction of code of ethics.
 KEY CATEGORIES
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Following are the key categories represents overall accounting

environment;

Statutory: this basically consists of companies act no.07 of 2007, Sri

Lanka Accounting Standards and Sri Lanka Auditing Standards
Professional & Technical: guide to act in line with professional code of
ethics and use scares resources with 3Es
Political & Economic: key macro economic factors and changes in the
financial/fiscal policies of the government
Social & Cultural: changes in social/cultural pattern along with the
structure of the population
Technological: evolution in technology (introduction of MIS/ERP)
 14 SRI LANKA ACCOUNTING
STANDARDS BOARD (SLASB)
SLASB is responsible for the development of accounting
standards for the application purpose to the entities under the
companies act.
Functions/responsibilities of the board

❑ Participating in IASB research projects

❑ Providing SLASB staff to the IASB to work on selected projects

❑ Establishing and maintaining good relationships with other

standard setters.
 15

DEVELOPMENT OF ACCOUNTING STANDARDS

Following are the key steps involved in the event of establishing a

new accounting standard.

❑ Emerging issues are identified through submissions and other

materials from interested parties. An emerging issue could be an
exposure draft issued the SLASB, or by a regulatory change in Sri
Lanka that has consequences for standard setting.

❑ When an emerging issue is added to the SLASB’s work program,

the SLASB usually invites people with expertise to participate in
the process to investigate different opinions, current practices
and viewpoints on the issue.
 16
❑ An early version of the standard for comment, known as an
exposure draft, is prepared and sent to selected entities, user
groups, individuals, academics and practitioners for comment. This
original draft is reviewed and may be amended after considering
the views of the different parties.

❑ The actual exposure draft is issued, inviting comment from all

interested parties over a pre determined period. This is available for
downloading from the SLASB website.

❑ The accounting standard is finalized by reviewing the submissions

from the exposure draft and the final standard is then prepared.
 17
SLASB FRAMEWORK

A reporting entity is identified by reference to users who are

dependent on general purpose financial reports for making and
evaluating resource allocation decisions.

General purpose financial reports are financial reports intended to

meet the information needs common to users who are unable to
command the preparation of reports tailored to suit their information
needs.

Hence, the financial statements prepared by the entity (external/ to

publish) can be treated as general purpose financial statements.
 18 current SLASB framework includes following key 03 areas;
The

THE OBJECTIVE OF FINANCIAL

REPORTS
The objective of financial reports is to provide information about the
financial position, financial performance & cash flows of an entity that
is useful to a wide range of users in making their economic decisions.
Financial statements will be used by existing and prospective
internal/inter-related/external stakeholders with the aim of making
economic decisions which leads to reap economic benefits.
Hence, financial statements prepared by an entity should contain all
relevant financial and non-financial information to make respective
decisions.
 QUALITATIVE CHARACTERISTICS
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Key qualitative characteristic expected from financial statements can be
identified as follows;
❑ Relevance – Information should be of value for users & relevant in
making & evaluating economic decisions. The relevant will affect by
it’s nature & materiality.
❑ Reliability/Faithful Representation – The information must be
without buyers or due error & must faithfully represent transactions
& events.
❑ Comparability – The users of financial reports must be able to
compare aspects of an entity at one time and over time, and
between entities at one time & overtime.
❑ Ability to Understand – The information should present in the
most understandable manner to users without sacrificing their
relevancy or reliabilities.
❑ Verifiability – The users of financial statements must be able
to verify the material items independently
❑ Timeliness – The users shall receive the financial statements
on time in order to take economic decisions.
 RECOGNIZING ELEMENTS IN FINANCIAL STATEMENTS
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Following elements should be identified in line with the provisions available in

the respective accounting standards (LKASs).

❑ Assets – A resource control by the entity as a result of the past events &
from which future economics benefits are expected to flow to the entity.
E.g. PPE, Investments, Goodwill, Debtors, Inventory, Cash in hand & etc.

A present economic resource controlled by an entity as a result of past events. Economic resource is a
right that has the potential to produce economic benefits.

❑ Liabilities – A Present obligations of the entity arising from past events &
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits. E.g. Long term & short term Loan,
accrued expenses, provisions & etc.

A present obligation of an entity to transfer an economic resource as a result of past events. An

obligation is a duty or responsibility that the entity has no practical ability to avoid.
 Equity – The residual interest in the assets of the entity after eliminating its liabilities.
Equity will increase through contributions made by owners & through the excesses of
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the entity’s income over its expenditures & decrease vice versa.
E.g. Share capital, capital reserves & revenue reserves (retained earnings)

 Income – Inflows or other enhancements of assets or decreases of liabilities that

result in an increase in equity during the reporting period. E.g. Sale of
goods/services, interest on investments, dividends, service fee, grants, gain from sale
of assets, discount received and etc. Increases in assets or decreases in liabilities
that result in increase in equity other than those relating to contributions from holders
of equity claims.

 Expenses – Decrease in economic benefits in the form of outflows or depressions of

assets or incurrence of liabilities that result in a decreasing equity during the
reporting period. E.g. Cost of sales, salaries & wages, power & electricity, rent,
depreciation, interest, bad debts, telephone and etc. Decreases in assets or
increases in liabilities that result in decreases in equity other than those relating to