FUNDAMENTALS OF ACCOUNTING

Financial Accounting

Financial Accounting is the art and science of recording and classifying financial transactions in

the books, summarizing and communicating financial information through production of

financial statements/reports and interpretation of results to facilitate decision making. The results

of financial accounting are prepared in form of financial statements

The business proprietor normally runs a business to make money. He or she needs information to

know whether the business is doing well:

How much profit or loss has the business made?

How much money do we owe?

Will I have sufficient funds to meet my commitments?

The purpose of conventional business accounting is to provide the answers to such questions by

presenting a summary of the transactions of the business in a standard form.

Financial Accounting and Management Accounting

Financial Accounting comprises two stages:

Book – keeping, which is the recording of day to day transactions; and

Preparation of accounts, which is the preparation of statements from the book keeping

records; these statements summarise the performance of the business usually over the

period of one year.

Management Accounting

Management accounting is defined by the Chartered Institute of Management Accountants

(CIMA) as follows:

“The application of professional knowledge and skills in the preparation and presentation of

accounting information in such a way as to assist management in the formulation of policies and

in the planning and control of the operations of the undertaking”.

Management accounting, therefore, seeks to provide information which will be used for decision

making – purposes (e.g pricing, investment), for planning and control.

OBJECTIVES OF FINANCIAL ACCOUNTING

The objectives of financial accounting are best discussed with reference to financial statements,

which form part of the process of financial reporting.

Financial accounting statements include the statement of profit and loss and other comprehensive

income, the statement of financial position, cash flow statements and notes that may be necessary

to explain matters relevant but not included in the statements. Financial statements should

Dr. Dorothy Ssendagire 1

NOTES FOR YEAR ONE SEMESTER ONE FOR ALL STUDENTS AND FINALISTS

Accounting and finance