Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

ACF 255/DBA 239

FINANCIAL ACCOUNTING 1
LESSON 1
The context, purpose and regulatory framework of
financial reporting

Department of Accounting and Finance

Akua Peprah-Yeboah, Kwame Mireku, Kwadjo Appiagyei, Albert Agyei

1
 Learning Objectives

1 2 3 4 5 6

Define and Explain the Explain the Identify the Explain the Explain the
explain the accounting kinds of users of key qualitative
meaning and process financial accounting components characteristi
purpose of statements information of the cs that make
accounting and their and explain Conceptual information
purpose(s) their Framework in financial
informational statements
needs useful

2
 Financial accounting defined
• ‘Financial accounting’ is a term that describes:
• maintaining a system of accounting records
for business transactions and other items of
a financial nature and reporting the financial
position and the financial performance of an
entity in a set of ‘financial statements’.

• Financial accounting can therefore be

defined as the system by which economic
information about an entity’s activities is
identified, measured, recorded and
summarised so it can be communicated to
users for decision making.
3
 The accounting process
Four (4) key elements can be identified in the accounting process:

Preparing and Analysing and

Identifying Recording
presenting interpreting

Identifying Recording Preparing Analysing

business transactions, and and
accounting classifying presenting interpreting
transactions and accounting the reports
summarising reports to for users
data users

4
 The accounting process cont’d…
1. Collect and
analyse
information from
source documents

7. Analyse and
2. Journalise
interpret the transactions
accounts

Continuously

Periodically (or
immediately in a 3. Post
6. Record and End of Period computerised transactions to
post adjusting
system accounts in the
entries
ledger

4. Balance off
5. Prepare accounts and
financial extract a trial
statements 5
balance
 Business Organisations

A business is an organisation in which basic resources (inputs) are assembled

and processed to provide goods or services (outputs) to customers.

Profit motive Activities Ownership

• Profit oriented • Manufacturing structure
• Governmental • Merchandising • Sole
• Non- • Service Proprietorship
governmental • Partnership
• Company
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 Features of business organisations
Business structure Sole trader Partnership Company
Ownership One person Several individuals working Shareholders
together (two or more up to 20)

Liability for the unpaid debts Personal liability of owner Personal liability of partners May be Limited
and other obligations of the
business

Management Managed by owner Managed by owners (partners) Large companies managed

by professional managers

Raising capital Capital provided by the sole Capital provided by the owners Capital provided by the
owner (partners) shareholders. Public
companies can raise
capital from the public
through an exchange

Financial accounting and Financial accounts needed Financial accounts needed for Regulation of financial
auditing for tax purposes the benefit of partners reporting. Auditing is legal
requirement

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 Characteristics of Sole Trader

Advantages Disadvantages

Owner enjoys all profits Limited source of funding

Less expensive to operate Lacks perpetual succession

Quick decision making Unlimited liability of owner

Easy to form and end if needed Difficulty in ownership transfer

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 Characteristics of Partnership

Advantages Disadvantages

Business continues even if a

Unlimited liabilities
partner leaves

Pooling of skills and resources Limited sources of funds

Less accounting regulation Sharing of profits with others

Possible disagreement between

partners 9
 Characteristics of Company

Advantages Disadvantages

Limited liabilities Subject to strict regulations

Separation of ownership and

Delayed decision making
management

Ease in transferring ownership

Wide access to raising funds

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 Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana

Scope and objective of financial reporting

• According to the conceptual framework, financial reporting is

primarily for the benefit of the “external” stakeholders of the
entity.

• Financial reporting is also useful to managers. However, they

obtain better information on the operations of their business
through management accounting systems.

• The objective of general-purpose financial reporting 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.
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 Kwame Nkrumah University of
Science & Technology, Kumasi, Ghana

Information for economic decisions

• Primarily, financial reporting provides useful financial information about economic
entities to stakeholders/ users.

• Information – including financial information – has no value unless it is used.

• Users of financial information usually have an interest in some aspect of what the
entity does or might do in the future.

• Users of financial reports can therefore be categorised as:

INTERNAL EXTERNAL
USERS USERS 12
 Users of financial reports and their information needs
Suppliers and other
Management Investors
trade payables
• Profitability • Profitability • Liquidity
• Liquidity • Liquidity
• Solvency • Asset efficiency
• Stock market performance • Stock market performance

• Assess their stewardship. • Assess return on • Assess ability of entity to

investment. settle its obligations to
• To support their functions suppliers.
of planning, operating, • Payment of dividends.
and evaluating (control). • Assess credit limits and
• Shareholder wealth policies.
maximisation.
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Users of financial reports and their information needs

Customers and other

Loan providers Government
trade receivables

• Profitability • Profitability • Profitability

• Efficiency • Liquidity • Efficiency
• Good corporate image • Solvency • Long-term survival
• Good corporate image

• Assess survival of entity • Assess ability of entity to • Assess entity for payment
to provide quality goods pay interests and loan of taxes
and service that are principal at maturity.
relied on. • Derive data to inform
policy formulation and
regulation.
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Users of financial reports and their information needs
Employees and trade Financial analysts and
Public
unions advisors

• Profitability • Profitability • Long-term survival

• Liquidity • Liquidity
• Efficiency • Solvency
• Solvency • Asset efficiency
• Stock market performance
• Good corporate image

• Bargain for better • Provide advice to clients • Assess contribution of the

working conditions. on which entity to invest entity to the local
or disinvest community
• Assess security of
employment.
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 Financial Statements
A complete set of financial statements comprise of:

– The statement of financial position at the end of the reporting

period

– The statement of profit or loss and other comprehensive income for

the reporting period

– Statement of cash flows for the reporting period

– Statement of changes in equity for the reporting period

– Notes comprising summary of significant accounting policies and

other explanatory information
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 Financial Statements
Statement of Statement of Statement of
Statement of Notes to the
Financial Changes in
Profit or Loss Cash Flows accounts
Position Equity
• Shows the • Shows financial • Shows sources of • Shows the change • Provides
financial position performance over cash (inflow) and in owners equity supplementary
at a point in time a period of time uses (outflows) over a period information in
over a period of including: three forms:
• Summarises the • Summarises time • Significant
assets, liabilities revenue and • Net profit or loss accounting
and owners equity expenses for shareholders policies applied
• Changes in • Additional
share capital details of items
reserves in the financial
• Dividends to statement
shareholders • Additional
• Gains and losses information on
recognised items not on the
directly in equity financial
statement

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Accounting Regulation and
International Accounting Standards
• Financial reporting is regulated and
controlled.

• Countries have their own national laws and

regulations for financial accounting.

• The accountancy profession has developed

a large number of regulations and codes of
practice that professional accountants are
required to use when preparing financial
statements. These regulations are
accounting standards issued by the
International Accounting Standards Board
(IASB).

ACF 255/APY, KM, KA 18

 Sources of Regulation of Financial Reporting in
Ghana
• The Conceptual Framework for Financial Reporting

• Accounting Standards e.g., IFRS, IPSAS, ISA

• Acts of Parliament e.g., Companies Act, 2019 (Act 992),

Incorporated Private Partnership Act, 1963 (Act 152),
Banking Act, 2004 (Act 673).

ACF 255/APY, KM, KA 19

 IFRS Foundation
• The body with overall responsibility for international accounting is
the IFRS Foundation formerly called the International Accounting
Standards Committee Foundation or IASC Foundation.

• The members of the IASC Foundation have no direct involvement in

setting accounting standards, but they have oversight of three
bodies that do:

I. The International Accounting Standards Board (IASB)

II. The International Financial Reporting Standards Advisory Council
(IFRS AC)
III. The International Financial Reporting Standards Interpretations
Committee (IFRS IC).
ACF 255/APY, KM, KA 20
The International Accounting Standards
Board (IASB)

•Independent standard-
setting board.

•Develops and approves

International
Financial Reporting
Standards (IFRSs).

ACF 255/APY, KM, KA 21

IFRS Interpretations Committee

•IFRS Interpretations Committee issues

interpretations and guidance for
accounting standards.

ACF 255/APY, KM, KA 22

The IFRS Advisory Council

• The IFRS Advisory Council

(IFRSAC) provides a forum
through which the IASB is able
to gather opinions and advice
from different countries and
industries. The IFRSAC consists
of experts from different
countries and different
business sectors, who offer
advice to the IASB.

ACF 255/APY, KM, KA 23

 The Role Of International Financial Reporting
Standards

• International Financial Reporting Standards provide rules and guidelines

for the preparation and presentation of financial statements, but they do
not cover every aspect of accounting and every type of business
transaction.

• Where there is no relevant accounting standard for particular aspects of

financial reporting, preparers of financial statements are expected to
apply the general principles and concepts of accounting that are set out in
the Conceptual Framework.

• A role of IFRSs is to encourage business entities in all countries to apply

similar principles, concepts and accounting methods, so that the financial
statements of all companies can be compared.
ACF 255/APY, KM, KA 24
 Conceptual
Framework

• The purpose is to provide a coherent set of principles that:

• assists with standard consistency

• assists preparers deal with issues not addressed by a standard

• assists auditors in forming an opinion on compliance

• assists users to interpret statements.

ACF 255/APY, KM, KA 25
 The components of the Conceptual Framework
The IASB’s
objective of
conceptual financial
reporting
framework for concepts of
capital and
financial
statements and
financial capital
maintenance
the reporting
entity

reporting
comprises 8
qualitative
chapters presentation IASB’s
characteristics
of useful
and disclosure Framework
financial
reporting

elements of
measurement financial
statements

recognition and
derecognition

ACF 255/APY, KM, KA 26

Qualitative Characteristics Of Useful
Financial Information

The IASB Conceptual

Framework describes:
Fundamental Enhancing
qualitative qualitative
characteristics characteristics

• relevance • comparability
• faithful • verifiability
representation • timeliness
• understandability
ACF 255/APY, KM, KA 27
 Fundamental qualitative characteristics

• Capable of making a difference in the

decisions made by the capital
- Relevance providers.
• Predictive and confirmatory value.

• Attained when the economic

- Faithful phenomenon is depicted completely,
representation neutrally and free from material error.

ACF 255/APY, KM, KA 28

 Enhancing qualitative characteristics

- Comparability - Verifiability
Quality of information that Quality of information that helps
enables users to identify assure users that information
similarities in and differences faithfully represents the economic
between two sets of economic phenomena.
phenomena.

ACF 255/APY, KM, KA 29

 Enhancing qualitative characteristics

- Timeliness - Understandability
Having information available to It is the quality of information that
decision makers before it loses its enables users to comprehend its
capacity to influence decisions. meaning.

ACF 255/APY, KM, KA 30

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