1.1.

Introduction to Financial Accounting for Business

1.1.0 Introduction to Financial Accounting for Business
Welcome to this your first module in Financial Accounting for Business. A number of you
will be taking Accounting “for the first time” so to speak and have a lot of fear of the study.
This one group will take every opportunity to tell anyone who has ears and time to listen that
“I have no background in Accounting” so that they have people who sympathise with them
from day ONE till examination date.
Inevitably, this group of students will not take the module seriously like any other modules
that they give their time to study and do exercises so that they master the concepts and
principles involved. In this group we find students who will not want to ask questions even if
they have them for fear of having others laugh at them. This should not be the case and as
you will realise it is a study that is not “new”, very difficult and one you cannot pass.
On the other hand, there is a group of students who “have a background in Accounting” and
they will spare no time to boast about their good fortune till they graduate. Such students will
not work hard but relax and not get the benefit of this background through distinctions. They
will not want to learn anything new even if there are a lot of new ideas to learn. Remember,
what knowledge you have is important. It brought you here. Add the new knowledge the
study offers and you share with others.
However, the study takes you and everyone else as “one who has no background in
Accounting” and hence we all start from that position. Feel free to ask. I do not expect people
to laugh at you but that they give the answers and explanations you need.
1.1.1 Some Illustration
What do l mean when I say Accounting is not that “new”? A number of you go to church and
you are taught something along these lines: Blessed is the hand that gives more than the
hand that receives. Of course, it could be in old English, but you get the idea of the verse.
Now, for those who have a background in Accounting please state to us the Double-entry
principle. It says Credit the giver and Debit the receiver. Looking at these two statements
closely, we realise the act of giving/ crediting and receiving/ debiting. The only difference
here is that God has more blessings to give the giver than the receiver but in Accounting what
is given/ credited is what is received/ debited: nothing more nothing less. We will deal a lot
with the Double-entry principle in this and subsequent modules this semester and other
semesters till your graduation.
Another illustration will help demystify Accounting as a study. Each one of you came to
MSU to start a degree programme with some budget to cater for various needs and
necessities. True? Now you had some Income so to spend. Now, from the moment you
boarded a means of travel to MSU and as the days at MSU accumulate, you were spending
money/ finance. Is it not possible that you can draw up an Income and Expenditure
statement that will end up with either a Surplus/ Deficit? It is very possible. We will deal
with the Income and Expenditure statement for a service provider where the service provider
has either a Profit/Loss so to speak.
Lastly, we have married students here or have relations who got married and “lobola” / bride
price was paid in whatever forms. It is also possible that not all the asked for price was paid.
There was a balance to be paid. Now without looking at this transaction as buying and
selling, but still as a transaction that took place, we can already see that the in-laws will say
their so-in-law owes them something and the son-in-law says he owes the in-laws something.
Correct? There is already a creditor/debtor relationship. If we add up all the son-in-law paid
in the hands of the in-laws there are now assets in the hands of the in-laws but still there is a
balance or a liability/ chikwereti/ isikwereti. True? For those that have a background in
Accounting, they can draw up a Balance Sheet or a Statement of Financial Position. We will
learn this statement in this semester and other semesters to come.
Now, do you agree that in this class there is nobody really who has no background in
Accounting. What seems to be new could be the technical terms used by Accountants as they
account for the money of an organization/ entity.
So how did Accounting develop?
We find that Accounting is as old as the history of mankind but it developed as part of
society’s Economic activities. It developed as human beings recorded their generation and
accumulation of wealth. Human beings had to count their livestock, bags of grain, tones of
iron for trade and/ or money in their banks etc and measure their wealth in the process. The
recording was done manually on clay slates, books of accounts and then automation was
developed. However, what did not change in this development was the Double-entry system.
I am sure when you paid your tuition fees, you got a machine printed receipt. If the system
was down, you got a handwritten receipt. There is no difference between these two receipts.
1.1.2 Exercise
Draw up an Income and Expenditure statement for yourself starting from the time you
departed from home up to week one at MSU.
Just how did you get your Income? Manually or electronically? How did you spend your
money?
1.1.3 What is Accounting?
Accounting is best defined as both the systematic and orderly recording of financial
information/or transactions of a sole trader or an organisation; it also involves the
classification and summarisation of these financial transactions with the aim of producing
financial reports periodically (i. e weekly, monthly, quarterly or annually) in the form of
financial statements. These financial statements are then communicated to interested users for
their decision-making purposes.
Notice that the sole trader is an individual and the organisation could be a company, school,
partnership etc.
A further analysis of the definition will help you appreciate what Accounting is and how it
differs with Book-keeping.
With Book-keeping, the main activity was the systematic and orderly recording of the
organisation’s transactions in the books of Accounts. This normally ends with the
production of the Trial Balance. However, Accounting goes further to produce financial
statements, communicating with the users of these financial statements who then make
decisions.
There are three parts to the process of Accounting. Let us look at them individually:
  The first part of this process is the identification of all those economic events/
transactions which stand as proof of relevant exchange of goods and services for
a particular organisation. If you pay ZUPCO bus to come to MSU, it is a
transaction that is not relevant to MSU. So your ZUPCO ticket will not be of any
relevance to MSU. It is therefore an irrelevant transaction that MSU cannot identify in
its books of accounts. When you pay for a meal at MSU, that is a relevant economic
event/transaction to MSU and it will be identified as a relevant transaction in its books
of accounts.
 The next part of the Accounting process is the recording function where the
monetary value of the transaction/ economic event takes place evidenced by
production of a receipt and an account is either debited or credited in the books of
accounts. We now have a permanent record of the economic transactions /
activities that took place in an organisation over a specific period of time. Note
that these permanent records are orderly and based on time meaning that we do not
expect receipt number 78 to be issued on day One or that cheque number 12 to be
written on day One. We expect receipt number One on day one, cheque number one
on day One which brings about the orderly and systematic recording of transactions.
The same transactions are expected to be classified then summarised. Hence, we
neither expect an acquisition of an asset to be recorded as an expense, nor that when
we sell goods on credit, we issue a receipt as if we received cash. No.
 After a specific accounting period of say a month, we can produce a financial report
in the form of financial statements. These financial statements need to be
communicated to interested users so that they can make informed decisions. The
communication process may involve physical posting of the financial statements or
posting to the electronic mail addresses/ email to these users of the organisation’s
financial statements. The users can now make informed decisions.
1.3.3.1 A short exercise
List some of the permanent records an organisation has that are of an Accounting nature.
1.3.4 The Nature of Accounting
Remember we started off by saying that none of us can truly say that they have no
background in Accounting. We said we all have some background in Accounting except that
we lack understanding of technical terms used in Accounting. Let us deal with the nature of
Accounting.
What is important to note is that Accounting is a specialised way of communicating a
specialised message concerning the financial affairs of an organisation/ an entity. Accounting
is a specialised language that utilises both words and figures therefore the recipient of the
financial reports/ statements should be familiar with this specialised language otherwise no
communication will take place and meaningful decisions made.
An example could be: For the Ndebele speakers Dube is pronounced Duve, but for the Shona
speaker, Duve is not pronounced that way. It has the “v” clearly heard. Or if you call the
name of the tennis player Jokovic….you pronounce it as Jokovich… but that is someone else.
In Accounting we do not water down the financial statements to suit those who do not
understand the Accounting language BUT that the user of these financial statements has to
rise up to understand this specialised language. Similarly, the Police, military and those in the
hotel industry do not spell words as we do.
For example the name NOAH is spelt November Oscar Alpha Hotel. Got it! You would not
understand this specialised language until you learn it. How do you spell your name if you
are in the Hotel industry or in the armed forces? Try it. My first name: Charlie Hotel India
Tango Oscar Mother Bravo Oscar and the second name Echo Delta Whisky India November.
Lastly, the surname is Kilo Alpha Zulu Echo Mother Bravo Echo.
Understand that each organisation uses “scarce” financial resources. Even at home, we tell
the children not to play with the tape water. We do not actually talk about high water bills.
We just instruct them to play away from the water tape so that we control the water bill. The
children would not understand terms such as “water bills”, high electricity charges etc. But
now that you want to manage organisations at a higher level, you will have to use the correct
Accounting language and talk to Accountants and understand what is happening in the
organisation in financial terms. You cannot manage what you do not understand, True?
 Each organisation in Zimbabwe has to record its financial transactions using a unit of
measuring monetary value…be it the Zim Dollar (ZWL)/ RTGS/ bond or if the entity
is using a multi-currency system, the US dollar, Rand or Pula will be used to record
transactions. The unit of measuring monetary value is called the universal accounting
denominator. We expect the entity’s financial statements to reflect that chosen
universal accounting denominator.
 Note that an organisation goes into events that are diverse so not all of these economic
events/ transactions have monetary value. Some events do not have such monetary
value such as an end of year party held at Mazvikadei Resort dam. That process of
getting together and looking back at the year does not have a monetary value but the
workers feel happy, energized and identify more with the entity.
 Money has an unstable value. Its value is affected by such economic forces as
inflation/ deflation.
 The above two points underline the weaknesses of the universal accounting
denominator.
 What is the universal accounting denominator your organisation is currently using to
record financial transactions?

1.3.5 Types of business organisations

When we talk of business ownership we deal with five aspects:
 How the business is owned
 How the business is managed
 How the starting capital was raised
 How the profits or losses are allocated/ divided/ distributed.
 How the risks faced by the entity are shared/ divided.
We will look at a sole trader as an example and tabulate these five aspects:
Table 1.1 A sole trader

Ownership of Management of Raising of start- Sharing of Sharing of

business business up capital profits/ losses business risks
Owned by 1 Managed by 1 Savings of/ All profits/ All business
person only person/ the loans got by losses taken by risks taken by
owner owner/ family owner. owner.
support/ gvt
grants

1.3.6 Exercise
Working in groups of three; add at least three more forms of business ownership in
Zimbabwe. Use the format in Table 5.1 above.

1.3.7 Importance of accounting

Accounting forms an important part of a business. A basic understanding of Business
Management says that management is essentially the Planning, Leading, Organising, Control
and Co-ordination of both the human and non-human capital. Accounting will enhance your
Planning and Control of the entity. When an organisation draws up a budget, it is Planning
to fund its future activities; when funds are disbursed to the employees to perform their
activities, there is Control of how much is issued to them at a given time to enable them to
achieve set organisational goals.

As you can see, Accounting is very important in your quest to become a good manager.

1.3.8 Definition of terms.

The terms will be defined as we go through the module. You may want to revise what we
have done so far.
1.3.9 Users of Financial Information
As you may realise by now, there are many users/ consumers of financial information. Each
group of users requires financial information that is specific to them and different from the
others. Hence, it becomes difficult to produce financial information for each user but rather,
the financial information will be tailor made so that each user picks what they want from it.
These financial information users require the financial information for decision-making
purposes.

There are basically TWO groups of financial information users: External and Internal
financial information users.

1.3.9.1 Investors
These are external to the organisation but get summarised financial information from the
Financial Accountant. Of the investors, there are two groups: Potential investors and
Shareholders.
Potential investors are interested to see whether the entity is both profitable, and has potential
to grow their investment. They are interested in the profit made they may share in through
dividends; and that the share price will be increasing and they have capital gains. This group
of investors will analyse the financial information and then invest their money when satisfied
on these two aspects.
Shareholders, on the other hand, have already invested their money into the entity. They are
the owners of the company. They are interested to see whether the entity is making profits
and they will be anticipating dividends as well as capital gains. They are interested to see to it
that the organisation is growing profitably, or if it was making a loss, that loss-making phase
is overcome.
1.3.9.2 Creditors
This group of people may extent supplies or short-term credits to the organisation through
credit sales of goods/ services rendered without immediate cash payment. They expect to be
paid back their advances in the current year. If they are banks, they would have advanced
long-term loans payable over a year. So, they are interested to see that the organisation is
capable of repaying them both their capital and interest which forms part of their income.
They get worried if the entity over-borrowed because this may mean that the organisation
may fail to pay back their capital and interest.
1.3.9.3 Government agencies
It is proper to say Government is the user of financial information, but rather that it does that
through its various agencies such as Zimra when it collects corporate taxes, PAYE and other
taxes. The gvt agencies are interested to know how much collectable taxes are from profitable
companies. Those gvt departments that are involved in manpower planning are interested to
see whether gvt policies are enabling companies to employ more people.
1.3.9.4 Employees
Some authors and even students classify employees as internal users, but I think this is not
correct. The employees get summarised financial information. The employees want to use the
financial information for collective bargaining and to decide whether there is still job
security. If both employees and management have the same detailed financial information,
then the deadlocks and strikes we witness during the collective bargaining seasons would not
arise. The employees would be in agreement with management. This is not the case.

External users are best served by a branch of Accounting called Financial Accounting. This
branch produces financial statements guided by International Accounting Standards (IAS)
and Generally Accepted Accounting Practice (GAAP). These are guidelines to enable various
external users to get uniform financial information otherwise if this was not the case, each
organisation in Zimbabwe or outside it would produce these financial statements in different
forms. Decision-making would be difficult to make.
1.3.10 Internal Users
It is only management that is the internal user of financial information. Management gets
detailed financial information so that it measures the attainment of set organisational goals
and set new targets for the coming financial period. Management specify how this financial
information should be presented to them.
For example, at MSU, the management may want to know in detail the Revenue by Faculty,
Mode of Entry, or by Campus. Such detail is not given to external users at all.
Management get their financial information from a branch of Accounting called Management
Accounting.
1.3.11 Exercise
1) Give reasons we say Accounting is a specialised language?
2) Who are the different users of financial information?
3) What are the differences between Financial Accounting and Management Accounting?
1.3.12 Accounting Principles
Accounting is a practical subject that requires you to make calculations of an individual’s or
organisation’s financial transactions/ economic events. However, Accounting practice is
guided by some principles/ theory/ concepts.
Write notes on the following Accounting principles:
 Accrual
 Consistency
 Prudence
 Materiality
 Matching
 Realisation
These principles/ concepts/ theories will be used extensively when we do Year-end
adjustments as we prepare to produce Financial Statements to close our study.

1.3.13 Financial Statements

Remember earlier on said that the user of Accounting information receives periodic financial
statements for decision-making purposes.
The full set of these financial statements are listed below:

 Statement of Profit or loss and Other Comprehensive Income that measures the
profit/ loss of the entity.

 Statement of changes in equity that shows how much the owner’s capital has
increased or decreased.
  Statement of financial position which measures the balance of Assets= Equity/
Capital + Liabilities.

 Statement of Cash Flows which measures the power of the entity to generate cash.

 Explanatory notes to the financial statements which explain how some Accounting
items/ balances were arrived at such as the depreciation method used.
We basically deal with four of the above statements. We do not cover the Statement of Cash
Flows at this level.