ACCOUNTING FOR ‘DUMMIES’ 1

This document summarizes my learnings from the Corporate Financial Accounting module at Lagos Business School. It is a straightforward guide on Basic Accounting Concepts and Principles.

Accounting is the primary method for communicating a company’s financial data to multiple users (internal and external) so that they may make informed decisions about the organization. It is known as a language of business, because it is used to evaluate a company’s operations, activities, and management decisions. Furthermore, accounting can be defined as the act of gathering, documenting, evaluating, and sharing historical financial data in order to help guide future decisions.

Shareholders, customers, employees, the government, investors, lenders, rating agencies, and regulators are users of accounting data.

Managerial Accounting Information

To make the best decisions for a company, an executive must first have a thorough understanding of the company. This data is utilized to make decisions in three areas of management: planning, implementing, and controlling. Financial data is frequently used to create goals, evaluate different possibilities on a budget-based basis, change plans as needed, and track success.

Financial Accounting Information

Executives, investors, financial institutions, lenders, the government, the general public, and others use financial accounting information to make decisions about the company and its activities. Investors want to know how much their investment is worth currently and whether they should increase their stake in the business. Financial institutions and other lenders want to know if the business appears to be able to return the money it has borrowed.

Types of Financial Statements

• Statement of Financial Position / Balance Sheet
• Statement of Comprehensive Income / Profit and Loss Account
• Statement of Changes in Equity
• Statement of Cashflow
• Notes to the Financial Statement

International Financial Reporting Standards

This is a harmonized accounting reporting standards across countries and continents to facilitate easier comparability of financial statements.

The following are the benefits of the standards convergence:

• Improved comparability of reported financial information by entities due to greater level of disclosure requirement.
• Easier access to foreign capital funding and cross-border stock exchange listings.
• Investors will better understand the financial statements of Nigerian companies.
• More effective management of enterprises and efficient processes since IFRS reporting is performance-based.
• More transparent financial information to all stakeholders.

Financial Statement Analysis

This is a process of selecting, evaluating, and interpreting data obtained from financial statements, along with other pertinent information, in order to formulate an assessment of a company’s past, present and future financial condition and performance

Purpose of Financial Statement Analysis for Users

Financial Statements indicates if:

1. a business has adequate liquidity to honour its short-term obligations.
2. the business is run efficiently, effectively and profitably.
3. the business is carrying excessive debt (highly leveraged) or not.
4. it is advisable for creditors to extend loans or credits to the company.

Purpose of Accounting for Managers

Managers must have a working knowledge of accounting for the following reasons:

• Understanding of ratios
• Ability to interpret annual reports and accounts
• Understanding of financial statements to make business decisions.
• Portfolio Management
• Useful tool for in-depth quantitative analysis for decision making and consequently problem solving.
• It is a measure of asset utilization
• Useful for budgets, budgeting and budgetary control
• It enables managers have a broader global perspective

That’s all I’ve got for now. See you in the next post.