expenditure of a property to guide in allocation of funds efficiently.
The Fiduciary Accountant
serves as trust manager, receivership or estate manager.
xii. Fund Accounting
A Fund Accountant works in not for profit organisation or Non-Governmental Organisation
(NGO) to prepare receipts and payments, income and expenditures, statement of financial
position to ensure efficient and accurate funds allocation. An organization such as Churches,
Educational Institutions, Hospitals, Clubs, Government Agencies and Charities.
1.4 Fundamental Qualitative Characteristics of FinancialAccounting
One of the foremost objectives Financial Accounting reports is the supply or provision financial
information to assist the users of the report in making effective decisions about how the economic
resources of entities are deployed. The information provided in the Financial Accounting will assist
the users of the information to make timely economic and other financial decisions. Financial
Accounting is principally concerned with providing accounting information to both internal and
externalusers. In accordance with IAS 1 on presentation of Financial Statements, the components of
Financial Statements are:
• Statement of Financial Position;
• Statement of Profit or Loss and Other Comprehensive Income (OCI, in this syllabus as
Statement of Profit or Loss);
• Statementofcashflows, (this is outside the present syllabus, it will be addressed as
candidates progress in the ICAN examinations);
• Statement of changes in equity(also, this is also not in this syllabus); and
• No test other financial statements (not in this syllabus).
Qualitative Characteristics of Useful Financial Information
The qualitative characteristics of Financial Statements are the main features or attributes or basic
elements that are inherent in the reports to make it useful and address the purposes why they are
prepared. The International Accounting Standards Board, which is referred to as the IASB’s
conceptual framework; it states that accounting information is use fulifit possesses both the
fundamental and enhancing qualitative characteristics.
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FundamentalQualitativeCharacteristics
The fundamental Qualitative Characteristics are relevance and faithful representation. These are
explained in the order of presentation.
a. Relevance
A financial information is relevant if it can make a difference in the decision made by users.A
financial information makes difference in users’ decision when the users areaware
capable of making differencein decisions when it:
• has the capacity to directly influence the outcomes of how users used the reports to
allocate economic resources among various alternative courses of actions, that is such
report should have capacity to influence major economic decisions of users on
resource allocations;
• is supplied in time to directly influence the economic decisions;
• has Predictive Value, Confirmative value or both information has predictive value if it
helps the users to predict what happen in the future. Where the information helpsusers confirm their
earlier assessments and predictions made in the past, it is said topossess confirmatoryvalue
b. FaithfulRepresentation
Financial reports are depictions or representations of economic phenomena in words and
numbers. An information is faithfully presented if it indicates faithfully the transactions they
contained, other events it purports to present and these are reported and accounted for in
accordance to the substance and economic realities but not merely their legal form of
ownerships. In other words, for a financial information to beuseful,theinformation
reportedmustnotonlyrepresentrelevant t h e phenomena,butitmust also faithfully represent the
phenomena that it purports to represent.For an information to be perfectly and faithfully
reported, it must have three characteristics. The information must be:
• Complete
A complete depiction includes all information and explanations necessary for a user to understand
thephenomenonbeingdepicted.
Aneutraldepictioniswithoutbiasintheselectionorpresentationoffinancialinformation.
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Freefromerrormeanstherearenoerrorsoromissionsinthedescriptionofthephenomenon, and the process
used to produce the reported information has been selectedandapplied with no errors in the process.
• Neutral, free from biasness;and
• Free from error, free from material errors that can distort the uses of the information, such an
information must mislead users of the information. An error free financial statements do not
mean the information is accurate in all ramifications, but the errors must be minimal and must
distort judgements of the users of the information.
Enhancing Qualitative Characteristics
These are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully
presented. Theyinclude:
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability.
i. Comparability
Comparability is that qualitative characteristic of financial information that allows a choice between.
Where an entity is privileged to have information about the financial performance of other entities of
similar sizes in the same industry, a comparison of the entity’s performance with those of others
enablessoundeconomicdecisionstobemade.For example, decisions as to whether to dispose or hold a
particular investment, whether toinvestin oneindustryinpreferenceto anotheraremadebythis process.
For financial information to be neutral, it must be:
• Consistent; and
• Fully disclosed all necessary explanations and information useful to the users
ii. Verifiability
Verifiability is the quality that enables users to have the assurance that the information depicts exactly
what it purports to state. As such different knowledgeable people considering the information will be
able to arrive at similar decisions on the same issue.
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iii. Timeliness
Timeliness implies that users are given the relevant information needed to take economicdecisions in
Generally, the longer the information had been obtained the less useful itbecomes for making today’s
decisions.However, where a user is required to make sometrendanalysis, seeminglyold information
mayhavesomecontinuingusefulness. The older an information the less it is not useful to the users of
the information.
iv. Understandability
Information should be presented in a way that the user can comprehend it. This can be achieved if the
information is appropriately classified so that the user easily grasps theinformation. Financial reports
should therefore be presented in a form that any average knowledgeable reader can understand for it
to beuseful tohim.
1.5 Principles of Coding in Financial Accounting
Coding in Financial Accounting means processes through which data is recorded in the books of
accounting. Each book of accounts or account heads are assigned unique code used in identifying the
correct account for posting in a computerized or manual accounting systems. In a computerized or
manual accounting environments, codes/symbols (alpha-numeric, numeric and combination ) are
engaged to represent revenue, purchases, inventories, expenses, assets and liabilities are assigned
numeric or alpha-numeric acronyms, which are used to describe the transactions and posting in the
accounts.
The Financial Accounting coding consists of fields and codes to classify, record and analyse
transactions and financial data in a computerized accounting environments. Coding is a symbolic
representation (alpha-numeric, SW, numeric, 1010, or combination, QQ12 ) of transactions in the
process of preparing financial accounting. The coding can be designed in such a way to capture
location (i.e. place), services, activities, journals, ledgers, account codes and other books of accounts.
Objectives of Coding in Financial Accounting
a) Uniformity
Coding is designed in such a way to ascertain sameness for preparation of financial
accounting, budgeting and data collation in an entity.
b) Consistency
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It is consistently applied to represent items of revenue, expenses, assets, capital and liabilities.
For example, cash sales may be represented with 1001, credit sales 1002, sales return 1003,
cash purchases 1004, credit purchases 1005, purchases returns 1006, carriage inwards 1007,
inventories 1008, salaries and wages 1009, electricity bills 1010, stationery 1011, property,
plant and equipment 1012, depreciation, trade payables 1013, trade receivables 1014, loan
1015 and capital 1016 among other transactions
c) Brevity
The acronym used in coding is not too lengthy. It is short and easily comprehensible.
d) Conformity with Generally Accepted Accounting Principles (i.e. International Financial
Reporting Standards (IFRS).
The code is designed in such a way that the principles in the IFRS is not violated. The code
conforms with the International Accounting Standards (IAS) and the IFRS to assist in the
preparation of a general purpose financial statements.
e) Regulatory Compliance
The coding demonstrates compliance with all extant regulations imposed by government and
regulatory agencies in Nigeria.
f) Data Integration
The coding (field and codes) integrates with an entity’s chart of accounts and it yield must be
consistent with external reporting needs such as the Integrated Post-secondary Education Data
System (IPEDS). It must be duly accredited by bond rating organization in compliance with
external reporting.
g) Conciseness and Unambiguity
It must be und--erstandable and less ambiguous to the users in the preparation of financial
accounting in an entity.
Advantages of Coding in Financial Accounting
a) It compresses large volume accounting and financial data in a fast growing entity;
b) It provides tools analyses for chartered accountants to measure trends of performance and
position statements to predict into the future;
c) It assists in programming and production of accounting software;
d) It assists in fast processing of real time transactions and other transactions;
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e) It is unambiguous in processing of financial transactions;
f) It is efficient and reliable in processing huge volumes of financial transactions of an entity.
g) It reduces amount to be incurred on labour to capture data in an entity; and ₵It aids the use
of batch and real time processing of financial data.
1.6 Types of Accounts
An account is a record, which is used to post financial transactions of an entity’s over a stated period
of time. The account has two sides, the debit and the credit sides. The account records twice every
transaction in a period of time. A ledger is a form of account with the debit and credit sides. The
principles of duality or double entry principles are usually engaged to record transactions into ledgers.
Debit Sides Kofi Business Enterprise Accounts Credit Sides
Date Descriptions Amount Date Descriptions Amount
₵ ₵
Left Hand Side= Right Hand Side=
Debit entries Credit entries
(a) Kofi started business with ₵100,000 Cedis
Capital Account and Cash Account
a) Purchased goods worth ₵20,000 cash
Purchases Account and Cash Account
b) Cashsales worth ₵30,000
Cash Account and Sales Account
c) Bought goods worth ₵60,000 from Mr. Gbeki
Purchases Account and Mr. Gbeki’s Account
d) Goods worth ₵90,000 sold to Mr. Essien
Sales Account and Mr. Essien’s Account
In financial accounting, every transaction has two accounts. These are indicated in transactions a –e above. In
Financial Accounting, a ledger is a form of account. It has a T-format. In an entity, ledgers record accounts of
individuals, partnerships, suppliers (payables), customers (receivables), physical assets and liabilities.
In Financial Accounting, there are two (2) main classifications of ledger. These are:
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a) General Ledgers; and
b) Subsidiary Ledgers
General Ledger (GL)
A General Ledger is a set of account, which records the day-to-day transactions of business entity using the
concept of double entries. This is known as duality concept. The General Ledger reveals the summary of all
subsidiary ledgers in which every transaction is recorded. Each transaction has two parts, these are the debit
and the credit parts. GL contains information which is needed to prepare the financial statements.
The transactions recorded in the GL reveals the summary/balance of assets, liabilities, capital/equity,
revenues and expenses. The GL encompasses all transactions to prepare the Income Statements, Statement of
Financial Position and other reports. The GL is very useful in extracting the Trial Balance, list of balances in
all books of accounts of an entity. This assist in locating errors in the books of accounts.
Subsidiary Ledger
A subsidiary ledger is called books of original entry or books of prime entry. The subsidiary accounts consist
accounts such as Sales Day Book, Purchases Day Book, Returns Inward Day Book, Return Outward Day
Book, Cash Book and Petty Cash Book, which will be discussed later in the study pack.
Classification of
Ledger/Accounts
Accounts/Ledgers:
Accounts/ledgers can be
subdivided into the following
types as depicted in the diagram
below.
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a) Impersonal Accounts
An impersonal ledger account does not involve individuals, firms, sole traders, partnership or
company.Impersonal account does not affect these groups of people. An Impersonal Ledger Account
can be classified into two main categories; these are real account and nominal account
(i) Real Accounts
A real account records transactions relating to tangible property or possession of individuals,
firms, and companies, etc. A real account can never be a liability account. Real accounts
are assets accounts. Examples of real account transactions include plant and machinery,
furniture, equipment, machinery, building, etc. They physically exist in reality.
(ii) Nominal Accounts
Nominal Accounts consists of accounts of incomes and expenditures or expenses and
intangible assets. Income relates to gain, that is, excess of revenue over costs; while
expenditures are expenses/costs expended on anything. Also, intangible assets are assets that
do not have physical existence e.g. Franchise, Patents, Goodwill and Copyright. Examples of
expenditures are rent, salaries and wages, stationery, rates, petrol, lubricants and postages etc.
Examples of incomes are discount received, commission received, sales, interest received,
commission received, and interest received among others. It should be stressed that all entries
in the nominal accounts end in the Statement of profit or loss. That is, the balances in the
nominal accounts are normally used to prepare the Statement of Profit Or Loss for the year
ended 31 December, 20X2. In smaller entities, every account may be kept in just one ledger
but bigger organizations keep their accounts in many ledgers.
b) Personal Accounts
On the opposite, personal ledger records the accounts of various individuals, firms, sole
traders, partnerships, companies etc. Examples include Yinka’s, ABC’s account, Olukunle’s
Account. It can be further categorized as: Receivables’ Ledger, which records customers who
bought business goods on credit, it is called sales ledger. It may also be Supplier’s Ledger –
records of suppliers who sold goods on credit to the business. Also, there is a private ledger.
A private ledger records private information such as capital account, drawings account, loans
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account, personal advances, bank/cash account and Statement of Profit or Loss for the ended--
- Capital Account monitors the resources use in starting business and Bank/Cash account, is
used to keep all monies of the business.
1.7 Users of Financial Statements
Accounting information is of interest to various groups of people. The users of Financial Statements
may be classified under two main headings:
a) Direct Users; and
b) Indirect Users
Direct users are mainly the stakeholders in the business. The direct users bear the consequences of
losses made in the course of a business. They are owners of business, management, employees, long
and short-term supplier of funds. The indirect users of financial statements do not have financial stake
in the running of a business entities. Examples of indirect users of financial statements are the Federal
Inland Revenue Services, State Inland Revenue Services, customers, financial analysts, government
at various levels, community and associations among others. The following people are likely to be
interested in accounting information.
(a) Owners of the business/investors: These are Sole traders, partners and shareholders.They
need accounting information to asses show efficiently the management is performing –they
want to know how profit able the business is and how much of this profit they can withdraw
for their own use. It will also allow shareholders tomake appropriate investment decisions
such as buying and selling of shares, deciding on whether to dispose some or all the shares,or
to acquire more of the entity’s shares.
(b) Management: These are the people who manage the affairs of the business for the owners.Ina
limited liability company, they are the member so the board of directors and other
m anagem ent. They need accounti ng information to ascertain the efficiency of the
policy they formulate and to plan and control there sources of the business.
(c) Trade Payables: These are the people who supply goods to the business on credit.The trade
pay ables want to know the ability of the business to pay or the good ssupplied to the business
promptly.They will be interested in the liquidity of the business.
(d) Customers: These are the people who purchase the goods or services provided by the
business. The customers want to know whether the business will continue to be areliable
source of supply; though they will also be interested in the quality of
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theproductsofthebusiness.
(e) Tax authority: Accou n t i n g Profits determine the basis of computingtax. The taxa uthority
wants to determine the taxpayable by the entity and its employees.
(f) Employees of the entity: Existing employees need accounting information to enable them
decide how secure their job is and the ability of the business to pay good salaries and provide
good welfare facilities.
(g) Lenders: These include the banks and other loan payables. Financial statementsenable them to
decide whether more credit facility can be granted and whether thecompany will be able to
pay interest and principal when they fall due. They areinterested in the liquidity and of the
entity’s profitability as well asreliability of itsunderlyingassets.
(h) Government: Government needs accounting information to enable it formulate fiscal policies.
(i) Financial Analysts: They analyze financial statements for their clients in order to help them
make informed decisions. Financial analysts include stock brokers, credit agencies and
financial reporters.
(j) The Public: Member sof the general public (individuals, trade unions and associations,
political parties, African unions, International Monetary Funds (IMF) etc need accounting
information for various purposes. They use the available financial information to take
decisions on whether or not to deal with an entity determine their level of involvement in its
activities.
1.8 Range of Accountant’s Services to an Entity
a) The Work of an Accountant
A professional accountant performs various types of work for an entit yeither as an employee or as a
consultant. For instance, member so the Institute of Chartered Accountants of Nigeria (ICAN) are
classified into two broad categories; members in public practice and members not in public practice.
b) Members in Public Practice
These are accountants working in accounting firms which offer a variety of accountingservicesto
theirclients.Theirprincipal functions are:
i. Auditing: They examine the books and records of the entities, obtain reliable,relevant and sufficient
audit evidence and then issue a report on the true and fair view of the financial statements. The report
issued by the auditor enables users torelyon the financial statements;
ii. TaxServices: They engage in tax planning for entities or in dividuals with a view to minimizing their
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tax payable. Their services are also engaged by government in the investigation of the adequacy of tax
paid by entities and individuals;
iii. Management advisory services: Firms rely on the extensive knowledge of accountants to
provide arrange of management consulting services. They could render advice in the area of mergers
and acquisition as well as give advice on whether an ent i t y should enter a new line of business or
divest.They could also offer advice on assetre place mentpolicy, the best Computer based accounting
system to adopt, setting up and operating the accounting system, etc;
iv. Insolvency Services: They could act as receiver manager in the process of winding up of entities;
v. Investigation and Forensic Services: They investigatefraud oranyother matter for which
investigation services are required, including the use of forensic accounting. As a forensic
accountant, he can investigate specific cases of frauds in an entity and provide evidences at the
appropriate government related agencies and court of appropriate jurisdictions.
c) Membersnotin PublicPractice
These are accountants in the employment of government ministries and parastatals or in private
entities. Their main functions include the following:
i. They prepare the financial statements and the annual reports of the entity on behalf of
management;
ii. They provide relevant management accounting information for decision making;
iii. They set up and run efficient systems of accounting and internal control;
iv. They act as treasury managers; and
v. Theyfunctionastreasuryandfinancialmanagers.
1.9 Role of Accounting in the Economy
A business if efficiently runs, why should it have to go through the stress of accounting procedures in
other to provide accounting information? Does it necessary? The following are some of the reasons
why accounting information are highly invaluable and inevitable in an economy:
a) It communicates economic measurement and details information on how management uses
resources;
b) It indicates where the resources are obtained for the use of business;
c) To measure the performance of the business yearly in terms of profit earned;
d) It is also used to indicate assets and liabilities of the business;
e) It shows the true value (price) or net worth of the business;
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f) It facilitates the process of calculating the business tax payable;
g) It keeps the inventory records, and receivable records and registers of items of noncurrent
assets; and
h) It indicates how liquid a business is i.e. ability to meet short-term credit obligations.
In an economy, other important roles of Financial Accounting
a) It offers useful information that is necessary for the efficient, economic and effective running
of the business. This is to ensure that scares resources, in term of Capital, Land, Labour and
Materials are well managed and optimally used;
b) It guarantees that resources placed in trust with the management are well utilized to attain the
basic missions, goals and objectives of a business in a transparent and accountable manner;
c) It provides transactions recorded in the Financial Accounting are reasonable, fair and can be
relied upon;
d) It gives the basic rules, regulations, conventions, principles ideology and postulates are
followed religiously in the preparation of accounts;
e) It supplies necessary information to the tax authorities;
f) It offers information that aids forecasting and planning;
g) It gives information for take-overbids, merger and acquisition;
h) It is useful in providing information in order to measure the performance of management;
i) It offers a guide to proper investment and acquisition decision;
j) Financial Accounting provides information that will facilitate preparation of budget and
allocation of resources among the competing alternatives;
k) It enables financial resources to be divide into short and long term; and
l) It measures wear and tear of noncurrent assets and amortization of intangible assets
1.10 Explain the Ethical Issues in Accounting
It may be difficult to explain ethics at this beginning stage of Financial Accounting. However, suffice
to mention that the Institute of Chartered Accountants of Nigeria (ICAN) has a Professional Code of
Conduct for every member of the Institute. A professional accountants owe certain duties to the
public at large and those who employ him/her to carry out external auditing and other accountancy
services. The professional assignments may sometimes be contrary with the personal interest of the
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Chartered Accountants, at all times, the Professional Codes of ICAN must guide the professional and
observe it for continuous membership of the Institute. The members and students of the Institute must
comply with Professional Codes of ICAN. The Professional Codes of ICAN are:
a) Integrity;
b) Objectivity;
c) Professional Competence and Due Care;
d) Confidentiality; and
e) Professional Behaviour
Integrity
This implies that all students and members of the Institute must be honest, fair, transparent and
straightforward in all professional dealings with the public and clients. A Chartered Accountant or a
would-be Chartered Accountant must not attest to false or misleading statements or recklessly omit or
suppress information to mislead members of the public at large.
Objectivity
It means that all students and members of the Institute must not be bias or act where there is conflict
of interest or allow undue influence of others to override his or professional judgments.
Professional Competence or Due Care
All members of the Institute have a duty to maintain adequate professional knowledge, skills and
competence in the discharge of his or her duties to members of the public. The members of the
Institute must render his or service to the clients based on competent services, current developments
in the field, techniques, legislations and other extant standards.
Confidentiality
The members of the Institute must ascertain confidentiality and secrecy in the use of information
provided by the clients in course of his or her professional services. The members of the Institute
must not disclose information provided by clients to third parties without authority to do so. The
members of the Institute can only disclose information supplied by the clients if he or she has
authority under the or has a duty to disclose such information provided by the clients.
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Professional Behaviour
Every member of the Institute must strictly comply with all relevant laws and must avoid any
behaviour, which discredits the profession in general. He or she must at all times avoid acts
unbecoming of a Chartered Accountant to embarrass the Institute. A Chartered Accountant must be
courteous, careful and diligent in his or her duty to the clients. He must avoid acts inimical to the
overall interest of ICAN.
1.11 Explain the Roles of International Accounting Standards Board (IASB)
The constitution of the IFRS Foundation states that the IASB:
i. Has complete responsibility for alltechnical matters of the Board including the preparation
and issuing of International Financial Reporting Standards (IFRSs) (other than Interpretations)
and exposure drafts, each of which shall include any
ii. Publishes exposure drafts on all projects and normally publishes a discussion document for
public comments on major projects in accordance with procedures approved by the
Trustees.
iii. in exceptional circumstances, and only after formally requesting and receiving prior
subject to thefollowing:
a) Consulting the Trustees and the Advisory Council; and
b) Carrying out a public consultation every three years.
iv. has full discretion over project as signment son technical matters: In organizing the conduct
of its work, the IASB may outsource detailed research or other work to national standard-set
tersor other organisations.
v. establishes procedures for reviewing comments made within a reasonable period on
documents published for comment.
vi.normally forms working groups or other types of specialist advisory groups to give
advice on major projects;
vii.consults the Advisory Council on major projects,agend a decisions and work priorities;
normally publishes a basis for conclusions with an IFRS or an exposure draft;
viii.considers holding public hearings to discuss proposed standards, although there is no
requirement to hold publich earings for every project;
ix.considers undertaking field tests (both in developed countries and in emerging markets) to
ensure that proposed standards are practical and workable in all environments, although
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