Introduction to Accounting — full notes
Paper No. 1: Financial Accounting · Introduction to Accounting
Introduction to Accounting
1. What is accounting?
Accounting is the process of identifying, recording, summarising, and communicating financial information about a business, so the people who rely on it can make informed decisions. Often called "the language of business" — a shared, structured way of describing financial performance and position.
2. Branches of accounting
| Branch | What it is for |
|---|---|
| Financial Accounting | Recording transactions and preparing statements for people outside the business |
| Management Accounting | Providing information for internal decision-making |
| Cost Accounting | Tracking and analysing the cost of producing goods or services |
| Auditing | Independently checking that financial statements are accurate and fairly presented |
| Taxation | Ensuring compliance with tax law and planning for tax efficiency |
3. Users of financial information
| User | What they need it for |
|---|---|
| Management | Running the business day to day, making decisions |
| Employees | Job security, pay, and prospects |
| Investors / shareholders | Deciding whether to buy, hold, or sell shares |
| Lenders (banks) | Deciding whether to lend, and on what terms |
| Suppliers | Deciding whether to extend credit |
| Customers | Confidence the business will continue to operate |
| Government (e.g. KRA) | Tax assessment, economic statistics, regulation |
| The public | Employment, environmental and community impact |
Management and employees are usually internal users; everyone else is external.
4. The accounting equation
Every other topic in this paper rests on: Assets = Capital + Liabilities. What a business owns is always exactly matched by who has a claim on it. A correctly-prepared Statement of Financial Position always balances because of this equation, not by coincidence.
5. Qualitative characteristics of useful financial information
The IFRS Conceptual Framework sets out what makes financial information genuinely useful.
Fundamental characteristics (information needs both, or it is not useful):
| Characteristic | Meaning |
|---|---|
| Relevance | Capable of making a difference to a user's decision |
| Faithful representation | Complete, neutral, and free from material error |
Enhancing characteristics (make relevant, faithfully-represented information more useful):
| Characteristic | Meaning |
|---|---|
| Comparability | Can be compared across periods and across companies |
| Verifiability | Different knowledgeable observers would reach similar conclusions |
| Timeliness | Available before it loses its capacity to influence decisions |
| Understandability | Clearly and concisely presented |