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Should be able to:

Demonstrate and understanding of the
principles of accounting
R B Subodha S Jayarathna

Faculty of Applied Science

Rajarata University of Sri Lanka

Record economic transactions and

develop the key financial statements for
the enterprise

1. Concept of financial accounting

2. Practices of book keeping including books of
prime entry
3. Ledgers and trial balance

Financial Accounting in Sri Lanka

(Second edition)
Prof. Hema Wijewardena

4. Preparation of trading profit and loss and

balance sheet
5. Cash flow statement
6. Bank reconciliation

After studying this chapter you should be able to:

Explain the accounting and its main functions
Distinguish between financial accounting and management
accounting
Describe the environment of accounting in Sri Lanka
Identify the qualitative characteristics of accounting information
Explain some basic accounting concepts and principles

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Definition
Accounting is the language of business

Accounting can be defined as the process of

identifying, measuring, and communicating

The affairs and the results of the business are

communicated

to

others

through

accounting

information, which has to be systematically

economic

information

judgments

and

to

decisions

permit
by

users

informed
of

the

information.

recorded and presented.

American Accounting Association

Accounting

Financial
Accounting

Management
Accounting

Accounting as an information system

for business decisions

Financial Accounting
Accounting that provides information to people outside
the business entity(external users)
Because these users have different needs, the
presentation of financial accounts is very structured and
subject to many more rules than management
accounting
Financial accountancy is governed by both local and
international accounting standards
Prepared on a periodic basic

Financial Accounting
Financial reports can be divided in to two categories;
01. General purpose financial reports
Users: who are unable to command the preparation of reports
Usually provide summarize information
02. Special purpose financial reports
Users: who are able to command the preparation of reports
Specific information provides ( with or without General purpose
financial reports)
Ex: for taxation authorities, lending institution (banks, leasing
co.)

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Financial Accounting

Management Accounting
Accounting information that provides information to
people within the business entity (internal users managers)

In short,
financial accounting is the process of summarizing
financial data taken from an organization's accounting
records and publishing in the form of annual reports
for the benefit of people outside the organization.

This information is detailed in nature and often include

both actual (historical) and planned (forecasted) data
which are prepared specific purposes
Prepared on the periodic basic and according to the
management requirements
No any standards or structures

Business Environment
Society

Accounting

International
Environment

Business Environment
Sole proprietorship
Business owned by a single person
Minimum amount of legal requirements
It is only required to be registered if sole proprietorship
is to be operated under a business name rather than
under the owners name.
No legal personality
Unlimited liability

Business Environment
Sole proprietorship
Advantages:
Easily established with few complications
Minimal organizational cost
Does not have to share profits or control with others
Disadvantages:
Unlimited liability for the owner
Owner must absorb all losses
Equity capital limited to the owners personal investment
Business terminates immediately upon death of owner

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Business Environment

Business Environment

Partnership

Partnership

Business owned by two or more individuals

Advantages

Relationship between partners - partnership agreement

Minimal organizational requirements

Less amount of legal requirements

Negligible government regulations

It is only required to be registered if partnership is to be

Disadvantages

operated under a business name rather than under the

All partners have unlimited liability

partners name.

Difficult to raise large amount of capital

No legal personality

Dissolve by the death of the withdrawal of general partner

Unlimited liability

Business Environment

Business Environment
Company

Company

A legal entity considered as a legal person

Company is a artificial person
Owners - shareholders
Ownership number of shared acquired by the
company
Limited liability
More legal requirements than other two

Business Environment

Advantages;
The stockholder have limited liability
Even the shareholders die or sell their shares
the corporation continues
Very easy to change ownership
Can raise large amount of capital
etc.

Regulatory Environment

Primary objectives of a business

The work of practicing accounts is governed by a wide
Two main objectives
Earn profits
Stay solvent have on hand sufficient fund
to pay debts a they fall due

Can be
measured
using
accounting

range of accounting regulations.

Three main sources of accounting regulation:
1. The requirement of company legislation

Other than main two:

2. The Colombo Stock Exchange listening requirements for public

3. Accounting standards issued by the Institute of Charted

Providing jobs for people

Protecting the environment
Creating new improved products
Providing more quality goods and services for less
cost

companies

Accountants of Sri Lanka

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International Environment
Institute of the Charted Accountants in England and
Wales

(models

examination

and

administration

Different categories of users need different kinds of

information for making decisions.

requirements for membership of local accounting

These users can be divided into :

bodies)
British Accounting bodies ICMA, ACCA

Internal Users

International Accounting Standards (IAS)

External Users

Stakeholders

Stakeholders
1) Understandability
2) Relevance
3) Reliability
4) Neutrality
5) Comparability
6) Consistency
7) Materiality

1) The accounting entity principle

2) The historical cost principle
3) The going concern principle
4) The accounting period principle
5) The matching principle