Introduction

-Accounting is the process of identifying, measuring and communicating

economic information to permit informed judgments and decisions by the
users of the information.
-Economic info is usually called financial information
-The role of an accountant is to present financial information to users so they
can make business decisions.
-there are 2 types of users-internal and external.

1 The Purpose and Functions of Accounting

5 key elements to accounting
1. Assets
2 . Liabilities
3. Owners Equity
4. Revenue (income)
5. Expenses
Assets and Liabilities
-in order to be classed as an asset or liability , 3 conditions must be met
1) They have service potential or future
1) Future sacrifice of assets.
economic benefit.
youll have to pay for it with an asset/$
we can use it or sell it to make money. in the future
2) They must be controlled by the entity.
You/ the business owns it.

2) The entity is obliged to make.

It is owed right now, on the day in question

3) Its a result of a past transaction.

The asset has exchanged hands.

3) A result of a past transaction.

An exchange has taken place.
(i.e) overspending transaction

Owners Equity (Capital)

-Owners Equity or capital are the total resources supplied to a business by
its owner.
(what the owner has put into the business).
-Capital is a liability- its $ a business owes its owner.
-In laymans terms: it is where the business has got its money from.

AL=
OE

-rearrangeable equation
** A = OE + L.

(e.g) I have $40,000 in

the bank and buy a vehicle for
$10,000.
I also purchased some inventory for $5,000 and was allowed to pay this 6
months later. OE=?

Bank

= 40,000 10,000
= 30,000.

Vehicle

= 10,000

A = 40,000 10,000 ( + 10,000)

= 40,000.

L = 15,000 for inventory (inventory =

asset)
Inventory =
0E= A-L
15,000
(Trade
A = 40,000 + 15,000
=55,000 0
OE =
Payables)
=55,000
=55,000.
liabilities are important because: A L
55,000.
= the worth/ value of a business.
Assets and

Asset or Not?
Assets
* rent paid in advance
* Building on a 5 year leasehold
* Vehicle you have bought on credit
Inventory you have bought
Money in the bank
A company owes you money
Machinery

Not Assets
* rent that you have paid
* Hire Vehicle
Machinery borrowed from rival
Balance of -$300
You owe them money

*leasehold : yours for 5 years

*credit :
youll pay later, but ownership is still yours
*advance : its still yours, youve paid in advance. Its another recieveable
The purpose of accounting is to accumulate and report on financial information
about the performance, financial position, and cash flows of a business. This
information is then used to reach decisions about how to manage the business,
or invest in it, or lend money to it.
Q: Identify the impact the following would have on assets, liabilities and
owners equity.
1. An owner puts $500,000 into the business.
2. Half of this money is put in the bank.
3. They purchase some inventory w/ cash for $100,000.
4. They buy equipment worth $50,000 half is paid on credit, rest is paid in 2
months time.
5. they borrow $50,000 from the bank.
6. Sells half their inventory for $75,000, on credit to a customer.
7. Owner takes $20,000 out for personal use.
Assets

Which Assets

$500,000

Cash
500,000
Cash

250,000
Bank
250,000

no change

Liabilities

Which
Liabilities

OE
Capital
500,000

no change

$25,000

$50,000
$25,000

-$20,000

Cash
100,000
Inventory
100,000
Equipm. 50,000 $25,000
Bank
25,000
Bank
$50,000
50,000
Inventory
50,000
Trade R.
75,000
Bank
20,000

Trade P.
25,000
Loan
50,000

Drawings
20,000

The Statement of Financial Position (The Balance Sheet) simple.

-This statement outlines a businesses assets, liabilities and Owners Equity.
-Its set out in the accounting equation A= OE + L
-it has important details of the financial position of a business.
-this one is used for small businesses (e.g- 1 owner, annual revenue $300,000.)
Simple Statement of Financial Position as at 31 December 2014
Assets
$
Liabilities
$
Building
80,000
Capital
100,000
Land
30,000
+Profit
+29,000
Fixtures and Fittings
30,000
-Drawings 4,500
Cash
500
=Capital 31/4
124,500
Bank
12,000
Mortgage
30,000
Debtors
7,000
Creditors
5,000
$159,500
$159,500
Income Statement for Plymouth Sports Store for the year ended 31
March 2014
$
$

Revenue

425,000

Less: Cost of Sales

Opening Inventory
Add: Purchases
Minus: Closing
Inventory
Gross Profit

60,700
150,500
211,200
55,000

156,200
268,800

Less: Expenses
Wages
Rent
Vehicle Expenses
Net Profit

126,000
40,000
40,000

Revenue (Income)
-3 aspects to Revenue:
1) Increase in assets (or decrease in liabilities)
2) NOT contributions from the owner (i.e)
introducing capital
3) Causes Owners Equity to increase

206,000
$ 62,800