Chapter 1 : INTRODUCTION TO ACCOUNTING

HISTORY AND DEVELOPMENT OF ACCOUNTANCY

 The first published works on double entry bookkeeping was done by Luca Pacioli, an Italian in1494

 Refined versions of Pacioli’s works were produced in England and Holland in the 17th century. This is where rules for
Double Entry book-keeping and the preparation of financial statements were formulated

ACCOUNTING VS BOOKKEEPING

 Accounting is a systematic process of classifying, recording,summarizing, interpreting and communicating financial

information.

 It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

 Accounting provides information on the (1) resources available to a firm, (2) the means employed to finance those
resources, and (3) the results achieved through their use.

 It is also known as language of a business

 Bookkeeping is the mechanical aspects of accounting, such as recording, classifying and summarising of transactions
(part of field of accounting

DEFINITION

 Classify-sorting out accounting data into orderly and meaningful categories e.g.receipts, payments, purchases and sales

 Record-recording transactions in the books of the business e.g. journals and ledgers

 Summarise-periodically accounting data are summarised in the form of financial statements

 Interpret-analysing the financial statements and the result is used for decision making purposes

OBJECTIVES

 Decision Making

• Help management to plan strategy and policy in future

• Improve weaknessess

 Controlling

• To watch and control over all business transactions that involved monetory value

 Report on financial position and performance

• By preparing final accounts

TYPES AND VARIOUS FORMS OF BUSINESS

 Sole proprietorship

• Business with a single and sole owner

• Small retail establishments

• From accounting point of view, owner is an individual entity that is separate and distinct from the owner

 Partnership

• Business organisation that joints 2 or more individuals

• Membership-non professional 2 to 20 members

• Professional 2 to 50 members
FORMS OF BUSINESS –con.

 Partnership

• Under the PA 1961, a partnership is defined as “the relationship which subsists between person carrying
business in common with a view of profits”

 Companies

• Organisations which have many owners referred to as shareholders

• Under the CA 1965, a company becomes a legal entity as well as accounting entity, that conducts its business
apart from its owners

• Owners

USERS AND USES OF ACCOUNTING INFORMATION – Internal and External

 Owners

• Interested in the profit earned

• Interested in the financial stability and growth

 Creditor

• To determine the firm’s ability to repay loans

 Investors

• To evaluate the financial positions of the business

 Managers

• To ensure the business is running smoothly

• To have the info for decision making purposes

 Financial institutions

• Loans purposes

 Government

• Taxable income

 Others

• Academic

• Planning of projects

 Employees

• Firm’s ability to pay wages

• Employment prospects
Chapter 2 : Business Transactions’ Accounting Equation and Classification and Double Entry Accounting

What is a business

 A commercial or industrial concern/entity which exists to deal with in the manufacture, resale or supply of goods or
services

 An organization which uses economic resources to create goods or services which customers will buy

 An organization providing jobs for people to work in

 Invests money in resources in order to make even more money for its owners

 Business transaction is an event which involves a transfer of property/money, the recognition of which gives rise to a
record in the books of accounts

BUSINESS ENTITY CONCEPT

 In accounting the business is considered a complete unit or entity which is different from its owners,
creditors, employers and other persons.

 Only transactions that affect the BUSINESS will be recorded.

 This concept ensures that owners of a business can identify their capital that has been invested without being
confused by personal transactions

ACCOUNTING EQUATION AND CLASSIFICATION

 THE ACCOUNTING EQUATION

 When a business starts up it needs resources, initially these are often supplied by the owner of the business
and later may be provided by external parties

 Resources in the business = Resources supplier.

 In Accountancy term, these are known as:

 Assets = Capital (OWNER’SEQUITY)

 Is, however, resources are supplied by others, as well as the owner, the equation becomes:

 Assets (A)=Capital (C) + Liabilities (L)

CLASSIFICATION OF STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) ITEMS

 CAPITAL/OWNER’S EQUITY

 Cash or other assets brought in by the owner for investment in his business.It is considered as a lent to the
business by the owner or in other word the amount owed by the business to the owner

 The capital amount may be increased when:

 further amount of capital is introduced and

 the business is making profit

 and may be decreased when:

 the owner withdraws money or stock of goods from the business and

 when the business is making losses

ASSETS

 ASSETS

 Assets are economic resources which are owned or controlled by a business and are expected to be of benefit
in the future

 Two types namely Non-current assets and current assets

 Non-current assets are those assets which are purchased for retention by a business to generate income, for
the purpose of providing a service to the business and not held for resale in the normal course of trading
CURRENT ASSETS

 Either items owned by the business with the intention of turning them into cash within one year (constantly changed
their form during accounting year); or

 Cash, including money in the bank, owned by the business

Examples of CURRENT ASSETS

 Stock/Inventory: Items purchased or produced for resale at a later date

 Accounts receivables/Debtors: an individual or organisation who owes money to the business

 Cash at Bank: The balance of cash in the business’ bank account

 Cash in hand: Notes and coins held by the business for small items of expenses. Also known as petty cash

DRAWINGS

 Cash or goods taken out of a business by the owner for his personal use use

 Any money or goods taken out of the business by the owner for his personal use will decrease capital

LIABILITIES

 Represents amounts owed by a business

 Two types:

 Long term/Non-current liabilities (amounts due to be paid in more than one year’s time)

 Current liabilities (amounts due within one year)

LONG TERM/NON-CURRENT AND CURRENT LIABILITIES

 LONG TERM LIABILITIES

 debts which are not payable within the short time ( one year or less)

 E.g.long-term Loans, mortgage on premises, debentures etc

 Current Liabilities

 Debts of the business that must be paid within a fairly short period of time (within one year)

 E.g.short-term loans, Bank Overdraft, creditors or accounts payable

ACCOUNTS PAYABLE VS ACCOUNTS RECEIVABLES

 Accounts payable is a person to whom money is owed for goods or services

 Accounts receivable is a person who owes money to the business for goods or services supplied to him

THE STATEMENT OF FINANCIAL POSITION/BALANCE SHEET

 Is a statement of the financial position of a business at a given moment in time. It is a statement of A, L and C of a
business.

 Format.

Name of Business

Balance Sheet as at DD Month YY

Non-Current Assets XX

Current Assets XX

5000

Capital/OWNER’S EQUITY XX

Long Term Liabilities XX

Current Liabilities XX

5000
A= C+L

ACCOUNTING EQUATION

 REMEMBER: Accounting Equation

Asset = Capital + Liabilities

 With profit: THE BUSINESS EQUATION

A + Expenses (E)=C + L + Revenues (R)

REVENUES

 Gross increase in capital resulting from business activities entered into for the purpose of earning income.

 Monetary value of goods and services supplied to the customers

 Examples : sales of goods or services, fees, commission received, dividend received, rental income, interest received etc

EXPENSES

 Costs incurred by the business in the course of trading or providing services, or

 Costs of operating the business (OPEX)

 Examples:

 Rent EXPENSE

 Repairs

 Electricity

 Accountancy fees

PROFIT

 The excess of income/revenue from sales and other sources over cost of sales and other expenses

 Profit made by the business is owed to the owner

 Sales: Total value of goods sold, at selling price Cost of Sales: The cost of the stock sold by the business

SALES Vs PURCHASES

 Sales

 Sale of those goods in which the firm normally deals and which were bought with the prime intention of resale

 Purchases

 Purchase of those goods which the firms buy with the prime intention of selling them

RETURN OUTWARDS Vs RETURN INWARDS

 Return outwards/PURCHASES RETURN

 Goods returned by the business to its suppliers

 Return inwards/ SALES RETURN

 Goods returned to the business by its customers

THE INCOME STATEMENT: GROSS PROFIT

 Its purpose is to calculate the gross profit earned for the period

 Gross profit is the excess of the net sales over cost of goods sold

 Gross profit is arrived at before taking into account expenses incurred in the running of the business

 COST OF GOODS SOLD=OPENING STOCK +PURCHASES –CLOSING STOCK

ADDITIONAL COST ON PURCHASES

 Are those expenses involved in the course of purchasing

 Concerned with getting the goods into into a saleable condition

 Examples include

 Carriage inwards (cost of transport of goods)

 Duty on purchases

CARRIAGE

 Carriage inwards

 Include cost of transport of goods (shipping), insurance and freight

 Added to purchases cost

 Carriage outwards

 Carriage of goods out of a firm to its customers

 Treated as an operating expense

THE INCOME STATEMENT: NET PROFIT

 Net profit=(gross profit +other income) – operating expenses

 Operating expenses are those expenses incurred in the running of the business

 Examples of other income include rent received, interest received

RELEVANT CONCEPTS

 Accrual concept

 Revenue are recognised when they have been earned during the period, whether received or not

 Expenses are recognised when they have been incurred, whether paid or not

 Matching concept

 Accounting profit is determined by a matching process whereby costs incurred in an accounting period are
matched I.e. substracted from the revenues earned in the same accounting period

Chapter 3 4 5 : PRINCIPLE OF DOUBLE ENTRY, BOOKS OF ACCOUNTS AND TRIAL BALANCE

EFFECTS OF BUSINESS TRANSACTIONS

• REMEMBER:

• Accounting Equation

Asset = Capital + Liabilities

• Expanded accounting Equation

Asset +Expenses=Capital+Liabilities+Revenues

DOUBLE ENTRY ACCOUNTING

• In recording transactions, the total dollar amount of debits must equal the total dollar amount of credit

• equal debit and credit entries are made for every transactions

• The double entry accounting enables an accurate and complete record to be kept of all transactions

DUALITY OR DOUBLE ENTRY CONCEPT

• This concept states that each transactions has a two-sided or dual effect on each of the parties involved in it

• As a result, both sides or effects of every transaction must be recorded in the accounting system for information to be
complete
 • EVERY ITEM MUST BE ENTERED TWICE:

– ONCE ON THE DEBIT (DR) SIDE

– ONCE ON THE CREDIT (CR)

• A DEBIT ENTRY IS AN ASSET OR EXPENSE

• A CREDIT ENTRY IS A LIABILITY, CAPITAL OR REVENUE

• Dr Name of Account Cr

Rules of Double-Entry Bookkeeping

Debits(left hand side)

• Increase in assets

• Decrease in liabilities

• Decrease in owner’s equity

• Decrease in revenues

• Increase in expenses

Credits(right hand side)

• Decrease in assets

• Increase in liabilities

• Increase in owner’s equity

• Increase in revenues

• Decrease in expenses

Inventory Movements

Accounts involved:

• sales account

• purchases account

• returns inwards account

• returns outwards account

Special meaning for sales and purchases

• purchases: the purchase of those goods which the firms buy with the prime intention of selling them

• sales: the sale of those goods in which the firm normally deals and which were bought with the prime intention of
resale

Inventory movements - cont.

Increases in Inventory

• causes

– the purchase of additional goods. In such a case PURCHASES account will be maintained

– the return in to the firm of goods previously sold. Open RETURNS INWARDS account

(credit note is issued)

Decreases in Inventory
 • causes

– The sale of goods, maintain SALES account

– Goods previously bought by the firm now being returned out of the firm to the supplier, open RETURNS
OUTWARDS account.

Double Entry Rules

• As Inventory is an asset and these four accounts are all connected with the asset, the double entry rules are those used
for assets

• Double entry rules

• A = C + L

• +Dr +Cr

• -Cr -Dr

DOUBLE ENTRY RULES

Cash Vs Credit Transactions

Sales Returns inwards

• cash sales:

• credit sales

Purchases Returns outwards

• cash purchases

• credit purchases

DEBIT AND CREDIT NOTE

• Debit note

– A document sent to supplier by the customer giving details of the goods and the reason for returning the
goods

• Credit note

– A document sent by supplier to customer showing the amount of allowance given for the return of goods

LEDGER

• A BOOK OF ALL ACCOUNTS

• Types

– Sales ledger – for customers’personal accounts

– Purchases ledger – for suppliers’ accounts

– General or Nominal ledger – for other accounts

TYPES OF ACCOUNTS

• Personal accounts

– Debtors/Receivables accounts

– Creditors/ Payables accounts

• Impersonal accounts

– Real accounts

• For property of all kinds

– Nominal accounts

• For expenses, income and capital

‘T’ ACCOUNT

• An account which is kept in the books of ledger

• The ‘T’ account has two sides I.e. the left and right side

• The left side is called the debit side and the right side is called the credit side

• Remember: Each transaction has dual effects i.e. each transaction is recorded twice, once to the debit side and once to
the credit of another ledger account

BALANCING OF THE ACCOUNTS

• Purpose: to determine how much is the balance left in each account at the end of each month

• Rule:

• If total debit >total credit-the account is said to have a debit balance

• If total credit is>total debit-the account is said to have a credit balance

• Steps in balancing off the accounts

– TOTAL UP BOTH SIDE OF THE ACCOUNTS

– DETERMINE THE BALANCING FIGURE I.E. THE DIFFERENT BETWEEN THE LARGER AND SMALLER AMOUNT

DEBIT AND CREDIT BALANCES

• Debit balance

– Under normal circumstances, all assets and expenses accounts would have a debit balances

• Credit balance

– Under normal circumstances, capital,liabilities and revenues account would have a credit balances

Trial balance

• A list of account titles and their balances in the books, on a specific date, shown in debit and credit columns

• Purposes:

– A form of checking on the arithmetical accuracy of the double entry rules used

– To help in detecting error

– To help in facilitating the preparation of financial statements

LIMITATION

• Errors can be in the accounts which will not be shown by the trial balance

• Two types;

– Errors affecting the trial balance agreement

– Errors not affecting the trial balance agreement

 Chapt 14 : Trial Balance

THE TRIAL BALANCE

TRIAL BALANCE

 A Trial balance is a list of all ledger accounts with balances at a particular date.

 All ledger account with zero balances at the date the trial balance is being prepares are excluded from the trial balance.

 All the accounts with debit balances will be listed in one column (debit column).

 Those with credit balances will be listed in a second column.

PURPOSE OF TRIAL BALANCE

 Act as a test of equality of the debit and credit balances in the ledger

 Helps to localise errors

 Facilitate the preparation of the financial statements

IF THE TRIAL BALANCE DOES NOT BALANCE

 1. Omission of part of an entry

 2. Errors of transposition

 3. Errors in addition in ledger accounts

 4. Posting to incorrect sides of accounts

 5. Errors in the addition in the trial balance itself

ERRORS NOT SHOWN BY THE TRIAL BALANCE

 1. Error of omission

 2. Error of commission

 3. Error of principle

 4. Complete reversal entries

 5. Compensating errors

 6. Errors of original entry