Introduction To Accounts

INTRODUCTION TO ACCOUNTS
What is accounting?
Accounting is the process of recording, classifying, and summarizing business information

in such a way that users understand. Accounting is performed periodically and relies on
having accurate bookkeeping records.
Accounts simply mean records. Since it is difficult to memorize all the money received and
paid by the business it is easier to write them down. The financial events of a business are
recorded in an account for further analysis and reference in the future.
Tasks performed by an accountant
 Prepare financial statements (Income statement and Statement of financial position

 Compare financial statements of one year with another
 Analyses financial performance
 Prepare a monthly report that analyses the profitability of the business
 Advise on cost reduction and profit maximization
What are the objectives of accounting?
 To maintain a systematic record of all business transactions

 To ascertain profit or loss of the business
 To measure the performance of the business
 To forecast the performance of the business
Internal users External users
 Business owners  Government
 Managers  Financial institutions-Bank
 Employees  Customers
 Existing investors  Suppliers
 Competitors
 Potential investors / General public
 To provide information to managers for decision making
Who are the users of accounts/ accounting information?
What is a business?
A business is an organization set up by a person, a family, or a group, to produce and sell

goods and services to customers with a view to making a profit.
Forms of business
Trading business
Trading businesses are those that buy tangible (ready-made/finished) products and sell
them at a profit. Trading businesses sell a variety of products and maintain an inventory of
goods. For example, supermarkets, furniture stores, and flower shop
Service business
A service business is an enterprise composed of a professional or team of experts that

support, deliver work, or help in completing a task for the benefit of its customers. For
example, hairdressing salon, accountant’s practice, and computer repair shop.
Manufacturing business
A manufacturing business is an organization that uses raw materials, parts, and

components to assemble finished goods. For example automotive companies, bakeries,
and shoe makers.
Types of business organizations
 Sole proprietorship
 Partnership
 Company
 Non-profit making organizations
Bookkeeping
Bookkeeping is a process used in accounting to record the financial transactions of a
business on a daily basis using the double-entry principle. It involves preparing source
documents for all transactions, operations, and other events of a business.
Tasks performed by a book-keeper
 Record financial transactions

 Maintaining cash book and petty cash book
 Record sales and purchase invoices
 Extract balances from the ledger accounts to produce a trial balance
 Provide information for decision-making
Accounting equation
The fundamental accounting equation represents the relationship between the assets,
liabilities, and capital (owner's equity) of a business. The accounting equation essentially
shows that what the firm owns (its assets) is purchased by either what it owes (its liabilities)
or by its owner's investment (capital). The accounting equation is the proposition that a
company's assets must be equal to the sum of its liabilities and equity.
Assets = Capital + Liabilities
OR
Assets – Liabilities = Capital
Assets
An asset is a resource with economic value that a business owns with the expectation that
it will provide a future benefit. There are two types of assets
Non-current assets
These are acquired to be used in the business for a long period of time to increase the
earning capacity of the entity. It is not purchased for resale. For example:
 Property, plant and equipment

 Machinery
 Motor vehicles
 Land and Buildings
 Fixtures and fittings
 Current assets
Current assets are short-term economic resources that are expected to be converted into
cash within one year. They are owned by the business and their value changes almost
every day. For example:
 Inventory of goods
 Trade receivables (Credit customers)
 Cash in hand/ cash at bank/ cash and cash equivalents / petty cash
 Other receivables (Expenses paid in advance/income due)
Liabilities
Liabilities are debts or obligations the company owes as a result of past transactions. There
are two types of liabilities:
Non-current liabilities
These are the amount of money owed by the business for a long period of time (usually
more than one year). These are normally utilized to increase the total capital of the
business. For example:
 Loan from bank

 Loan from friend
 Mortgage of premises
Current liabilities
These are the amount of money owed by the business for a short period of time (usually
less than one year). They are mostly used for the sustainability of the working capital of the
business. For example:
 Trade payables (Credit suppliers)

 Other Payables (Expenses due / Income prepaid)
 Bank overdraft (Bank – credit balance)
Capital
The capital of a business refers to the money used to start or expand an entity. It also
refers to money available to pay for its day-to-day operations and to fund future growth.
Capital may be in the form of assets brought in by the owner. It is known as owner’s equity.
The expanded accounting equation can be written as
ASSETS = Capital + Liabilities

Non-current assets + Current assets = Owner’s equity + Non-current liabilities + Current liabilities
Transactions Assets Capital Liabilities
Started business with Cash increase by Capital increase by

cash $ 12 000
$ 12 000 $ 12 000
Purchased goods by cash Inventory increase by $

$ 1 100 1100
Cash decrease by $ 1 100
Sold goods for cash $ 2 Inventory decrease by $

500 2500
Cash increase by $ 2 500
Purchased equipment by Equipment increase by $

cash $ 300 300
Cash decrease by
$ 300
Paid supplier by cash $ Cash decrease by Trade payables decrease

200 by $ 200
$ 200
Effects of transactions on the accounting equation
NOTE:
Each transaction affects the accounting equation twice.
Double entry system
The accounting equation is a basic principle of accounting and sets the foundation of a
double-entry bookkeeping system. Double-entry accounting is a system where every
transaction affects both sides of the accounting equation.
According to the double-entry system each transaction must be recorded twice in the
ledger. A ledger is a form used to record transactions of a business and it consists of two
sides.
o Debit Side (Dr)

o Credit Side (Cr)
The dual aspect concept states that every business transaction must be recorded in two
different accounts. It states that each debit entry must have a corresponding credit entry.
There are 3 types of transactions
i. Cash transaction
ii. Bank transaction
iii. Credit Transaction

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INTRODUCTION TO ACCOUNTS

Accounting is the process of recording, classifying, and summarizing business information

Tasks performed by an accountant

 Prepare financial statements (Income statement and Statement of financial position

What are the objectives of accounting?

 To maintain a systematic record of all business transactions

Internal users External users

 Business owners  Government

 Managers  Financial institutions-Bank

 Existing investors  Suppliers

 To provide information to managers for decision making

Who are the users of accounts/ accounting information?

A business is an organization set up by a person, a family, or a group, to produce and sell

A service business is an enterprise composed of a professional or team of experts that

A manufacturing business is an organization that uses raw materials, parts, and

Types of business organizations

Tasks performed by a book-keeper

 Record financial transactions

Assets = Capital + Liabilities

Assets – Liabilities = Capital

 Property, plant and equipment

 Loan from bank

 Trade payables (Credit suppliers)

The expanded accounting equation can be written as

ASSETS = Capital + Liabilities

Transactions Assets Capital Liabilities

Started business with Cash increase by Capital increase by

Purchased goods by cash Inventory increase by $

Cash decrease by $ 1 100

Sold goods for cash $ 2 Inventory decrease by $

Cash increase by $ 2 500

Purchased equipment by Equipment increase by $

Paid supplier by cash $ Cash decrease by Trade payables decrease

Each transaction affects the accounting equation twice.

Double entry system

o Debit Side (Dr)

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