Accounting Notes
Chapter 1 Introduction to accounting
Accounting is regarded as the language of business.
What is accounting? *
Accounting is an information system which includes the process of
recording, classifying, summarizing, reporting, analyzing and interpreting
the financial condition and performance of a business to communicate it
to stakeholders for business decision making.
Accounting can be divided into two sections: (because we first do the
bookkeeping and after that we proceed to do accounting).
1. Bookkeeping
2. Accounting
Book-keeping is the detailed recording of all the financial transactions of
a business.
What is bookkeeping? *
It is the process of recording, in chronological order, the daily transactions
of a business entity. It forms part of the accounting information system.
Accounting is using bookkeeping records to prepare financial statements
and to assist in decision-making. So, understand accounting begins where
book keeping ends. (What we are learning now is a part of bookkeeping.
We have not technically started learning accounting.)
The owner of a business needs to know whether the business is making a
profit or a loss. Periodically (often at yearly intervals), an income
statement is drawn up.
What is an income statement? *
It shows the calculation of the profit or loss earned by the business.
The owner of the business also needs to know the financial position at
regular intervals, so a statement of financial position is prepared.
What is a statement of financial position? *
A statement of financial position shows the assets and liabilities of a
business on a certain date. This shows what the business owns and what
is owing to it, its assets; and what the business owes, its liabilities.
State what is included in the term financial statements. *
The term financial statements are often used as a collective name for an
income statement and a statement of financial position.
State two reasons why it is necessary to prepare financial
statements at regular intervals. *
1. Comparison- The progress of the business can be measured by
comparing the financial statements of one year with those of
previous years, or with those of other similar businesses.
2. Monitor the progress- The information provided by the financial
statements shows the owner of the business what has happened
during a certain period and helps in monitoring the progress of the
business.
What is capital? *
Capital is the total resources provided by the owner and represents what
the business owes the owner.
Once the business is formed and capital is introduced, the business will
own the money or items provided by the owner.
What are the assets? *
Things owned by the business (or owed to the business) are regarded as
the resources of the business or the assets of the business.
owned by the business examples: cash, land, building furniture, inventory
owed to the business- Trade receivables
Assets can be divided into two categories:
1. Non-Current Assets* are items owned by the business in the long-
term. Examples include tangible assets (which can be seen and felt)
such as buildings, land, machinery and vehicles. Non-current assets
may be intangible (which cannot be seen and felt) such as patents,
goodwill or brand value.
2. Current assets* are short term, they will be owned for, or last for,
less than a year. This may include things such as stock, raw
materials, and cash.
What are liabilities? *
Liabilities represent anything owed by the business.
Liabilities can be divided into two categories:
1. Current Liabilities*: represent amounts payable within a period of
12 months from the balance sheet date as (Bank overdraft, trade
payables, owing expenses)
2. Non- Current Liabilities*: There are the amounts payable more
than 12 months after the balance sheet date as (Loans)
The Accounting Equation*
Like any other mathematical equation, the two sides of the equation will
always be equal.
The formula for this equation is:
Assets = Capital + Liabilities.
Capital is sometimes referred to as owner’s equity. So, the previous
equation can also be
written as:
Assets = Owner’s equity + Liabilities.
Like any mathematical equation, the accounting equation can be used to
find any one of the three elements if the other two are present.
Liabilities= Assets - Owners’ Equity
Owners’ Equity = Assets – Liabilities
This equation illustrates that the assets of a business (the resources used
by a business) are always equal to the liabilities and capital of a business
(the resources provided for the business by others). The assets represent
how the resources are used by the business and the liabilities and capital
represent where these resources come from.
