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The Accounting Fundamentals

This document provides an overview of accounting fundamentals including: 1) Accounting is a method of recording, analyzing, and evaluating financial information to provide a clear view of a business's performance. Bookkeeping involves recording business transactions in books. 2) Accounting information is used by various stakeholders like employees, investors, customers, and government agencies. Objectives of accounting include controlling resources, financial planning, measuring performance, and complying with tax laws. 3) Transactions must involve an exchange of money or goods between parties and be measurable in monetary terms to be recorded through double-entry bookkeeping. Assets, liabilities, and capital are key accounting concepts.

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15 views

The Accounting Fundamentals

This document provides an overview of accounting fundamentals including: 1) Accounting is a method of recording, analyzing, and evaluating financial information to provide a clear view of a business's performance. Bookkeeping involves recording business transactions in books. 2) Accounting information is used by various stakeholders like employees, investors, customers, and government agencies. Objectives of accounting include controlling resources, financial planning, measuring performance, and complying with tax laws. 3) Transactions must involve an exchange of money or goods between parties and be measurable in monetary terms to be recorded through double-entry bookkeeping. Assets, liabilities, and capital are key accounting concepts.

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THE FUNDAMENTALS

OF ACCOUNTING
PART-1
ACCOUNTING- It is a systematic method of recording, analyzing and evaluating figurative
information in such a manner that the user of the information gets a fair and clear view
regarding the financial performance of the business
BOOK-KEEPING
• Book-keeping involves all the activities of recording business dealings in a set of
books.
• Keeping the most basic records is described as bookkeeping.

THE USERS OF ACCOUNTING INFORMATION?


• Employees
• Investors
• Customers
• Suppliers
• Government
• Owner
• Creditors/ Lenders

OBJECTIVES OF ACCOUNTING
• Control over the use of resources
• Effective financial planning and decision making
• Preparing Financial position to calculate profits and losses
• Measuring the performance of the business
• Mistakes and fraud detection
• Comply with law (tax)
EVENTS & TRANSACTIONS
• Events are all incidents or occurrences that relate to the business or have an impact
on the business.
• Transaction is an event or a business activity which involves exchange of money and
goods between parties. Transactions are those events that make an immediate
change in the financial resources or obligations that are measurable in monetary
terms.
• Cash Transaction & Credit Transaction?
EVENTS TRANSACTION
1. All events are not transaction. 1. All transaction are events.
2. All event cannot be expressed in 2. All transactions can be expressed in
monetary terms. monetary terms.
3. Events may or may not require two 3. In the case of transaction two parties
parties. . are must.
4. The earning of profit is not the 4. The earning of profit is the main object
objects of all events. the business transaction.
DIFFERENCE

EVENT
Monetary Event Non- Monetary Event

Personal Business

Transaction

ASSETS- are resources OWNED by a business.


 Assets are expected to provide current and future benefits (used to generate
revenue for the business).
 Example: factory building, machines, inventory, etc.

NON-CURRENT ASSETS CURRENT ASSETS


- Long term resources. - Short term resources.
- Used/stays in the business for more - Expected to be used /converted in
than a year. to cash WITHIN ONE year.
- Cannot be converted into cash - Can be converted into cash easily.
easily.
Examples: Examples:
Land/Premises Inventory/stock
Building Accounts receivable (customers)
Fixtures and fittings Bank
Office Furniture Cash
Motor van/ Vehicle Other Receivables
Equipment
Machinery

LIABILITY- is an amount that a business OWES to someone else (a supplier, bank, lender
etc.).
 A liability can be considered a source of funds
 Example: Bank loans, accounts payable etc.
NON-CURRENT LIABILITY CURRENT LIABILITY

• Long term liabilities/obligations. • Short term liabilities/obligations.


• Non-current liabilities are due after • Current liabilities are due and
a year or more. payable within one year.
• Used to fund the purchase of non- • Obligations are met using current
current assets  assets. (liquidity)

Examples: Examples:
Bank loans Bank overdraft
Debentures Accounts payable (suppliers)
Other Payables

CAPITAL- is the total investment made by the owner(s) of the business.


It is often called OWNER’S EQUITY or NET WORTH.

ACCOUNTING EQUATION
• Assuming that the owner supplied all the resources-
Resources in the business (Asset) = Resources supplied by the owner (Capital)
• If the owner borrows to increase resources of the business-
ASSET (A) = CAPITAL (C)+ LIABILITY (L)
PART-2
ACCOUNTING CYCLE
Accounting Cycle is a series of steps that involves recording transactions in the
daybooks, posting them to ledger, extracting a trial balance and finally drawing up
financial statements.
• Step 1- Recording Transactions in Daybooks (6 day books)
• Step 2- Posting Transactions in Ledgers (3 ledgers)
• Step 3- Balancing off accounts at the year end
• Step 4- Extracting Trial Balance with the year-end account balance amount
• Step 5- Draw up Financial Statements (balance sheet & income statement)

DOUBLE ENTRY SYSTEM


• Double entry bookkeeping is a system of recording transactions that recognizes that
there are two sides/aspect of every transaction.
• Every transaction involves giving and receiving. It is important that you recognize
and record both aspects of each transactions
• Double entry book keeping is a system by which every debit entry is balanced by an
equal credit entry.
• DEBIT- It means writing something to at the left hand side of an account.
• CREDIT- It means writing something to at the right hand side of the account.

ACCOUNTS
• An account is a place where all the information referring to a particular asset or
liability, or to capital, is recorded.
• It is a history of all transactions of similar nature and it separates what is received
from what is given.
• T-accounts used to classify and summarize the increase, decrease and balance of a
particular account involved in transaction.
DRAWING UP A T-ACCOUNT
• Account title
• Date
• Cross reference
of other accounts title
• Currency
• Total amount

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