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Principles of Accounts (POA) CXC NOTES

The document outlines the key principles and processes of accounting, including the accounting cycle, financial statements, double-entry bookkeeping, and control accounts. It also discusses additional accounting topics like bank reconciliation, depreciation, and inventory valuation methods.

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175 views

Principles of Accounts (POA) CXC NOTES

The document outlines the key principles and processes of accounting, including the accounting cycle, financial statements, double-entry bookkeeping, and control accounts. It also discusses additional accounting topics like bank reconciliation, depreciation, and inventory valuation methods.

Uploaded by

joelwillie252
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Principles of Accounts (POA) CXC NOTES

1. Accounting Cycle

Steps in the Accounting Cycle

● Journalizing: Recording transactions in the journal as they occur.


○ General Journal: Chronological record of all transactions.
○ Special Journals: Used for specific types of transactions, such
as sales or purchases.
● Posting to the Ledger: Transferring journal entries to individual
accounts in the ledger.
○ General Ledger: Contains all accounts needed to prepare
financial statements.
○ Subsidiary Ledger: Provides details about specific accounts,
such as accounts receivable and accounts payable.
● Preparing a Trial Balance: Listing all ledger accounts and their
balances at a specific point in time to ensure debits equal credits.
● Making Adjusting Entries: Updating accounts at the end of the period
for items not yet recorded.
○ Types: Accruals (revenues earned but not received, expenses
incurred but not paid), deferrals (revenues received but not
earned, expenses paid but not incurred), depreciation, and
inventory adjustments.
● Preparing Financial Statements: Summarizing financial data to
provide information about the business's financial position and
performance.
○ Income Statement: Shows profitability over a period.
○ Balance Sheet: Shows financial position at a point in time.
○ Statement of Cash Flows: Shows cash inflows and outflows.
○ Statement of Changes in Equity: Shows changes in owner’s
equity.
2. Financial Statements

Income Statement

● Purpose: To determine the net profit or loss over a specific period.


● Components:
○ Revenue: Total income from sales of goods/services.
○ Cost of Goods Sold (COGS): Direct costs attributable to the
production of goods sold.
○ Gross Profit: Revenue minus COGS.
○ Operating Expenses: Costs required to run the business, e.g.,
rent, utilities, salaries.
○ Net Profit: Gross profit minus operating expenses.

Balance Sheet

● Purpose: To show the financial position of a business at a specific


point in time.
● Components:
○ Assets:
■ Current Assets: Cash, accounts receivable, inventory.
■ Non-Current Assets: Property, plant, equipment.
○ Liabilities:
■ Current Liabilities: Accounts payable, short-term loans.
■ Non-Current Liabilities: Long-term loans, bonds payable.
○ Equity: Owner’s capital, retained earnings.

3. Accounting Principles

Key Accounting Principles

● Consistency: Ensuring that the same accounting methods are applied


from period to period to allow for comparability.
● Prudence (Conservatism): Recording expenses and liabilities as soon
as possible, but only recognizing revenues when they are assured.
● Accrual Basis: Recording revenues and expenses when they are
earned or incurred, regardless of when the cash is received or paid.
● Going Concern: Assuming that the business will continue to operate
indefinitely.
● Materiality: Recognizing the importance of items that are significant
enough to influence decisions.
● Objectivity: Ensuring financial statements are based on verifiable
evidence and free from bias.
● Matching: Matching revenues with the expenses incurred to generate
them within the same period.

4. Double-Entry System

Principle of Double-Entry

● Debits and Credits: Every financial transaction involves at least two


accounts, with debits equaling credits.
○ Debit: Increases assets or expenses, decreases liabilities or
equity.
○ Credit: Increases liabilities or equity, decreases assets or
expenses.
● Account Types:
○ Assets: Debit increases, credit decreases.
○ Liabilities: Debit decreases, credit increases.
○ Equity: Debit decreases, credit increases.
○ Revenues: Debit decreases, credit increases.
○ Expenses: Debit increases, credit decreases.

Example of Double-Entry Transaction

● Sale of Goods:
○ Debit: Accounts Receivable or Cash
○ Credit: Sales Revenue

5. Control Accounts

Purpose and Function of Control Accounts

● Purpose: To provide a summary of the transactions recorded in


subsidiary ledgers, helping to ensure the accuracy of individual
account balances and detect errors.
● Types of Control Accounts:
○ Accounts Receivable Control Account: Summarizes amounts
owed by all customers.
○ Accounts Payable Control Account: Summarizes amounts
owed to all suppliers.
● Reconciliation: Regular comparison of control accounts with
subsidiary ledgers to ensure they match.

Benefits of Control Accounts

● Efficiency: Streamlines the accounting process by summarizing


numerous transactions into a single account.
● Accuracy: Helps identify discrepancies between ledgers and control
accounts.
● Internal Control: Enhances financial oversight and fraud detection by
providing a check against individual entries in subsidiary ledgers.

Additional Topics for Principles of Accounts

Bank Reconciliation

● Purpose: To reconcile the bank statement with the company's cash


book to identify and correct discrepancies.
● Steps:
○ Compare the cash book and bank statement balances.
○ Adjust for outstanding checks, deposits in transit, bank
charges, and errors.

Depreciation

● Purpose: To allocate the cost of a tangible asset over its useful life.
● Methods:
○ Straight-Line Method: Evenly spreads the cost over the asset’s
useful life.
○ Reducing Balance Method: Applies a constant rate of
depreciation to the diminishing book value each year.

Inventory Valuation

● Methods:
○ First-In, First-Out (FIFO): Assumes the first items purchased are
the first sold.
○ Last-In, First-Out (LIFO): Assumes the last items purchased are
the first sold.
○ Weighted Average: Calculates a weighted average cost for
inventory items.

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