Lecture 1- Nature and Role of Accounting

What is Accounting?
- Language of business
- Measure business activity-> process data into reports-> communicate results to decision
makers

Financial Accounting
- Record past transactions
- Prepare reports for internal and external decision makers

Management Accounting
- Future
- Make complex choices, predictions and decisions

Business Structures
1. Proprietorship (Sole trader)
Advantages
- Easy to set up
- Full control
- All profit + capital
Disadvantages
- Unlimited liability
- Limited resources
- Limited life

2. Partnership (2 or more)
Advantages
- Cheap to set up
- Greater access to skill and capital
- Greater access to expertise and knowledge
- No tax on partnership income
Disadvantages
- Unlimited liability
- Shared control over decision-making
- Limited life
 3. Company
Advantages (shareholders + directors)
- Limited liability
- Greater ability to attract capital
- Taxed at company tax rate
Disadvantages
- Costly to form
- Complicated, more regulations
Lecture 2- The double entry system
Definitions
Entity- Business/company Eg. Sole trader, partnership, company
Separate Entity- Separate from affairs of owner (part for individual, part for company)
Valuation- Historical cost (original price)

The Accounting Equation

Asset = Liabilities + Owner’s Equity
Asset = Liabilities + Capital - Drawings + Revenue - Expense

Profit Determination Equation

Revenue earned - expenses incurred = Profit earned / Loss incurred

Valuation
Eg. Computer originally costs $1000, but to bring it in, you have to pay extra
Valuation:
Computer $1000
Freight (shipping) $50
Insurance $100
Import Tax $150
Total $1300
; Value of the computer is $1300 and not $1000

Financial reports
1. Income statement (R-E=P)
2. Balance sheet
3. Statement of changes in equity
4. Statement of Cash flow
Accounting cycle
Debit and Credit rules
Lecture 3- The double entry system
(Journalising Transactions)
Step 1: Recording transactions

Step 2: Prepare journal entries

1. Identify the transaction from source documents
2. Identify the accounts affected by the transaction
3. Identify the account type
4. Determine whether each accounts is increased or decreased
5. Determine whether to debit or credit the account
6. Record the transaction in the journal, including an explanation (narration)
Lecture 4- The double entry system
(Ledgers and Trial Balance)

Ledger accounts
- Book containing ledger accounts is called the general ledger
- Ledger accounts - T accounts
Trial Balance
Purpose
- Error detection
- Check accuracy (DEBIT MUST EQUAL CREDIT)
Identifying errors
- Math error
- Transposition error
- Missing one side of the posting
- Posting on the wrong side of the ledger account
- Listing incorrect balances in the trial balance
- Incorrect opening balance in the ledger account

Despite balancing…errors may still exist

1. Posting to the wrong account
2. Incorrect amount posted to both sides
3. Missing a complete journal entry
Lecture 5- The double entry system
(Profit determination, adjusting entries)
Cash Accounting VS Accrual Accounting
Cash Accounting
- Only accounted for when transaction is in cash
- Simple but inaccurate
- Only cash
Accrual Accounting
- Records the effect of each transaction as it occurs
- Complex but more accurate

Steps to Adjust entries

1. Record adjustments in general journal
2. Record adjusted ledger
3. Record adjusted trial balance

Prepayments (Prepaid expense)

- ALWAYS ASSET
- Prepaid expense (future expense paid in advance)
- Example: Rent, Insurance
- Dr expense
- Cr asset

Accrued Expense
- ALWAYS LIABILITY
- Past expense that hasn’t been paid for
- Eg. My gardener does service first, provide me with invoice, I pay invoice to gardener
later (perspective of a buyer)
- Dr expense
- Cr expense payable

Accrued Revenue
- Revenue earned that has not been billed yet
- Eg. I am a gardener, I mow the lawn, finished the job so I raise and invoice, then i get
paid later (perspective of a seller)
- Dr account receivable
- Cr revenue
Unearned Revenue (Prepaid Revenue)
- AlWAYS LIABILITY
- Payment received but goods/service has not been provided
- Eg. I paid the school’s tuition of $40,000 in advance at the beginning of the year but I
have not received the education.
- Dr unearned revenue
- Cr revenue

Depreciation
- Reducing book value of a tangible asset due to use
- Dr depreciation expense
- Cr accumulated depreciation
Lecture 6 - The double entry system
(Adjusted Trial balance, worksheet)

Adjusted Trial Balance

- When you take into account of the unadjusted trial balance and the adjustments to form
the adjusted trial balance

Accounting worksheet
Definition
Summarize accounting cycle, determine accuracy of financial statements.

Includes
- Unadjusted trial balance
- Adjustments
- Adjusted Trial balance
- Income statement
- Balance sheet
Income statement
- Determine profit or loss
- Revenue - Expense = Profit / Loss

In a retail business
○ Sales are a major form of revenue
○ Less sales return and sales discount, which equals net sales
○ Format:

NAME OF THE COMPANY

FOR THE PERIOD ENDING ____________________.

$ $

Revenue

Sales revenue

Less: sales return/sales discount

Net sales

Less: cost of goods sold

Purchases

Opening inventory

Freight inwards

Less: purchase return

Total cost of goods available for sale

Less : Closing inventory

Cost of goods sold

Gross profit

Less: expenses

Net profit/loss
In a service business
○ Fees are a major revenue item
○ Format:

NAME OF THE COMPANY

FOR THE PERIOD ENDING ____________________.

$ $

Revenue

Service revenue

Add: other income

Less: expenses

Rent expense

Wage expense

Depreciation expense

Net profit/loss
Statement of changes in Owner’s equity
- Calculate ending capital
- OE= C-D + R-E

Balance Sheet
- A=L+OE
Asset classification
- Current Assets (CA), owned for less than accounting period (12 months)
- Eg. cash, receivables
- Non current Assets (NCA), owned for more than accounting period
- Eg. property, plant, equipment

Liability classification
- Current liability (CL), will be paid within one accounting period
- Eg. accounts payable
- Non current liability (NCL), take longer than one accounting period to pay
- Eg. mortgages

Owner’s equity classification

- Ending calculation from statement of owner’s equity
Financial reports
Lecture 7- The double entry system
(Completing the accounting cycle)
Closing entries
- Journal entries in general journal
- Reset temporary accounts to zero and transferred to permanent account

Temporary Accounts
Revenue
Expense
Drawings

Permanent Accounts
Assets
Liability
Equity

How to do closing entries

1. Close revenue account -> Income summary
2. Close expense account -> Income summary
3. Close Income summary account -> Capital
4. Close drawings account -> Capital
Summary of Financial reports
Income statement
● A report prepared to show details of profit or loss for the accounting period
● R-E=P
● In a retail business
○ Sales are a major form of revenue
○ Less sales return and sales discount, which equals net sales
○ Format:

NAME OF THE COMPANY

FOR THE PERIOD ENDING ____________________.

Revenues

Expenses

Net Profit

Statement of change in owner’s equity

● Calculate ending capital
● Format:

NAME OF THE COMPANY

FOR THE PERIOD FROM_____________.

$ $

Opening capital

+ Investments

+/- profit or loss

- Drawings

Ending capital
Balance sheet