Contents What is book keeping? ................................................................................................................... 2 What is accounting? ....................................................................................................................... 2 What is financial accounting? ........................................................................................................ 2 What is management accounting?

................................................................................................ 2 What are the purposes of accounting? ......................................................................................... 2 Who are the users of accounting information? ............................................................................ 2 What are the major financial statements? .................................................................................... 2 What is the basic accounting equation? ....................................................................................... 2 What increases assets? .................................................................................................................. 3 What decreases assets? ................................................................................................................. 3 What increases liabilities? .............................................................................................................. 3 What decreases liabilities? ............................................................................................................. 3 What increases owners equity? .................................................................................................... 3 What decreases owners equity? .................................................................................................. 4 What are the main types of business entity?................................................................................ 4 What are the main requirements all limited liability entities must fulfil?.................................... 4 Who are the users of the financial statements of limited liability entities? ................................ 4 What is an Account? ....................................................................................................................... 5 What are the classifications of accounts? ..................................................................................... 5 What are the rules of debit-credit determination? ...................................................................... 5 What are the steps in accounting? ................................................................................................ 5 What is cash flow forecast? ........................................................................................................... 6 Why cash flow forecast is important? ........................................................................................... 6 What does cash flow statements represent? ............................................................................... 6 What are the terms under Financial Reporting Standard for preparation of cash flow statement?...................................................................................................................................... 6 What are the main causes of cash flow problem?........................................................................ 8 What is Profit & Loss Account? ..................................................................................................... 8 What are the Purpose & Use of Profit & Loss Account? .............................................................. 8 What is Balance Sheet (statement of financial position)? ........................................................... 8

What is book keeping? Book keeping is a method to record economic events. What is accounting? Accounting is the process of identifying, measuring, recording and communicating economic transactions. Through accounting we identify the economic transactions of the business; next we measure those economic transactions in monetary terms; then we record them into the accounting system; and finally we communicate them to users by producing financial statements. Two main branches of accounting are financial accounting & management accounting. What is financial accounting? Financial accounting classifies, measures, and records economic transactions of an entity in accordance with accounting standards, established principles, and legal requirements. It is a faithful representation of the entitys economical activities to external parties. What is management accounting? Management accounting collects, analyzes, and interprets quantitative and financial information. Its primary concern is to communicate information to management for planning, controlling, and decision making. What are the purposes of accounting? - Providing information. - Ascertaining financial performance. - Ascertaining result of service. - Determining liabilities. - Determining owner equitys. - Determining assets. - Establishing entity. Who are the users of accounting information? Internal users: owners, management, employees. External users: investors, creditors, suppliers, customers, taxing authorities, regulatory agencies. What are the major financial statements? Income statement: shows financial performance of a specific period. Balance sheet: shows financial position on a specific date. Statement of owners equity: shows causes of change in owners equity. Cash flow statement: shows cash inflows and outflows of a specific period. What is the basic accounting equation? Assets = Liabilities + Owners Equity

The main idea of accounting is that the sum of claims of an organization must always be equal to the sum of claims to an organization. Assets: resources owned by a business e.g. cash, property, machinery, investment, debtors, expense paid in advance etc. Liabilities: the claims against the asset other than that of owners e.g. creditors, loans, note payable, unpaid expense etc. Owners equity: the ownership claim against the total assets e.g. investment by owner, share of profit retained in business etc. Simply, it is the difference between the assets and liabilities. What increases assets? - Investment by owner. - Purchase of equipment. - Cash sale. - Sale on credit. - Prepaid expense. What decreases assets? - Payment of expense by bank. - Payment to creditors. - Depreciation of assets. - Sale of an asset. - Purchase of assets on cash. What increases liabilities? - Loan. - Bank overdraft. - Purchase of goods on credit. - Purchase of assets on note payable. - Cash received for service provided in future. What decreases liabilities? - Payment of due expense. - Payment of note payable. - Payment to creditors. - Payment of tax liabilities. - Discount on payment to creditors. What increases owners equity? - Investment in business. - Revenue of business. - Profit of business.

What decreases owners equity? - Withdraw from business. - Expense of business. - Loss of business. What are the main types of business entity? Sole proprietorship (unincorporated): An unincorporated business owned by one person. Partnership (unincorporated): Minimum of 2 partners is needed to set up a partnership. Limited liability entities (incorporated): on formation, must register at companies house and file a memorandum of association (details about the constitution of the business and its objectives) and an article of association (details about internal regulation of the business). Limited liability partnership (incorporated): Organised internally as a traditional partnership, has a legal identity separate from owners known as members who have limited liability, and raises capital by increasing the number of members. Limited company (incorporated): A company has a separate legal identity from its owners (members). It raises capital by issuing shares to members. These shareholders have limited liability. Private limited company (incorporated): Formed with minimum of one director, shares are only offered to sale privately, name must end with limited or ltd. There is no minimum amount of share capital and there is no need of a secretary with formal qualification. Extent of financial disclosure depends on size and public interest. Public limited company (incorporated): Formed with minimum of two directors, must have a qualified company secretary, and name must end with public limited company or plc. Can offer shares to public via stock exchange listing, minimum amount of authorized share capital is 50000 of which at least 12500 must be paid up share capital. Extensive financial disclosure is necessary due to public interest. What are the main requirements all limited liability entities must fulfil? - Must keep accounting records. - Must prepare annual report and accounts. - The annual report and accounts must be filled at companies house and given to every shareholder. Who are the users of the financial statements of limited liability entities? Present and potential investors: To know about risk & return. Employees: For security, bargaining, opportunities, benefits. Lenders: To assess & monitor lending risk. Suppliers and other trade creditors: To determine credit risk. Customers: For continuity, after sales service, warranties.

Governments and their agencies: To allocate resources, assess economic and fiscal policies, regulation, taxation, national statistics, etc. The public: For impact on local economy, the community, the environment, etc. What is an Account? An account is an individual accounting record of increases and decreases in a specific asset, liability, or owners equity item. In its simplest form an account consist of three parts: 1) The title of the account. 2) The left side or debit side. 3) The right side or credit side. Once an account is given a title, the same title must be used throughout the accounting records. What are the classifications of accounts? Accounts can be classified into five different broad ways. Asset Account: Cash, furniture, accounts receivable, prepaid expense, bank deposit, land, building etc. Liability Account: Accounts payable, creditor, note payable, bank overdraft, expense payable, mortgage, loan etc. Owners Equity Account: Investment by the owner, withdrawn from business, interest on capital, interest on drawings etc. Expense Account: Wage expense, salary expense, advertisement expense, interest expense, insurance expense, rent expense, supplies expense, utilities expense, discount expense etc. Revenue Account: Service revenue, sale of goods, interest income, discount received, gain on sale of assets etc. What are the rules of debit-credit determination? Asset account: If asset increases, then it is debited. If asset decreases, then it is credited. Liability account: If liability increases, then it is credited. If liability decreases, then it is debited. Owners equity Account: If owners equity increases, then it is credited. If owners equity decreases, then it is debited. Expense account: If expense increases, then it is debited. If expense decreases, then it is credited. Revenue account: If revenue increases, then it is credited. If revenue decreases, then it is debited. What are the steps in accounting? - Journalizing.

Posting (Ledger). Preparing Trail Balance. Preparation of Financial Statements. Analysis of Financial Statements.

What is cash flow forecast? The cash flow forecast predicts the net cash flows of business over a future period. Why cash flow forecast is important? - Indentifies potential shortfalls in cash balances in advance. - Makes sure that the business can afford to pay suppliers and employees. - Spots problems with customer payments. - An important discipline of financial planning and a management process. - External stakeholders such as banks may require a regular forecast. What does cash flow statements represent? Cash flow statements represent the liquidity position of a business or firm. What are the terms under Financial Reporting Standard for preparation of cash flow statement? 1) Net cash inflow from operating activities. 2) Returns on investments and servicing of finance. 3) Taxation. 4) Investing activities. 5) Financing. Overall presentation of a cash flow statement: Operating activities A Returns on investments and servicing of finance B Taxation C Investing activities D Net cash inflow/outflow before financing E Financing F Increase/decrease in net cash and cash equivalents G Cash and cash equivalents at start of year H Cash and cash equivalents at end of year J 1) Net cash inflow from operating activities Operating activities: Profit before tax, interest and extraordinary items A

Depreciation charged (+) B Increase (-) / decrease (+) in debtors C Increase (-) / decrease (+) in stock D Increase (+) / decrease (-) in creditors E Net cash inflow/outflow from operating activities F 2) Returns on investments and servicing of finance Cash inflows from returns on investments and servicing of finance include: Interest received. Dividends received.

Cash outflows from returns on investments and servicing of finance include: 3) 4) Interest paid. Dividends paid. Taxation Investing activities

Cash inflows from investing activities include: Receipts from sales or disposals of fixed assets. Receipts from sales of investments in subsidiary undertakings. Receipts from sales of investments in other entities. Receipts from repayment or sales of loans made to other entities.

Cash outflows from investing activities include: 5) Payments to acquire fixed asset. Payments to acquire investments in subsidiary undertakings. Payments to acquire investments in other entities. Financing

Cash inflows include: Receipts from issuing shares or other equity instruments. Receipts from issuing debentures, loans, notes, and bonds, and other loan, and short time borrowings.

Cash outflows include: Repayment of amount borrowed. Payment to re-acquire or redeem the entitys share. Payment of expense or commission on any issue of shares, debentures, loans, notes, bonds or other financing.

What are the main causes of cash flow problem? 1) Low profit or losses: The profit a business makes from trading is the most important source of cash. 2) Over-investment in capacity: This happens when a business spends too much on fixed assets. Fixed assets are hard to turn back into cash in short-term. 3) Too much stock: Holding too much stock ties up cash and there is a increased risk for stocks to become obsolete. 4) Allowing customers (trade debtors) too much credit: Offering credit is a good way of building sales. On the other hand, late payment is a common problem and there is a chance of not getting paid at all (bad debt). 5) Overtrading: Occurs when a business expands too quickly, putting pressure on short-term finance. Businesses that rely on long-term contracts are also at high risk of overtrading. 6) Unexpected changes: These are items or events that are not included in cash flow forecast; they are unforeseen. 7) Seasonal demand: When there are predictable changes in demand and cash flow, production and purchasing usually occurs in advance of seasonal peak in demand which results cash outflows before inflows. What is Profit & Loss Account? Profit & loss account reports the items that comprise the total revenue, total expense, and resulting net profit for a specific period of time. What are the Purpose & Use of Profit & Loss Account? - It shows whether a business has made a profit or loss over a specific period of time. - Describes how profit or loss originated. - Summarises transactions of a business over a period of time. - It is a legal requirement for limited liability entities. What is Balance Sheet (statement of financial position)? The balance sheet lists the assets owned by a business, the liabilities owed to others, and the accumulated investment of its owners at a specific date. What are the Purpose & Use of Balance Sheet? - Balance sheet is an instant representation of what the businesss resources and obligations are. - It provides helpful information in determining the degree of financial risk.

It shows the financial position of a business to creditors such as bank at the time of loan.