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Introduction to accounting
and accounting equation
1
What is accounting
It is a systematic process of identifying,
recording, measuring, classifying, verifying,
summarizing, interpreting and
communicating financial information.
Accounting is a process
Collection in money terms of information
relating to transactions that have resulted
from business operations
Recording and classifying data into a
permanent and logical form. This is usually
referred to as "Book-keeping
Summarizing data to produce statements
and reports that will be useful to the
various users of accounting information both external and internal
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Accounting is a
communication device
Aim is to provide accounting
information that can be communicated
to a range of people and institutions
who will then make use of this
information.
Users of accounting
information
Two categories
Internal users
External users
Regulatory authorities
Suppliers
Customers
Bankers
Competitors
Community groups
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Types of accounting
Financial Accounting
Management Accounting
Financial Accounting
Reporting of the financial position (the
statement of financial position) and
performance (the profit and loss
account and cash flow statement) of a
firm through financial statements issued
to external users
Management accounting
Management accounting is concerned with
the provisions and use of accounting
information to managers within organizations,
to provide them with the basis to make
informed business decisions that will allow
them to be better equipped in their
management and control functions.
Management Accounting
(Cont)
In contrast to financial accountancy
information, management accounting
information is:
designed and intended for use by managers
within the organization, whereas financial
accounting information is designed for use
by shareholders and creditors.
usually confidential and used by
management, instead of publicly reported;
forward-looking, instead of historical;
computed by reference to the needs of
managers
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Activity 1
Which stakeholder
group...
Activity 2
Distinction between assets, liabilities
and capital
Assets
a)
b)
12,000
?
Liabilities
Capital
4,000
6,000
5,000
c)
16,000
12,000
d)
28,000
4,000
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Activity 3- Classification of
assets and liabilities
Distinguish from the following list the
items that are assets from those that
are liabilities
Office machinery
Loan from Jones
Fixtures and fittings
Motor vehicles
We owe for goods
Bank balance
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Effects of transactions on
accounting equation
Business transactions affect both
sides of the accounting equation
Example 1
On June 2000, Rita set up a business producing computer
software for musicians. She provides Rs 2,000 capital from
her savings which she puts in her business bank account and
persuaded a bank to lend her business Rs 1,000 for two years.
With the money, she bought a computer for Rs 2,700 and
deposited the remaining Rs 300 in the bank. During the year
she did not undertake any other transactions
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Effect of transactions on
accounting equation
Example 2
On June 2000, Rita set up a business producing computer software
for musicians. She provides Rs 2,000 capital from her savings
which she puts in her business bank account and persuaded a
bank to lend her business Rs 1,000 for two years. With the money,
she bought a computer for Rs 2,700 and deposited the remaining
Rs 300 in the bank. On July 2000, she introduced another Rs 1,500
into the business and deposited it in bank during July.
The effect of this transaction on the business would be
An increase of capital by Rs 1,500, from Rs 2,000 to Rs 3,500
An increase in assets by Rs 1,500, from Rs 3,000 to Rs 4,500.
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Activity 4
On June 2000, Rita set up a business producing computer software
for musicians. She provides Rs 2,000 capital from her savings which
she puts in her business bank account and persuaded a bank to lend
her business Rs 1,000 for two years. With the money, she bought a
computer for Rs 2,700 and deposited the remaining Rs 300 in the
bank. On July 2000, she introduced another Rs 1,500 into the
business and deposited it in bank during July. During the year, Rita
buys a car for her business for Rs 850, paying by cheque. During
September, Rita sells some software, banking a cheque of Rs 740.
She also has to incur expenses of Rs 230 for the transaction.
Rearrange the accounting equation to show the position of the
business on 30 September 2000.
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The accounting
equation and the
statement of financial
position (balance sheet)
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Assets
An asset is something the business owns or controls such
as: Inventory (goods manufactured or purchased for resale)
Receivables (money owned by credit customers, prepaid
expenses)
Cash
Non-current assets
Liabilities
Rs
Rs
Non-current assets
Plant
Xxx
Machine
xxx
xxx
Current assets
Inventory
xxx
Debtors
xxx
Cash
xxx
Total assets
xxx
xxx
xxx
Non-current liabilities
Loan
xxx
Current Liabilities
Bank overdraft
Total equity and liabilities
xxx
xxx
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Types of business
Sole trader
Partnership
Company
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Further reading
Frankwood business accounting 1- Chapters
1,2, 3, 4
Randell As Level and A level- Chapters 1 and 2
ACCA text book- Chapters 1 and 2
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