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INTRODUCTION TO ACCOUNTING & BOOKKEEPING

INTRODUCTION TO ACCOUNTING & BOOKKEEPING. OBJECTIVE OF THE SESSION. TO UNDERSTAND DEBIT AND CREDIT (DOUBLE ENTRY BOOKKEEPING SYSTEM) MAKE A STATEMENT OF FINANCIAL POSITION MAKE A STATEMENT OF COMPREHENSIVE INCOME INTERPRETATION OF FINANCIAL STATEMENTS. TERMINOLOGIES.

malik-rodriguez
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INTRODUCTION TO ACCOUNTING & BOOKKEEPING

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  1. INTRODUCTION TO ACCOUNTING & BOOKKEEPING

  2. OBJECTIVE OF THE SESSION • TO UNDERSTAND DEBIT AND CREDIT (DOUBLE ENTRY BOOKKEEPING SYSTEM) • MAKE A STATEMENT OF FINANCIAL POSITION • MAKE A STATEMENT OF COMPREHENSIVE INCOME • INTERPRETATION OF FINANCIAL STATEMENTS

  3. TERMINOLOGIES • Asset: anything owned (or controlled) by the business • Non-CurrentAsset: an asset the business intends to keep (longer than 12 months) • Current asset: not a non-current asset i.e. as asset the business keeps for a year or less than a year • Accounts receivable: amount owed to the business by customers • Prepayment: a payment made by the business in advance • Inventory: an asset bought by the business intended for sale • Capital: amount owing by the business to the proprietor (owner) • Drawings (or withdrawals: anything taken from the business by the owner • Liability: amount owing by the business • Current liability: a liability due within 12 months • Non-Current liability: a liability due more than 12 months • Accounts payable: liability due to suppliers • Bank overdraft: liability due to the bank (a negative bank balance)

  4. CAPITAL AND REVENUE ITEMS • We call the purchase of assets (for the Statement of Financial Position) Capital Expenditure, whereas the payment of expenses (for the Statement of Profit or Loss) is called Revenue Expenditure. 1) Capital expenditure: • An expenditure which results in the acquisition of permanent asset (which may last for a few years) which is intended lo be permanently used in the business for the purpose of earning revenue, is known as capital expenditure. These expenditures are 'non-recurring' by nature. 2) Revenue expenditure: • All the expenditures which are incurred in the day to day conduct and administration of a business and the effect-of which is completely exhausted within the current accounting year are known as "revenue expenditures“ i.e. these type of expenses are related to short period, means benefit of these expenses is less than one year.

  5. THE ACCOUNTING EQUATION ASSETS – LIABILITIES = CAPITAL The term net assets is often used to refer to: Assets - liabilities, and so: NET ASSETS = CAPITAL There are only three reasons why the capital of a business should change over time: • More capital introduced (this will increase the capital) • Profit for the period (this will increase the capital) • Drawings during the period (this will reduce the capital)

  6. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

  7. STATEMENT OF COMPREHENSIVE INCOME (P&L)

  8. WORKED EXAMPLE Example 1 On 1 January, net assets of a business were $25,000. On 31 December they had increased to $32,000. During the year the owner had introduced more capital of $10,000 and had made drawings of $7,000. You are required to calculate the profit for the year Example 2 On 1 January, the net assets of a business were $118,000. On 31 December, the net assets were $150,000. During the year the owner had introduced no additional capital, and the proit for the year was $54,000 How much were the drawings during the year?

  9. NOMINAL LEDGER • Every item in the Statement of Financial Position or Statement of Profit or Loss will have an account in which we will keep a record of that item. The account used to always be a page in a book, but these days we record on a computer. • The book or file containing the accounts is known as the nominal ledger (or general ledger), and the accounts are called ledger accounts. • In the next few slides, we shall see how to make these ledger accounts which are used to make up the statement of financial position and the statement of comprehensive income.

  10. DEBITS AND CREDITS • Debits and credits are the building blocks of the double entry accounting system.  • To understand debits and credits, we need to first understand the following: • Ascertain the type of account • Ascertain the type of transaction NB: Debits and credits are distinctly different from a plus and minus

  11. DEBITS AND CREDITS (CONTINUED) • Let’s say you have to increase the cash balance. Cash is an asset and therefore has a default debit balance. When you debit it further, you increase its balance. Therefore, you will debit the cash account. • Similarly you can ascertain whether an item needs to be debited or credited. As a check, you must ensure that the debits in every transaction are equal to the credits. This is like the fundamental principle of accounting. NB: This is essentially the double entry bookkeeping system i.e. there are 2 sides to every transaction. DEBITS MUST ALWAYS EQUAL THE CREDITS

  12. DOUBLE ENTRY T Account Debit Credit • The left hand page is always called the debit side, and the right hand page is called the credit side. • If we make an entry on the debit side, we say that we debit the account. If we make an entry on the credit side, we say that we credit the account. • For every transaction there will be two entries, one on the debit side of an account and one on the credit side of another account. We call this double entry.

  13. DOUBLE ENTRY (CONTINUED) A debit entry represents one of the following: ๏ an increase in an asset ๏ a decrease in a liability ๏ an item of expense A credit entry represents one of the following: ๏ an increase in a liability ๏ a decrease in an asset ๏ an item of income

  14. WORKED EXAMPLE The following are the transactions of KXYZ business during the accounting period Jan – Dec 2017 (remember the accounting principle accounting period?!) of trading. Record each transaction in t-accounts. (a) Kristine starts a business and pays in $5,000 as capital (b) The business buys a car for $1,000 cash (c) They buy goods for resale for $500 cash (d) They buy more goods for resale for $600 on credit from Mr A (e) They pay rent of $200 cash (f) They sell half the goods for $800 cash (g) They sell the remaining goods on credit for $900 to Mrs X (h) They pay $400 cash on account of the amount owing to Mr A (i) They receive $500 from Mrs X (j) Kristine withdraws $100 cash from the business (k) Kristine buys a movie ticket for $10 (payment by cash) for her entertainment.

  15. TRIAL BALANCE • Although we now know the balance on each account, there are many mistakes that we could have made. For instance, when recording the transactions we could have accidentally debited and credited with different figures. A very common error is to enter (say) $1,200 in one account but $2,100 in the other account. This is known as a transposition error. • There is a very simple and quick check we can make to see if the debits and credits are equal. • The check is to list the balances on every account. The total of the debit balances should equal the total of the credit balances. We call this list the Trial Balance! MAKE A TRIAL BALANCE FROM THE PREVIOUS EXAMPLE!

  16. MAKING FINANCIAL STATEMENTS MAKE A STATEMENT OF FINANCIAL POSITION AND STATEMENT OF COMPREHENSIVE INCOME FROM THE PREVIOUS EXAMPLE!

  17. INTERPRETATION OF FINANCIAL STATEMENTS • Financial statements are prepared to assist users in making decisions. They therefore need interpreting, and the calculation of various ratios makes it easier to compare the state of a company with previous years and with other companies. • The data (input) has been collected and sorted into records from which reports have been prepared (process) and now it is up to you to use that information to make decisions (output). • There are several steps in using output: • Analysis: significance of various figures and their relationships eg comparing this years sales with the previous years • Evaluation: to assess the value of step 1 above • Decision making: make decisions based on conclusions reached from the above 2 steps INPUT → PROCESS → OUTPUT

  18. INTERPRETATION OF FINANCIAL STATEMENTS (CONTINUED) • When attempting to analyse the financial statements of a company, there are several main areas that should be looked at: • Profitability: measure of profit against sales, assets, capital or other figures. 2) Liquidity: ability of the firm to meet its short term debts. 3) Efficiency: 4) Stability: long term prospects of the business surviving.

  19. PROFITABILITY

  20. PROFITABILITY (CONTINUED)

  21. PROFITABILITY (CONTINUED)

  22. LIQUIDITY

  23. EFFICIENCY

  24. STABILITY

  25. LIMITATIONS IN THE USE OF ACCOUNTING INFORMATION • Problems in using historical information: 1) the nature of the business may have changed 2) the historical information may have been obtained from unreliable data 3) the business may be in an industry which is changing 4) the data may not reflect the state of the economy, either specific to this industry or in general 5) the quality of leadership may not be shown 6) not all information may be available; for example, the intention to introduce new technology

  26. LIMITATIONS IN THE USE OF ACCOUNTING INFORMATION • The qualities of good information include: 1) Comparability 2) Relevance 3) Reliability 4) Materiality 5) Understandability REMEMBER THESE WERE ALSO THE ACCOUNTING CONCEPTS!!!

  27. THE END

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