Accounting is a system of recording information about a business The information that is collected is primarily numerical.

This information is then presented to various people to help them make decisions. The accounting system is used to maintain records for all businesses, whether a multinational corporation or a small business. To account for something means to keep a record of something in your business by using the accounting system. An accountant (or bookkeeper) collects documentation and records this information, categorizes it (i.e. organizes the different bits of information under certain categories), and presents it in specific formats. Accounting information is finally presented in the form of financial statements the key reports of a business. An asset is officially defined as: A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. An asset is a possession of a business that will bring the business benefits in the future. An asset is anything that will add future value to your business. Employees can even be seen as assets. If the following criteria are met, then you have an asset according to the accounting system. 1. DOES YOUR BUSINESS OWN/CONTROL IT? 2. WILL IT BRING YOUR BUSINESS BENEFITS IN THE FUTURE? 3. CAN YOU VALUE IT ACCURATELY? Theres a basic rule about how one values any asset. The rule is:

The cost of an asset includes all costs necessary to get it to the business premises and into a condition in which it can be sold. So the cost of an asset can include the following: - Purchase price, - Import duties, - Transport costs to get it to your premises, - Installation or set-up costs. A business is started by the owner. The owner invests his assets in the business so that the business will produce a profit for him. The investment of assets in a business by the owner or owners is called capital. The owners stake in the business (the owners equity) increases when he invests assets in the business, because it is his assets When the owner removes assets from his business, we call this drawing. This is because the owner withdraws assets. Drawings are the exact opposite of capital. The assets of the business have decreased, and the owners stake in the business assets has decreased, so assets and owners equity both decrease. A liability is officially defined as: A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Liability is simply a debt of the business. The debt will result in assets (usually cash) leaving the business in the future. The most common liability is a loan. Another common liability is called creditors.

A creditor, also known as a payable, is any business or person (apart from the bank) that you owe. Suppliers (who you owe for products purchased on credit) would fall under creditors. When you pay a loan back, or you pay off your creditors, some of your assets (most often cash) will leave your business. Owners equity is officially defined as: the residual interest in the assets of the enterprise after deducting all its liabilities. The owners equity is simply the owners share of the assets of a business. Assets can only belong to two types of people: the first type is people outside the business you owe money to (liabilities), and the second is the owner himself (owners equity). Owners equity, often just called equity, represents the value of the assets that the owner can lay claim to. In other words, it's the value of all the assets after deducting the value of assets needed to pay liabilities. It is the value of the assets that the owner really owns. ASSETS = EQUITY + LIABILITIES These three elements, assets, owners, equity and liabilities, when compared to one another, show what we call the financial position of the business. Profit is the positive amount you are left with when your total income exceeds your total expenses. A person starts a business, and invests his assets in the business, so that the business will produce a profit for him. This reason or motivation of starting and running an organization with the objective of making a profit is called the profit motive. Other organizations, such as welfare and educational organizations, are non-profit organizations i.e. they do not exist so the owner makes a profit, but for

other reasons such as benefiting the community or a group of people. Thus, when we are looking at income, expenses and profit, we are really looking at your for-profit business.

In order to calculate if the business has made an overall profit (or loss), we take our income and deduct our expenses. The amount of profit that a business makes indicates how well a business is performing. This is called the financial performance of a business. Income is simply the event that results in money flowing into the business. Examples of income: - Sales - Services rendered (such as an accountants services, doctors services, a plumbers services, etc.) - Interest received - Rent received Each one of these things above represent some sort of event that occurs (like a sale being made), which results in money flowing into a business. Accrued income is income your business has earned, that is still owed to your business. The accrual basis of accounting means that if a sale is made in October, but cash is received in January, the income is recorded in October (not when the cash is received in January). Between October and January we record that cash is owed (a debtor is recognized). The accrual basis means that income and expenses are recorded in the periods to which they relate, and not necessarily when cash is received or paid. Debtors are people that owe your business money. Debtors are assets, as you expect to receive benefits from them in the future you expect to be

paid. What happens if someone owes you money but you dont expect them to pay you in future? Well, there are no benefits then, so this is not an asset. Another name for debtors is accounts receivable. The word receivable simply means capable of being received, or will be received.