Lecture 1 - lntroduction

University Of London

Pri

nciples Of Accounting

Lecture Notes Lecture 1

Topics Covered
lntroduction To Accounting Forms of Business Organisation Basic Accounting Terms

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Lecture 1 - lntroduction
The objective of any business is the maximisation of owners'wealth.

This may take the form of the maximisation of profits or maximisation of

market share or

revenue.

Defi

nition of Accounting

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Accounting can be defined as the process of identifirir*g, measuping; recording and communicating economic information about the-busln"s to the users of the information. Accounting is concerned with the "iitity provision of information about the(financial positiof,, performance and changes in financial position of an enterprise that\ useful to a wide range of potlntial users in making economic decisions.

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Lecture The Users of Accounting lnformation

I - lntroduction

The users of the information are varied and they are also usually the
stakeholders of the organisation. The stakeholders refer the various groups of people who have a vested interest in the orginisation. These include: qa((},fitnd rrfiyn,,otcn". U.)ho a{no rtsss

. . . . .

Owners: lnterested in profit ariO financial stability.

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Creditors: lnterested in ability to repay loan.(t,cr"rtt) ''Banks

Employees: concern about bonus and job security dependent on profit and financial stability. Government: Collection of taxes which is dependent on profits. Management: Similar interest to that of owners.
Drrc{ss

The type of accounting information that is provided generally falls into two
category. These two category include: tttha+ rs lfp/1{[4rn(C bcilr.fi jt-e, X.+9pn o[ Creo"ma4t Management Accou ntin g Versud Fi nancial AYcou nting

Financial Accountinq Manaqement Accou ntinq frrte/nqtl 1. Analyse information with the aim of Based on historical cost(past ( influencinq future behavior) q BJ",r:trna transactions)

2.

Not leqal requirements

Reouired bv law

3. No need to conform to regulatory

requirements

Need to conform to regulatory requirements for example the

Companies Act.

4. Focus on internal management

needs

Focus mainly on external users needs for examole shareholders

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Lecture

- lntroduction

Functions of Accounting
It is generally accepted that accounting should serve the following functions:

Recording & Glassification : accounting systems supply a means of recording and classifying data so as to enabte the-production oi summarized financial statements relating to the entity's results and current state of affairs. Records also enable one-off requests for data to be complied with.

l.

P'"lrts .2. Measuring: accounting tries to assist in the measurement of the \(economic
results)of the entity's activities, usually with a view to sharing out the results among the various interested parties (e.g. government (tales),
employees (wages), shareholders (dividends).

Stewardship: accounting provides a record of how the funds entrusted to managers have been used by them, and to what ends. Vlaryklrfr+ icrortvra (Braffi,nd ), Monitoring/ pldnnlng and control: accounting should provide sufficient information on the results of past activities to enaSle management to monitor the results and take action if necessary, and to formulate plans for the future.

3.

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4. "

Performance evaluation and compensation. Accounting systems provide information on the performance of different individuals ariO jarts ot the business in order to determine how much managers and employees should be rewarded.

5.

lnformation For Decisions: accounting should assist .investors.. for example, in deciding how to allocate heir{limited resources\ \$rftL-t\tr.)
Gommunication: accounting should communicate information to both internal and external users. (Finaniial statements are lhe mair\ tools used to achieve this function for external users.) Swnal rl9c E$evr'nl Ute.s- - ' -}4a(gew^d.+ -gnflrcu.tJcn These functions are interlinked to some extent. Their;"TieiY"tifiportance is a matter of opinion and point of view. The recording function is'pernaps the earliest function which people recognise. withoJt it, none of the other functions would be possible. The stewardship and measurement functions developed when the rise of the joint stock companies increased the split between ownership and control of resources (i.e. between shareholders on the one hand and management on the otherj. These functions have been displaced in importance by the last three funciions listed above which have increased in prominence as accounting has been recognised as a social science and a branch of applied economics.

6.

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Lecture 1 - lntroduction

Business structure operating in today's environment can generally take one of three forms:

9ne

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Sole proPrietor -t-tf/s41-1 PartnerShipS lnrfc*,.r-\ prsol Company

Sole proprietor/ Partnership

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Sole proprietor This refers to business that is owned by single owner who is entitled to all the profits and is responsible for all the losses. Partnerships Refers to the ownership structure involving two or more persons carrying out a business in common with a view of making profits Advantages of a Sole proprietor/ Partnership . EasV to start and administer -Tncrl^c tax ilrrE . Flexibility in the running of the business as the owner/partners do not have to consult others in making decisions Disadvantages include

. .

Unlimited liability: The owner/partners are personally liable for all the debts of the business Lack of sources of capital and expertise: The sources of capital are usually restricted to the owners/partners savings and monies raised from families and friends.

This form of ownership is usually restricted to very small(micro) business.

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Lecture 1 - lntroduction

Company registered company is a body of persons granted a charter legally recognising them as a separate legal entity having their own rights, privileges and liabilities distinct from those of their members.

The owners of the company are the shareholders or stockholders. The Advantages of a Company

Separate Legal Entity. A company is a separate legal entity, has most of the rights of a person except those of veting and marrying.

Limited Liability. Because a company is a separate legal entity, company creditors can satisfy their claims only against the assets of the company, not against the personal property of the shareholders of the company.
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Ease of Capital Generation. lt is easy for a company to raise capital as it can sell shares to wide groups of shareholders.

Gontinuous Existence. As the company is a separate legal entity it is not affected by the death of its shareholder and enjoys perpetual life.
The Disadvantages of a Company (AqM) Extensive Government Resur"tion. government laws. Meeting these laws may be expensive.

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the extensive

Separation of Ownership and Control. The separation of ownership and control has disadvantages as sometimes directors makes decisions that are not for the good for the shareholders as a whole. Jttlare eY(es{lva b,rurcs J' pu..t t
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Lecture 1 - lntroduction
The Accountinq Gycle The following diagram provides an overview of the recording process. Notice that that entire recording process begins with the initial recording and ends with the preparation of the financial statements.

FINANCIAL TRANSACTION

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GENERAL LEDGER

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TRIAL BALANCE

ADJUSTMENTS

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) Not "f ttou

lncome Statement

Statement of financial position

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Lecture 1 - lntroduction

The Basic Financial Statements

The two basic financial statements, which you need to be familiar with at this stage, are the lncome Statement (Also known as Statement of Financial Performance or Profit and Loss Statement) & the Statement of Financial Position (also known as balance sheet).

Example of a lncome Statement Format of a sole trader(Service Entity)

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MNG tnc. lncome Statement - lir^orrval forf,yrnane, For the Year ended 31 December 20X0

(Di Revenue

^ 1- ' . ......... ............-. . -

Office Expenses

10,000 000

Berrl1

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Lecture
Exampte of

lntroduction

alstater?ilitH"cial

Positiodpf a sole trader

[4Na.heStatement of Financial Position As at 31 December 20X0

Assets Non Gurrent Assets Motor Vehicles Total Non- Current

Assets _

: 110,000

esh oft_

Bank)

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lnventorv

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Credit-o-1_s
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Total Current Liabilities Non Current Liabilities

Total Liabilities

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Lecture 1 - lntroduction
Basic Accounting Terms
The following are the basic accounting terms that you must be familiar with:

Assets:

' ' ' . .

;u o^avdriP This refers resources controlled by the business that yields future
economic benefits. Generally refers to resources owned by the business that have value Example include land, building, Cash at hpnk, tracle nehrnrs

Liabilities (Dcfisd ll*,

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Present Obligations of the business to others. Examples include Bank Loans. trade Creditors.

Assets and liabilities can be divided into current & non-current.

Current Assets t\*'; fisrts1 ' Current assets lre either cash or any other asset that can be converted into cash within one year from the date of the Statement of financial

. ' . . . .

position.

Examples of current assets are

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Current Liabilities
Obligations that are due within one year from the date of the Financial position. lncludes

Revenues/ Sales Earnings of the business that result from its operations Refers to the inflow of future economic benefits Revenues increase the owners equity in the business

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Expenses

. . . .

Costs that is incurred in earning the revenues Refers to the consumption of future economic benefits Examples of expenses include rent. utilities, salaries ete. Expenses reduce the owners equity in the business

Profit for a given period = Revenue less Expenses

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Lecture 1 - lntroduction

Owners Equity

. . . . .

Refers to the capital provided by the owners as well as the residual interest in the business, this is the accumulated profits in the business.

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Refers to the residual interest in the assets after the liabilities have been deducted. (Eq,uity = Assets L-ess Liabilities) \Nq+wyii^. Capital refers to the amount invested in the business by the owners and drawings refer to the amounts withdrawn by the owners for
personal use. Drawings as used in the context of accounting refer to the withdrawal by the owner of any asset of the business for personal use. The value of the Owners Equity at any point in time is equal to: Capital contributed + Retained EarningVqoftts

Lecture lllustration
Assets(A),

Classify the following items into their correct category as either

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iab

ility(L), revenues(R), expenses(E) or equ ity( EQ).

Items a) Premises -Larut /Brldrnt b) Creditors c) Stocks d) Motor vehicles e) Loan from Star bank Machinerv o) Retained Earninqs h) Debtors Bank Sales k) Bank Overdraft Marketable Securities ["i"!fr{xfi! m) Debenture Pavable n) lnsurance o) Rent

Category

* A
L

n ) )

q!
A A
R,

l)

{ E L
E

p) Land o) Caoital

+
EQ

r)

lnterest oavable

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Lecture 1 - lntroduction

Journal Entry
The basic Journal Entry is done in the following format:
Date

Account Name

Debit ($)

Credit($)

The Accounting Equation & The statement of financial position All financial transactions involve a dual aspect. The following relationship is developed for the Balance sheet:

Asset = Liabilities + Equity (capital)

After a period of trading the equity at the year- end equal:
r q/,nfricit$ri[*qa

Cdpital at the start of the Period

+

lnjections of new capital

O'a*ings
+

+" o'rrrri txtr'lrc'{'*ti\

+Profits{Losses) Profit for the period = Revenues (Sales) Less Expenses

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Lecture 1 - lntroduction
Record ing
Fi

nancial Transactions

Points to Remember:

The sole purpose of recording the financial transactions is to prepare

the financial statements

Basic Recording Rules:

1.

EAGH TRANSACTION HAs TWO EFFECTdtDouble Entry).

TOTAL OF DEBITS (LEFT SIDE) = TOTAL OF CREDITS (RIGHT SIDE)

Double entry recording rules:

1.

Each transaction has two effects (duality).

TOTAL OF DEBITS (LEFT SIDE) = TOTAL OF CREDITS (RIGHT SIDE)

TO INCREASE

I-

TO DECREASE

TO INC,

TO DEC,

DEBIT

CREDIT

CREDIT

DEBIT

HINT ADJUST THE BANK ACCOUNT FIRST. BANK lN = DEBIT BANK

. .

BANK OUT = CREDIT BANK

REMEMBER: DEBIT DOES NOT MEAN INCREASE!

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7
Lecture 1 - lntroduction

Lecture lllustration 2
Jennifer Tan opened an Accounting practice on 1 January of the current year. The following transactions occurred in January.

1. Jennifer opened a special cheque account at the

$q,000 in her practice. -Capfia\ Purchased Office Furniture for $2,500 on credit.
Paid rent fo.r January $SOO.

ba_nk, investing

2.
3.

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4.
5. 6.
7.

Billed clients for professional services rendered, $4,800. Collected $2,200 from clients billed in transaction 4.

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Paid January salaries, $1,500.

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Jennifer withdrew $500 for oersonal use. \ uorr.*rt tD^.'1j*

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Lecture 1 - lntroduction

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THE END - LECTURE

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