Thursday 17 November y

Business Accounting
Chapter 1 - The background and the main features of financial
accounting

- Memorandum
- Journal
- Ledger
- Single entry
- Double entry
- Financial accounting =
(i) recordings business transactions, (ii) preparing financial statements, (iii) reporting
on financial positions

- 1. Recording of data (bookkeeping)-> 2. Classifying & summarise -> 3. communicate

= strengths and weaknesses and worth of business
- Financial accounting PAST to PRESENT - for owners to make holistic decisions and
see worth of business

- Management accounting PRESENT to FUTURE - for managers to make operational

decisions and plan ahead.
Accounting equation
what business generates/owns - what it owes = worth of business
Capital aka. Equity - resources provided to the business by the owner
Assets - all resources a company has
Liabilities - all resources within the company that a 3rd party provided and is still to be
paid/owed
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Assets = Capital + Liabilities (Assets can be provided by the owner, i.e. capital, or by
third parties, i.e. in form of liabilities). Thus, Equity = Assets - Liabilities

Assets = all property of the business (physical and intangible, e.g. stocks)
Other assets = receivable and money on the bank
Equity = Capital (Profits + Investments) - Liabilities
Equity and Liabilities are sources of funds
Assets are application of funds

Statement of financial position aka. balance sheet, where equity is always equal
capital - liabilities Accounting equation record
Accounts payable - what is still owed to the creditor
Accounts payable - what is still owed to business by a debt
Current - can be liquidated within a year, e.g. inventory, accounts receivable
non-current assets - more than a year, e.g. buildings,fixtures, machinery
Non-current liabilities - debts that have to be paid within a year, e.g. accounts payable,
goods sold

All expenses (i.e. negative deductions) are put into ( )

Double-entry system - at least two accounts are affected (debit and credit)

Chapter 10 - Accounting concepts and assumptions

Financial statements used to make decisions on buying, selling or holding equity and
debt instruments and providing or settling loans and other forms of credits.
- future cashflows
- effective and efficient use of resources by management
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Historical cost concept - using historical data to arrive at a relatively well founded
assumption/guess/estimate
One statement to ensure objectivity - assumptions and calculations are in general
acceptable
Accounting standards/principles - rules to ensure consistency in reporting / accounting
Statements of Standard Accounting Practice - (SSAPs) & Financial Accounting
Standards - (FAS) by Accounting Standard Board (ASB)

money measurement concept - accounting does not show how business actually is
performing (processes, human resources, market conditions etc.)

business entity concept - only business activities, i.e. transactions are recorded.

time interval concept - financial statements are done annually, some times in-between
called interim statements.

Net Profit = Revenues - Expenses (matching expenses, expenses to obtain

revenues)

Going concern - uncertainty of the business in the future

Materiality - record materials in accordance to size vs company size (not every single
items listed individually)
Prudence - avoidance of understatement of liabilities and expenses, vice versa,
overstatement of assets and incomes.

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Thursday 17 November y
Lecture 1
Accountability - effect on the community (postive & negative) - ethical, environmental,
financial (tax)
Single entry - list of things
Growth of economy & business - town economies - more information - double-entry
accounting
Financial accounting vs. management accounting
Add Slide 19

Economic entity business activities ->: measurements -s> processing -> communicate -> make decisions
Stakeholders: Internal vs External
owners, managers, employees, lenders, suppliers, customers, peers , analysts,
governments agencies.
Types of Business Ownership
Sole proprietorship
LLMC ? - limited liability m company
Partnership - joint equally liable
Limited owner liability - set to a limit of liability which is equal to the share of the company
LLP - limited liability partners

Regulatory Framework
GAAP - generally accepted accounting practice
IASB - International accounting standard board - international gap
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Conceptual Framework

- supports regulatory framework

Revaluation
Income & financial statement - accruals / matching concept - income and expenses need
to be recorded as they accrue - acc payable are seen as expenses, acc receivable are
seen as income.

Consistency - depreciation is set once on elaborated formula and doesn't change over
time recorded for each single item.

Qualitative characteristics vs two fundamental ones

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Lecture 2
Source Documents
Journals
Ledger (T-Accounts)

Trial Balance
Financial Statement

Prepare T- Accounts and Trial Balance primary questions in exam

AS at?

Turnover = Sales = Revenue

Sales inwards or Sales returns = Reduce by sales returns

Balance Sheet - end of the period - accrual basis (when they take place)

Income Statement - during the period - accrual basis (when they take place)
Income - Expenses = Profit (Inflow and Outflow) (Matching principle)
Revenue - COS + Other Income - Other expenses (e.g. taxes) = Net Profit

Cash - Cash Flow Statement

Statement of changes in equity - change in worth of company through out a period

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Add Profit/Loss
deduct dividends

Alter profit - to reduce taxes - start with target profit and work backwards

Chapter 7 - Statement of profit or loss: an introduction

Show Profits / profitability to:
- planning ahead
- get loans (private/bank etc.)
- prospective business partners
- future selling the company
- tax calculation
T-account - Accountants and bookkeepers often use T-accounts as a visual aid for
seeing the effect of the debit and credit on the two (or more) accounts
Debit - LEFT - increase in possession
Credit - RIGHT - increase in capital
ALWAYS DEBIT EQUALS CREDIT

Increased with debit (left) - DEAL

Dividends / Drawings
Expenses
Assets
Losses
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Increased with credit (right) - GIRL

Gains
Income
Revenues
Liabilities & Capital

Stockholders' (Owner's) EquitY

To decrease an account you do the opposite of what was done to increase the
account. For example, an asset account is increased with a debit. Therefore it is
decreased with a credit.

Statement of profit or loss - debit & credit (not detail for each account, but just
outcome of t-account)
Sales - COGS=Gross Profit -Other expenses/+other income = Net Profit

Trading Account- detail on the statement of profit or loss - needed to calculate gross
profit.
Purpose
1. gross profit should be adequate to meet indirect expenses.
2. net sales can be determined
3. comparing net sales figures over time (increase not equal success as prices
could have gone up and not sales volume)
4. gross profit radio (increase or decrease showcase performance) = gross profit /
revenue
5. direct expenses to gross profit ratio - controlling expenses
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6. inventory turnover ratio Trial balance - test correctness & try to have equal credits to debts - done before

Profit AND Loss account - to calculate Net Profit

Gross Profit = Revenue - COGS
Net Profit = Gross Profit - Other Expenses/+Other Income
Gross loss- COGS > Sales Revenue
Double entry - Debit vs Credit
COGS = Purchases - Closing inventory

Transaction (with a proof such as an invoice, cash etc.)

Journals (Entry of transaction through creating of account with date etc.)
Ledger (Book with accounts)

Types of financial statements (statements made at the end of reporting periods)

1. Income statement / Profit and Loss Statement - ACCRUAL
During the period - accrual basis (when they take place)
Income - Expenses = Profit (Inflow and Outflow) (Matching principle)
Revenue - COS + Gross Profit Other Income - Other expenses (e.g.
taxes) = Net Profit
2. COGS statement
Cost of goods sold represents the sum of the costs of all goods which have
been sold during the accounting period.

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3. Balance Sheet
Balance sheet is a list of the accounts having debit balance or credit
balance in the ledger (not double entry!) - two sides - left assets, right
liabilities 4. Profit or Loss Statement (includes Trading Account) (Net Profit or Net
Loss?)
Starts with gross profit, thus result from trading account. Calculating Net
Profit = Gross Profit - indirect expenses & income
Business is making a loss or (net) profit?
5. Trading Account (Gross Profit or Gross Loss?)
Detail on the statement of profit or loss - needed to calculate gross profit
6. Statement of financial position
List of balances arranged according to assets, capital or liabilities

Account - ALWAYS DOUBLE ENTRY

Chapter 8 - Statement of financial position

Assets
Current - <1 year (Inventory, accounts receivable, cash at bank, cash at hand)
Non-Current > 1 year(land & buildings, fixtures & fittings, machinery, motor
vehicles)

Liabilities
Current have to be paid within < 1 year
Non-Current have to be paid > 1 year
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Chapter 9 - Statement of profit or loss and statements of

financial position: further considerations
Sales account - goods sold
Return inwards - returned by customer

Purchase account - goods bought

Return outwards - goods returned to supplier

Sales (account) - return inwards (- cost of goods sold)= actual sales / goods sold
Purchase (account) - return outwards (- closing inventory) = actual goods bought

Carriage - expenses that occur with inward and outward returns (i.e. posting, packaging
etc.) ->
Inward carriage - included in trading account (gross profit)
Outward carriage - included in profit and loss statement (net profit)

The ending inventory for one period is always brought forward as the opening
inventory for the next period.

Chapter 4 - The effect of profit or loss on capital and the double

entry system for expenses and revenues
Revenue - Costs = Profit/Loss
Old capital + Profit/ - Loss = New Capital
Costs and Revenues are split into various accounts to understand profit calculation
better.
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Increase in assets and expenses are entered on the debit side (using assets to generate
revenue)

Rent received account?!?! temporarily.

Drawings - money taken out of the company by the owner - NEVER EXPENSES cash (asset) is decreasing, thus credited
drawings is decreasing, thus debited

Chapter 5 - Balancing-off accounts

1. Close of account - if both sides of a t-account are equal and thus is not needed
anymore and can be closed (e.g. all accounts receivable have been paid is equal zero).
2. balance of - equalising both sides, to close account for that period called carried
down c/d
3. , and balance carried down b/d to the next time period. (take totals and add the
difference between the two totals to the side of the smaller sum/total) page 69.
4. debit or credit?
5. add to trial balance
Three-column accounts - third column balance is added accumulative sum up (add
up debits and subtracts credit on the right side)

Chapter 6 - The trial balance

To check wherever the debit side matches the credit side (always equal) a trial balance
is created.
Listing all accounts and entering the totals of debits and credits.
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In a T-Account all transactions are listed and the end debit and credited are put
against each other to see wherever the account is debited, credited or equal (in
that case the account can be closed?)

Closing inventory

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