DEFINITION OF ACCOUNTING Accounting is the process of identifying, measuring and communicating economic information about an entity to permit informed judgments and decisions by users of the information (Anthony et al, 1995)

What economic information? Examples Assets of the entity Liabilities of the entity Expenses & income of the entity Performance of the entity Financial position of the entity Liquidity position of the entity

Users of accounting information Management Investors: Shareholders/owners & lenders Creditors/ suppliers Debtors/customers Government The public/ Community Financial analysts Employees

Branches of Accounting Financial accountingManagement accounting 1. Provides economic information useful to external users 1. Provides economic information useful to internal users 2.Generates general purpose financial statements 2. Generates specific purpose statements and reports 3. Reports on financial effects of past events 3. Set up for future oriented reports 4. Must conform to external standards 4. Not subject to external standards 5. Uses objective data5. Uses subjective data.

Separate entity concept a business is treated as a distinct entity, or different persona separate from the owners who provided capital. transactions entered into by the business have to be dealt with from the point of view of the entity whose books are being done, not from the point of view of the owners.

Accounting equation flows from the separate entity concept the assets of a business will always be equal to the sum of its liabilities plus its owners’ equity. Assets =Equity + Liabilities. Equity = Assets – Liabilities. Liabilities = Assets – Equity.

Where: Assets are resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liabilities are present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity (or owners’ interest) is the net interest in the assets of the entity after deducting all its liabilities.

Double entry system of accounting Every financial transaction gives rise to two accounting entries; Each entry shows dual effect of the transaction on the accounting equation. Note: A transaction is an agreed upon transfer of value from one party to another which affects the amount, nature or composition of an entity’s assets, liabilities or equity.

The double entry rule says : For every debit entry there must be a corresponding credit entry in the ledger. IN SHORT Debit the receiver and credit the giver.

Books of Accounts Subsidiary books Subsidiary books are those books where transactions are recorded as information is extracted from the source documents. These books are also referred to as books of prime entry, books of original entry or books of first entry.

Subsidiary books Subsidiary bookuseSource document Cash bookCash transactionReceipts, bank deposit slips, cheque counterfoils bank statements Petty cash bookSmall cash paymentsPetty cash voucher Sales journalCredit salesSales invoice Purchases journalCredit purchasesPurchases invoice Sale returns journal Returns inwards/sales returns Credit Note (C/N) Purchases returns journalReturns outwards/ purchases returns Credit Note (C/N) General journalAny other transactionsDepends with nature of transaction: invoice, C/N

Subsidiary books Subsidiary books are books in which entries are made prior to their posting to the divisions of the ledger. They are not part of double entry with the exception of the cash book. The purposes of subsidiary books are: To relieve the ledger of unnecessary detail by posting thereto only summarized data;

Subsidiary books To classify transactions and enable periodic totals to be posted to appropriate accounts in the ledger.

General journal The typical uses of the general journal are to record: The sale, or purchase, of non-current assets on credit; The correction of errors; Opening entries, i.e. entries to open the books of the entity; Other transfers.

The Ledger It is the main book of accounts All transactions entered in subsidiary books are posted to the ledger Divisions of the ledger are: The cashbook Sales/debtor’s ledger Purchases/creditor’s ledger The General ledger

Divisions of the Ledger Ledger SectionContents Cash bookCash and bank accounts Sales /debtors ledgerPersonal accounts of trade debtors Purchases /creditors ledgerPersonal accounts of trade creditors General ledgerProprietary accounts, loan capital accounts, asset accounts, income accounts and expense accounts.