INTRODUCTORY ACCOUNTING

INTRODUCTORY ACCOUNTING
ACC 100 : INTRODUCTORY ACCOUNTING YEAR OF STUDY 1 SEMESTER 1 CREDIT POINTS 2 CONTACT HOURS PER WEEK: 5 (3 Lectures and 2 Seminars) COMPULSORY COURSE IN: BAF I (BS/PS) ELECTIVES COURSES IN: NONE MODE OF DELIVERY: Lectures, Seminars, Individual and Group Assignments, and Case Studies BY STEWART MBEGU ECA, BAF, CPA(T), MBA - FINANCE FREE NOTES AT http/idianaconsultancy.blogsport.com INTRODUCTORY ACCOUNTING

TOPIC ONE B: Introduction to bookkeeping and accounting
Types of accounts Types of Books of accounts The accounting process The Accounting Cycle Accounting Equation TOPIC ONE B: Introduction to bookkeeping and accounting 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

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What an Accounts An Account is a summary of relevant business transactions at one place relating to a person, asset, expense or revenue named in the heading. is a brief history of financial transactions of a particular person or item. An account has two sides called debit side and credit side. is a record of a transaction of a particular type or with a particular person usually expressed in financial terms and maintained in a ledger. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

What an Ledger Ledger Ledger is a main book of account in which various accounts of personal, real and nominal nature, are opened and maintained ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense, or income or gain or loss which have taken place during a specified period and shows their net effect ultimately. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Types of accounts (classification of accounts)
The main categories of accounts are two 1. Personal accounts Natural personal artificial personal Groups/Representative personal Accounts 2. Impersonal accounts Real accounts Nominal accounts Types of accounts (classification of accounts) 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Types of accounts or classification of accounts
Meaning: Personal accounts These are accounts for individual (Natural persons people like Musa and Neema) and artificial persons like institution that enjoys the personality under the eye of the law. Contains all customer (debtor) and supplier (Creditor) accounts. It recording transactions with a person or group of persons. Types of accounts or classification of accounts 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

(a) Natural persons: An account recording transactions of an individual human being is termed as a natural persons’ personal account. (b) Artificial or legal persons: An account recording financial transactions with an artificial person created by law or otherwise is termed as an artificial person, personal account, e.g. Firms’ accounts, limited companies’ accounts, educational institutions’ accounts, Co-operative society account. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

(c) Groups/Representative personal Accounts: An account indirectly representing a person or persons is known as representative personal account. When accounts are of a similar nature and their number is large, it is better total group under one head and open a representative personal accounts. e.g., prepaid and outstanding insurance, salaries, rent, wages and most of liabilities etc. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Impersonal accounts . These are accounts for thing (asset, expense or revenue) and events like drawings Accounts not relating to an individual Includes fixed assets, stock, services, wages, property 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Real accounts A real account is a general ledger account that does not close at the end of the accounting year. In other words, the balances in the real accounts are carried over to become the beginning balances of the next accounting period Real accounts can be further classified into tangible and intangible. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Real accounts Is an Account relating to properties or assets separate account is maintained for each asset e.g., Cash Machinery, Building, goodwill etc., The accounts which represent tangible aspects. Cash a/c - representing cash (sales) which is tangible. Goods/Stock a/c - representing Stock (purchases) which is tangible. Furniture a/c - representing Furniture which is tangible The accounts which represent intangible aspects. Are goodwill, trademark, etc 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Nominal accounts The elements or accounts which represent expenses, losses, incomes, gains. Salaries a/c - representing expenditure on account of salaries, an expense. Interest received a/c - representing income on account of interest, an income. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Nominal accounts Loss on sale of Asset a/c - representing the loss incurred on sale of assets, a loss. We do not come across such accounts till a later stage of our learning. For now, please, assume that such accounts exist. Profit on sale of Asset a/c - representing the profit made on sale of assets, a gain. We do not come across such accounts till a later stage of our learning. For now, please, assume that such accounts exist. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Diagram Types of accounts or classification of accounts 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

CLASSIFICATION OF ACCOUNTS
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Quiz CLASSIFY THE FOLLOWING ACCOUNTS
1. Capital PERSONAL 2. Sales REAL 3. Drawings PERSONAL 4. Outstanding salary PERSONAL 5. Cash REAL 6. Rent NORMINAL 7. Interest paid NOMINAL 8. CRDB Bank PERSONAL 9. Discount received NOMINAL 10. Building REAL 11. Bank PERSONAL 12. NEEMA PERSONAL 13. Murugan Lending Library PERSONAL 14. Advertisement NOMINAL 15. Purchases REAL

CLASSIFY THE FOLLOWING ACCOUNTS
1. Capital PERSONAL 2. Sales REAL 3. Drawings PERSONAL 4. Outstanding salary PERSONAL 5. Cash REAL 6. Rent NORMINAL 7. Interest paid NOMINAL 8. CRDB Bank PERSONAL 9. Discount received NOMINAL 10. Building REAL 11. Bank PERSONAL 12. NEEMA PERSONAL 13. Murugan Lending Library PERSONAL 14. Advertisement NOMINAL 15. Purchases REAL

SOURCE DOCUMENTS 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Are the evidences of business transactions which provide information about the nature of the transaction, the date, the amount and the parties involved in it. Transactions are recorded in the books of accounts when they actually take place and are duly supported by source documents. According to the verifiable objective principle of Accounting, each transaction recorded in the books of accounts should have adequate proof to support it. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents These supporting documents are the written and authentic proof of the correctness of the recorded transactions. These documents are required for audit and tax assessment. They also serve as the legal evidence in case of a dispute. The following are the most common source documents. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Cash Memo When a trader sells goods for cash, he gives a cash memo and when he purchases goods for cash, he receives a cash memo. It Details regarding the items, quantity, rate and the price to be paid. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Invoice or Bill When a trader sells goods on credit, he prepares a sale invoice. It contains full details relating to the amount, the terms of payment and the name and address of the seller and buyer. The original copy of the sale invoice is sent to the purchaser and its duplicate copy is kept for making records in the books of accounts. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Debit Note is prepared by the buyer and it contains the date of the goods returned, name of the supplier, details of the goods returned and reasons for returning the goods. Each debit note is serially numbered. A duplicate copy or counter foil of the debit note is retained by the buyer. On the basis of debit note, the suppliers account is debited in the books. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents A credit note is prepared by the seller and it contains the date on which goods are returned, name of the customer, details of the goods received back, amount of such goods and reasons for returning the goods. Each credit note is serially numbered. A duplicate copy of the credit note is retained for the record purpose. On the basis of credit note, the customer’s account is credited in the books. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Pay-in-slip is a form available in banks and is used to deposit money into a bank account. Each pay-in-slip has a counterfoil which is returned to the depositor duly sealed and signed by the bank official. This source document relates to bank transactions. It gives details regarding date, account number, amount deposited (in cash or cheque)and name of the account holder 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents Cheque is a document in writing drawn upon a specified banker to pay a specified sum to the bearer or the person named in it and payable on demand. Each cheque book has a counterfoil in which the same details in the cheque are filled. The counterfoil remains with the account holder for his future reference. The counterfoil forms the source document for entries to be made in the books of accounts. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Source Documents A voucher is a written document in support of a business transaction. Vouchers are prepared by an accountant and each voucher is counter signed by an authorized person of the organization. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Types of Books of accounts

ledgers are books of final entry. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

The accounting process
Accountants and book keepers follow a process in taking raw financial data and turning it into output information and financial statements. This process begins with the documentation of transactions and continues in stages up to the production of the final accounts. It is called a process because the same procedure is repeated from one financial year to another. The following are the stages of the accounting process: 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Documentation of Business Transaction When a business transaction occurs, the immediate task is to prepare business documents to show evidence of the transaction. These documents are an important source of the information that is recorded in the books of original entry. Invoices and receipts are examples of these documents. Entering Transactions into the Journal Journals are books of original entry. They are the books in which business transactions are first recorded before posting to the ledger. The information that is recorded in the documents of transactions is used to write up the books of original entry (the journals). 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

The books of original entry that are kept by the business include the journal proper, sales journals, purchases journal, return inwards and return outwards. The cash book is also an example of a journal, and it also acts as part of the ledger. iii) Posting of Transaction to the Ledger The information which has been entered into the journals is transferred and written in the ledger in a process called posting. The journals feed the ledger. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

iv) Preparation of the Trial Balance At the end of the trading period, all accounts in the ledger are closed and balanced off. If there is any balance of the accounts, this is used to construct the trial balance. A Trial Balance is a statement that contains a list of debit and credit balances extracted from the ledger. Its purpose is to check the arithmetic accuracy of the double-entry system and to check whether any errors were made in entering or balancing the accounts. If there is any error in posting the transactions or in the calculations, the trial balance will not balance. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

v) End-of-year Adjustments and the Preparation of Financial Statements. Financial Statements are prepared from the trial balance. But before this is done, some adjustments are made, including provision for depreciation, bad debts, prepaid expenses and income. After these adjustments the final accounts are produced. These include the income statements and the balance sheet. vi) Studying, Interpreting and Analyzing the FS This can be done through the use of accounting ratios. After the interpretation, the information is communicated to all interested parties. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

The Accounting Cycle refers to the steps involved in accounting for all of the business activities during an accounting period Accounting Cycle includes the following: Recording of all transactions in a journal or in its subsidiary books. Posting of data of different heads to different accounts i.e posting in the ledger. Preparation of the final accounts after closing the accounts in the ledger. The above steps are to be followed during each accounting period and are to be repeated for the next year. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

The Simple Accounting Cycle

The complex Accounting Cycle

Accounting Equation An Accounting Equation is a mathematical expression which shows that the assets and liabilities of a firm are equal. An Accounting Equation is based on the dual aspect concept of accounting i.e., every transaction has two aspects-debit and credit. It holds that for every debit there is a credit of equal amount and vice versa. Eg. Steven bought a pen for 100/= tshs In his books he has debited a pen for 100/= And credited cash 100/= That to say the value of a pen (an asset) = Steven (capital) invested in buying a pen 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Accounting Equation Total Claims (i.e. Capital and Liabilities) are always equal to the total Assets and is known as Accounting Equation. The claims, also known as equities. are of two types: Owner's equity or capital, and Outsiders Equity (Liabilities or amounts due to outsiders). We can express Accounting Equation as follows: Assets = Liabilities + Capital or Liabilities = Assets – Capital or Capital = Assets - Liabilities 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Accounting Equation An Accounting Equation always holds true with every change that occurs due to a transaction entered into. It is because of this reason that it is based on the dual aspect concept of accounting. A transaction may affect either both sides of the equation by the same amount or one side of the equation only. by both increasing or decreasing it by equal amounts. Transactions from the Accounting Equation viewpoint, can be divided into two, i.e., 1. Transactions Affecting Two Items and 2. Transactions Affecting More Than Two Items. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Transactions affecting opposite sides are: (i) Increase in Asset, Increase in Liability: Transaction such as credit purchases increase asset (stock) and also increase liability (creditor). Similarly, loans from bank increase asset (cash) and also increase liability (loan). (ii) Decrease in Liability, Decrease in Asset: Transaction of payment to a creditor decreases liability (creditor) and also reduces asset (cash or bank). To balance the equation you have to increase or decrease both side by the same amount Accounting Equation Assets = Liabilities + Capital 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Transactions Affecting Two Items (iii) Increase in Asset, Increase in Owner's Equity: Introduction of capital by the proprietor increases asset (cash or bank) and also liability (capital). (iv) Decrease in Owner's Capital, Decrease in Asset: Drawings by the proprietor decreases liability (capital) and also asset (cash or bank). Accounting Equation 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Accounting Equation Transactions affecting same side but in opposite direction are: (i) Increase in Asset, Decrease in Another Asset: Transactions such as cash purchases or receipt from debtors increase one asset (goods and cash or bank, respectively) and decrease another asset (cash or bank and debtors). (ii) Decrease in Liability, Increase in Another Liability: Settlement of creditor by issue of Bill of Exchange decreases a liability (creditor) and increases another liability (Bill of Exchange). 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Accounting Equation The procedure to workout an Accounting Equation is: Analyse the transaction in terms of such variables as assets, liabilities, capital. revenues and expenses. Decide the effect of the transactions in terms of increase or decrease on variables mentioned in 1. Record the effect on the relevant side of the equation. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

RULES FOR ACCOUNTING EQUATIONS
Capital: has CR balance. When capital is increased, it is credited (+) and when a part of the capital is withdrawn, i.e. drawings are made, it is debited (-). Interest on Capital is an expense for the business, and thus, profit is reduced by the amount and since interest on capital is an income for the proprietor, it is added to capital. Interest on Drawings is a profit for the business therefore added to profit and thus, capital. Since it is a loss/expense for the owner it is deducted from capital. Assets and Liabilities will not be affected by interest on capital and interest on drawings. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Revenue: Owner's equity (Capital) is increased by the amount of revenue. Expenses: Owner's equity (Capital) is decreased by the amount of expenses. Income = Revenue - Expense Income is the profit earned during an accounting period. Profit increases the owner's equity (Capital) and loss decreases the owner's equity (Capital). 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

Outsiders' Equity: Has CR balance. When liabilities are increased, outsiders' equities are credited (+) and when liabilities are decreased, outsiders' liabilities are debited (-). Assets: has DR balance. If there is an increase in Assets, the increase is debited (+) in the Asset Account. If there is decrease in Assets, the decrease is credited (-) in the Asset Account. It is possible that when one asset increases, the other asset decreases, e.g., purchase of furniture for cash. Thus, furniture increases and cash decreases. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

It is possible that one asset decreases, the other asset increases, e.g., sale of furniture for cash. Thus. cash increases and furniture decreases. It is possible that when one liability increases, the other liability decreases, e.g., on dishonour of bills payable. the Bills Payable Account is debited and the Creditor's Account is credited. Thus, creditor increases and the amount of bills payable decreases. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

It is possible that one liability decreases and the other liability increases, e.g., creditors were made payment by accepting bills payable. Thus, creditor decreases and bills payable increases. It is possible that when an asset increases, liability also increases, e.g., furniture is purchased on credit. Thus, furniture increases and the amount of creditors also increases. It is possible that when an asset decreases, liability also decreases. e.g., cash paid to creditors. Thus, cash decreases and the amount of creditors also decreases. FREE NOTES AT http/idianaconsultancy.blogsport.com 11/28/2017

Effect of Outstanding Expenses (e.g., Outstanding Salary): Increase in liabilities and decrease in capital. Accrued Income: Increase in asset and increase in capital. Income Received in Advance: Increase in asset (as cash) and increase in liabilities. 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

An increase in an asset, without a corresponding increase in liability or a corresponding decrease in another asset, means an increase in capital. Conversely, an increase in liability without a corresponding increase in asset, or a corresponding decrease in another liability, indicates decrease in capital. More practice on accounting equation will be on the next topic double entry 11/28/2017 FREE NOTES AT http/idianaconsultancy.blogsport.com

INTRODUCTORY ACCOUNTING

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