1. 1 BOOK KEEPING I LECTURE 1

2. 2 Aims of the Lecture What is Accounting and the purpose of Accounting. What is Accounting and the purpose of Accounting. The use of Financial Statements The use of Financial Statements Users of Financial Statements Users of Financial Statements Accounting cycle during a period Accounting cycle during a period Forms of business organizations Forms of business organizations The accounting equation The accounting equation Solution of exercises Solution of exercises

3. 3 A service that is systematically recordingand summarizing the financial transactions of a business and then analyzing, verifying and reporting the results. A service that is systematically recording and summarizing the financial transactions of a business and then analyzing, verifying and reporting the results. The person in charge for the execution of accounting is known as an Accountant, and this individual is typically required to follow a set of rules and regulations of the IFRS (International Financial Reporting Standards). The person in charge for the execution of accounting is known as an Accountant, and this individual is typically required to follow a set of rules and regulations of the IFRS (International Financial Reporting Standards). What is Accounting?

4. 4 Purpose of Accounting Accounting allows a company to analyze the financial performance of the business and look at statistics such as net profit. Therefore the management is able to make informed judgment and better decision. Accounting allows a company to analyze the financial performance of the business and look at statistics such as net profit. Therefore the management is able to make informed judgment and better decision.  Defines the economic position of a company (assets of the company, liabilities - responsibilities, capital)  Provides useful results and information for the present and future position of the company.  Planning of future activities  Computation of Net Profit/Loss

5. 5 Financial Statements The Accounting service is analyzing data with the preparation of financial statements. The most widely used financial statements are: The Accounting service is analyzing data with the preparation of financial statements. The most widely used financial statements are:  The Statement of Financial Position (Balance Sheet) and  The Income Statement (Trading and Profit & Loss account). To achieve its goals, an accounting system may make use of computers and video displays as well as handwritten records and reports printed on paper To achieve its goals, an accounting system may make use of computers and video displays as well as handwritten records and reports printed on paper

6. 6 Financial Statements  1. Balance Sheet: is a statement of the assets, liabilities and owners’ equities as at a specific point in time (next day things could be different). Assets – are things owned by the business such as motor vehicles, machinery, inventory (goods manufactured or purchased for resale), money outstanding by debtors, balance at bank and prepaid expenses. Assets – are things owned by the business such as motor vehicles, machinery, inventory (goods manufactured or purchased for resale), money outstanding by debtors, balance at bank and prepaid expenses. Assets are divided into fixed assets: A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time, and current assets:Are all assets that a business can turn to cash to pay debts and liabilities without having to sell fixed assets... Goodwill is an Intangible F.A. Assets are divided into fixed assets: A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time, and current assets:Are all assets that a business can turn to cash to pay debts and liabilities without having to sell fixed assets... Goodwill is an Intangible F.A. Liabilities – are amounts owed such as money due to creditors, bank overdrafts, short term loans. Liabilities – are amounts owed such as money due to creditors, bank overdrafts, short term loans. Owners’ equity /capital – the money contributed by the individual in the business - is a type of liability but this amount is due to the owner of the business rather than to ‘outsiders’. It increases by any new capital brought in and by the net profit made by the business and reduces by any amounts withdrawn by the owner. Owners’ equity /capital – the money contributed by the individual in the business - is a type of liability but this amount is due to the owner of the business rather than to ‘outsiders’. It increases by any new capital brought in and by the net profit made by the business and reduces by any amounts withdrawn by the owner.

7. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations,innovation,new products and favorable location. The evidence that goodwill exists is the proven ability to earn excess profits. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations,innovation,new products and favorable location. The evidence that goodwill exists is the proven ability to earn excess profits. 7

8. 8 Statement of Financial Position (Balance Sheet) as at 31st December 20YY Fixed Assets Land and Buildings Furniture and Fittings Motor Vechicles Goodwill € X X X X Current Assets Stock f goods Debtors Bank Cash X X X X Capital Add Net Profit Less Drawings X X € X X Current Liabilities (amounts due within a year) (amounts due within a year) Creditors Bank Overdraft Short Term Loan X X X Long-term Loan X XX Long-term Liabilities (repayable later than one year) Premises Machinery Prepayments Bills Receivable

9. Statement of Financial Position (Balance Sheet) as at 31st December 20YY Fixed Assets Land and Buildings Furniture and Fittings Motor Vechicles Goodwill € X X X X Current Assets Stock f goods Debtors Bank Cash X X X X Capital Add Net Profit Less Drawings X X € X X Current Liabilities (amounts due within a year) (amounts due within a year) Creditors Bank Overdraft Short Term Loan X X X Long-term Loa Long-term Loan X XX Long-term Liabilities (repayable later than one year) Premises Machinery Prepayments Bills Receivable

10. Assets are shown on balance in liquidity order: we start with the least liquid and we finish with the most liquid. For assets, liquidity means nearness to cash. For this reason cash is the last item on the balance sheet. Assets are shown on balance in liquidity order: we start with the least liquid and we finish with the most liquid. For assets, liquidity means nearness to cash. For this reason cash is the last item on the balance sheet. Liquidity refers to the ease in which an asset can be converted to cash. Cash is therefore the most liquid of all assets. Assets that are very liquid are shown on the balance sheet as current assets. Current assets are assets that are expected to be converted to cash in 12 months or less. Liquidity refers to the ease in which an asset can be converted to cash. Cash is therefore the most liquid of all assets. Assets that are very liquid are shown on the balance sheet as current assets. Current assets are assets that are expected to be converted to cash in 12 months or less. 10

11. 11 The Accounting Equation The Accounting Equation Assets = Liabilities + Capital Assets = Liabilities + Capital Or otherwise : Capital=Assets-Liabilities Or otherwise : Capital=Assets-Liabilities The balance sheet must always balance which means must always satisfy the above equation, at any time assets equals liabilities plus the capital.

12. Balance Sheet as at 31 December Year 20XX Fixed Assets€€ Land and Buildings Furnitures and fittingsx Motor Vehiclesxx Goodwil Current Assets Closing Inventoryx Debtorsx Prepaymentsx Bankx Cashxx xxxxxx Capital Accountx Add Net Profitx Less Drawingsxx Long-trrm Liabilities Long term loan Current Liabilities Creditorsx Accrualsx Bank Overdraftx Short term loanxx xxxxxx

13. 13  2. Income Statement: Presents the results of operations for a period of time. It usually covers a year of business activity in contrast to balance sheet which is as at a specific point in time. The income statement is prepared following the accruals The income statement is prepared following the accruals concept: the income and expenses are recorded as they concept: the income and expenses are recorded as they occurred regardless of whether cash has been received or occurred regardless of whether cash has been received or paid. paid. Income – the sales revenue shows the income from goods/services sold in the year. Income – the sales revenue shows the income from goods/services sold in the year. Expenses – in order to make revenues we must incur expenses: an outflow of money to pay for an item or service e.g. wages, rents, electricity e.t.c Expenses – in order to make revenues we must incur expenses: an outflow of money to pay for an item or service e.g. wages, rents, electricity e.t.c The income statement is split into two parts a) the Trading account which gives the gross profit and b) the Profit & Loss account which gives us the Net Profit.

14. 14 Trading and Profit & Loss account Opening Stock Add Purchases Less Purchases Return Less Closing stock € X X X X Gross Profit c/d Wages and Salaries Insurance Rent Depreciation of motor vehicles and Furniture's Bad Debts X X X X X Sales Less Sales Returns X € X Discounts Received X X Cost of Sales X X Gross Profit b/d Office Expenses X X Discount allowed Net Profit X X X X

15. Trading and Profit & Loss account Opening Stock Add Purchases Less Purchases Return Less Closing stock € X X X X Gross Profit c/d Wages and Salaries Insurance Rent Depreciation of motor vehicles and Furniture's Bad Debts X X X X X Sales Less Sales Returns X € X Discounts Received X X Cost of Sales X X Gross Profit b/d Office Expenses X X Discount allowed Net Profit X X X X

16. 16 The above layout of the income statement is not mainly useful but it assists the appreciation of the actual double entry processes and the realization that the income statement is part of the double entry. The above layout of the income statement is not mainly useful but it assists the appreciation of the actual double entry processes and the realization that the income statement is part of the double entry. The modern-vertical layout is as follows: The modern-vertical layout is as follows: Income statement: Trading and Profit & Loss account Sales x Less Cost of Sales: Op. Stock x Purchases x Less Closing stock (x) (x) GROSS PROFIT xx Less Expenses (x) NET PROFIT xxx

17. 17 The modern-vertical layout of Income Statement is as follows: Income statement: Trading and Profit & Loss account Sales x Less Cost of Sales: Op. Stock x Purchases x Less Closing stock (x) (x) GROSS PROFIT xx Less Expenses: Wages / Salaries x Heating & Lighting x Rent x Insurance x Advertising x Bad Debts x Depreciation x Stationery x Commission Paid x Bank interest & charges x Cleaning x Office Expenses x (x) NET PROFIT xxx NET PROFIT xxx

18. 18 Exercises