Nature of AccountingUnit 1

The meaning & functions of Accounting The difference between Accounting &

Bookkeeping The purpose of keeping Accounting records The Accounting Cycle/Process Identify the different users of Accounting

information

Learning Objectives

Accounting is the language of business It involves:

Recording transactions Classifying transactions Summarising transactions Interpreting and analysing transactions

What is Accounting

4 Steps in Accounting

Recording Journal

Classifying

Trial Balance

Final Accounts

Ledger

Interpretation

Summarising

Day to day recording of transactions

“T “shape accounts

Verification of accuracy of accounts

Preparation of reports Ratio Analysis

Bookkeeping involves the actual data recording

This is often computerized in organizations Accounting is concerned with the use,

analysis & interpretation of accounting records

Accounting verses Bookkeeping

Financial Statements

Income Statement orProfit & Loss Account

Revenue – Expenses = Income (or profit)

Balance Sheet

Asset – Liability = Owners Equity

Cash flow statement

$ Receipts - $ Payments = Changes in cash balance

Users and Uses of Accounting

Information

Profitability Return on investment Operational efficiency (day-to-day

operation) Ensure security of investment Basic functions like planning, budgeting,

decision-making and control purposes

Managers, to know:

Earning capacity of the business

Solvency or financial strength of the business

Ability of the management

Decision to invest in a business

Prospective investors, to ascertain

The borrower's capacity for repayment

Whether to grant a credit or advance money to a busines

The limits of advance, or credit limits for a customer

Creditors/ Banks, to find out

To discuss and arrange labour contracts

To be assured of steady employment

To determine the ability of the business to pay higher wages

Employees/ Unions

To evaluate tax returns to calculate tax payable by the business

To check that the business is following the government rules and regulations

Tax inspectors/ Government

To know the effect of pricing on customers

To judge the ability of the firm to survive and honour it's product warranties

General Public

Profitability of the firm Security of capital Return on their investment (ROI) Resources owned Financial stability Whether to increase of decrease their

existing ownership in the firm

Owners of the business, to ascertain

Capital Resources supplied by the owners to the business

Assets Resources owned by the business

Liabilities What the business owes for the assets supplied

Purchase Goods bought by the business

Sales Goods sold by the business

Common Terminology

Purchase return/ Goods returned by the business to it's suppliers

Return outwards

Sales return/ Goods returned to the business by it's customers

Return inwards  Creditor A person to whom the business has to pay

for goods and services rendered.

Debtor A person from whom the business has to receive money for goods and services supplied.

Common Terminology

Stock Unsold goods Expense Cost of operating the

business Revenue Money received for goods

and services supplied Profit Revenue minus expenses Loss Expense minus revenue

Common Terminology

The Accounting Equation

Assets = Liabilities + Owner's Equity

Sole Trader

Features This is a one-man show Capital put in by the owner Business is run by the proprietor Profits and losses at the year end are taken

over by the proprietor Usually small retail establishments Unlimited liability

Types of Business

Partnership

Features Minimum 2 people, maximum 10 or 20, depending

upon the type of partnership Capital contributed by all partners Every partner has a right to participate in the business Each partner acts as the principal and agent of the firm Profits or losses at the end of the year are shared in the

agreed ratio Usually professionals like doctors, lawyers,

accountants, etc Unlimited liability

Types of Business

Company

Features Largest form of business organisation Capital contributed by the public, who are joint owners

of the company Can be public or private Separate legal entity Registered under the company's act Ownership and management is usually separate No limit to the maximum amount of members Accounts must be prepared and audited yearly under

the company's act

Types of Business

Q & A