Chapter One

Introduction to Accounting

In the chapter you will learn to:•Understand the difference between bookkeeping and accounting•Understand why business need to keep accounting records

In the chapter you will learn to:• Understand the meaning of terms assets, liabilities and capital• Understand and apply the accounting equation• Prepare a simple balance sheet

Accounting Terminology

Financial statement purchases Income statement Gross Profit Balance sheets Net Profit Assets Fixed Assets Capital Land & Building Liabilities Plant and Equipment Sales Bank Expenses Cash Sales

Accounting

The activity of providing goods and services involving financial and commercial and industrial aspects

Two sections of Accounting:

1. BookkeepingThis is a process of detailed recording of all the financial transaction of a business.

Records of daily Income & expenses

Sept 1 Bought t-shirt @ H&M RM50

Sept 2 Meals @ seoul GardenRm45

Sept 5 Movie @ 1City Rm12

Sept 10 Car Maintenance Rm100

Sept 15 Received allowance Rm500

Sept 15 coffee @ Starbucks RM20

What is the difference between Bookkeeping and Accounting?

Bookkeeping is the process of recording, in chronological order, the daily transactions of a business entity. It forms part of the accounting information system.

On the other hand, accounting is an information system – includes the process of recording, classifying, summarizing, reporting, analysing and interpreting the financial condition and performance of a business

Double entry Bookkeeping

The basis of maintaining these detailed records

2. Accounting

This uses the bookkeeping records to prepare financial statements at regular intervals.

Financial statements

1. Income statement (trading, profit and loss account)

2. Balance sheet

Income statement Shows calculation of the profit and loss earned by the business.

Amount Invested

$

Expenses

$

Profit/ loss

$10,000 8,500 1,50010,000 11,500 1,500

Balance Sheetand what the business owes, its liabilities

This shows what the business owns, its assets;

(Owner’s Equity)

Any resources provided by the owner of the business

provided

The actual resources that are then in the business are called assets

Assets

Capital=Assets

Things owned by the business (or owed to

the business) are regarded as the resources of the

business

Van/ Vehicle/ motor vehicle

Cash/Bank

Land

Building

Machinery /Equipment

Stocks/ inventory

• When other people provide assets to the business.• The amount owed by the business to these people known as liability

Loan bank overdraftpayables

Borrow money

• the business owes to the bank• The business obliged to pay back the

bank• Therefore, the business has a liability

to the bank

Accounting Equation

This is also referred as the BALANCE SHEET

EQUATION

Accounting Equation Capit

alAsset

sLiabiliti

es =-

Capital

Assets

Liabilities

= +

Owner’s Equity

Assets

Liabilities= +

Accounting Equation Capit

alAsset

sLiabiliti

es= +

The assets represent how the

resources are used by the business

The liabilities

and capital represent

where these resources come from

Introduction to CapitalExample 1.1

20-7 January 1

Leena set up to trade under the name of The Dress Shop. She opened a business BANK ACCOUNT and paid in $20,000 as CAPITAL.

Leena set up to trade under the name of The Dress Shop. She opened a business BANK ACCOUNT and paid in $20,000 as CAPITAL.

What is the name of the Business?How much is the capital she opened to the bank account?Where did she paid her capital?

20-7 January 1Leena set up to trade under the name of The Dress Shop. She opened a business BANK ACCOUNT and paid in $20,000 as CAPITAL.

Date ASSETS = CAPITAL + Liabilities

Jan 1 Bank $20 000

$20 000Account Effect Account EffectAsset—Bank

INCREASE

Capital INCREASE

Effect of the transactionDate ASSETS = CAPITAL + Liabiliti

es

Jan 1 Bank $20 000

$20 000Account Effect Account EffectAsset—Bank

INCREASE

Capital INCREASE

January 2The Business purchased premises, $15,000, and paid by cheque.

Date

ASSETS = CAPITAL

+ LIABILITES

Jan 2 Premises

$15 000

Bank 5 000$20 000

$20 000

Date

ASSETS = CAPITAL

+ LIABILITES

Jan 2 Premises

$15 000

Bank 5 000$20 000

$20 000

Effect of the transaction

Account Effect Account EffectAsset—

PremisesINCREA

SE Capital

Asset—Bank DECREASE

January 3

The business purchased goods, $3,000, on credit.

Purchasing on credit means

that the business does

not pay immediately

Goods refer also as

INVENTORY/ STOCK

THE BUSINESS HAS ALSO

ACQUIRED A LIABILITY AS IT

OWES MONEY TO THE

SUPPLIER

WHO IS KNOWN AS A CREDITOR

IN A BALANCE SHEET THIS IS

DESCRIBED AS A TRADE

PAYABLE

January 3The business purchased goods, $3,000, on credit.Date

ASSETS = CAPITAL

+ LIABILITES

Jan 3 Premises

$15 000

Inventory

$3 000

Trade payable

$3000

Bank 5 000$23 000

$20 000 $3000

Account Effect Account EffectAsset-

Inventory INCREA

SETrade

PayableINCREASE

Date

ASSETS = CAPITAL

+ LIABILITES

Jan 3 Premises

$15 000

Inventory

$3 000

Trade payable

$3000

Bank 5 000$23 000

$20 000 $3000

January 4

The business sold goods, at the cost price of $1000, on credit.

Selling on credit means

that the business does

not receive the money

Goods refer also as

INVENTORY/ STOCK

A NEW ASSET HAS BEEN ACQUIRED IN FORM OF MONEY OWING TO THE BUSINESS BY A

CUSTOMER WHO IS KNOWN AS DEBTOR IN A BALANCE

SHEET THIS IS DESCRIBED AS A

TRADE RECEIVABLE

January 4The business sold goods, at the cost price of $1000, on credit.Date

ASSETS = CAPITAL

+ LIABILITES

Jan 4 Premises

$15 000

Inventory

$2 000

Trade payable

$3000

Trade Receivable

$1 000

Bank 5 000$23 000

$20 000 $3000

Account Effect Account

Effect

Asset—Inventory DECREASE

Asset—Trade Receivable

INCREASE

Date

ASSETS = CAPITAL

+ LIABILITES

Jan 4 Premises $15 000

Inventory

$2 000

Trade payable

$3000

Trade Receivable

$1 000

Bank 5 000$23 000

$20 000 $3000

The Balance Sheet

This is a statement of the financial position of a business on a certain period of time.

Three elements of the accounting equationThe AssetsThe CapitalThe Liabilities

The balance sheet will be

affected every time the

business makes changes to the

assets, liabilities and capital

The Dress ShopBalance Sheet at 1 January 20-7

Assets $

Liabilities $

Bank $20 000 Capital $20 000$20 000 $20 000

The Dress ShopBalance Sheet at 2 January 20-7

Assets $

Liabilities $

Premises 15 000 Capital 20 000Bank 5 000

20 000 20 000

The Dress ShopBalance Sheet at 3 January 20-7

Assets $

Liabilities $

Premises 15 000 Capital 20 000Inventory 3 000 Trade payable 3 000Bank 5 000 ______

23 000 23 000

The Dress ShopBalance Sheet at 4 January 20-7

Assets $

Liabilities $

Premises 15 000 Capital 20 000Inventory 2 000 Trade payable 3 000Trade Receivable

1 000

Bank 5 000 ______23 000 23 000