BASIC ACCOUNTING CONCEPTS

A system of recording information about a business.

Lucas Pacioli (1494)

What is Accounting?

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Activity 1: List who you think will make use of this information.

Accountant/bookkeeper…◦collects documentation ◦records this information◦categorizes it ◦presents it in specific formats

  Bookkeepers - data collection & entry.

Accountants - preparing financial statements, advisory or consulting role.

Balance sheetReports company's assets, liabilities, and owners’ equity at a given point in time.

Income statement (Profit and Loss report)Reports company's income, expenses, and profits over a period of time.  Statement of cash flows Reports company's cash flow activities.

3 main financial statements

OWNERS’ EQUITY = ASSETS - LIABILITIES

 OR 

ASSETS = OWNERS’ EQUITY + LIABILITIES

The Accounting Equation

 Asset: a possession of a business that will bring the business benefits in the future.  Asset Test  

1. DOES A BUSINESS OWN/CONTROL IT? 2. WILL IT BRING A BUSINESS BENEFITS IN THE

FUTURE? 3. CAN YOU VALUE IT ACCURATELY?

Assets

Land Rented factory

Computer Motor vehicle

Cash

LoanDebtors

Am I an Asset???

ASSETS

Fixed(non-current) assets

Current assets

Land & buildings Equipment Vehicles 

Trading stock Debtors Bank Cash float Petty cash

 Liability: a debt (money owed) of the business.  Results in assets (usually cash) leaving the business in the future. Examples…LoanCreditors (payables)

Liabilities

LIABILITIES

Non-current liabilities

Current liabilities

Loan Creditors Bank overdraft

Owner’s Equity: the value of the business to the owner(s) Owner’s Equity = value of all the assets –liabilities.

Owner’s Equity

OWNERS EQUITYCapital

Drawings 

Income Sales Current income Rent income Commission received Interest on bank

account Donations Interest on fixed

deposit 

Expenses Rent expense Salaries and wages Stationery Cost of sales Rates Insurance Water and electricity Advertising Bank charges Telephone Repairs Packing material Interest on bank

overdraft Donations Interest on loan