INTRODUCTION TO ACCOUNTING I

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INTRODUCTION TO ACCOUNTING I

• You can find a range of additional self-test
  questions, as well as material to help you with
  your studies, on the following website.
• http//www.pearsoned.co.uk/wood

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PURPOSE OF ACCOUNTING

• To provide information which is potentially
  useful for making economic decisions.
• RELEVANCE
• UNDERSTANDABLE
• RELIABLE
• COMPLETE
• NO BIAS
• TIMELY
• COMPARABLE

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WHO ARE THE DECISION MAKERS?

• SHAREHOLDERS\OWNERS
• EMPLOYEES
• LENDERS
• GOVERNMENT
• BUSINESS CONTACT GROUP
• PUBLIC
• MANAGERS

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SCOPE OF ACCOUNTING
DATA COLLECTION HISTORIC FORECAST
ACCOUNTING THEORY
DATA RECORDING
DATA EVALUATION
DATA PROCESSING
DATA REPORTING EXTERNAL INTERNAL
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DATA RECORDING

• The method of recording data is referred to as
  double entry bookkeeping, or the Italian Method.
  The system is believed to have originated in the
  Italian city-states, and was first expounded by
  Luca Pacioli in 1494.

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BUSINESS ENTITY CONCEPT

• This concept separates the individual/s forming a
  business from the business itself. Hence,
  transactions are recorded in accounting
  statements as they affect the business, not its
  owner/s.

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The Accounting Equation
RESOURCES IN THE BUSINESS RESOURCES SUPPLIED BY
OWNER
ASSETS CAPITAL
CAPITAL ASSETS - LIABILITIES
ASSETS CAPITAL LIABILITIES
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ASSETS

• ASSETS CONSIST OF PROPERTY OF ALL KINDS, SUCH AS
  BUILDINGS, MACHINERY, STOCKS OF GOODS FOR RESALE
  AND MOTOR VEHICLES.
• OTHER ASSETS INCLUDE DEBTS OWED BY CUSTOMERS TO
  THE BUSINESS AND THE AMOUNT OF MONEY HELD BY THE
  BUSINESS IN CASH OR IN THE BANK.

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LIABILITIES

• LIABILITIES ARE AMOUNTS OWED BY THE BUSINESS TO A
  THIRD PARTY, THAT IS OTHER THAN THE OWNER/S.
• EXAMPLES INCLUDE AMOUNTS OWED BY THE BUSINESS FOR
  GOODS AND SERVICES SUPPLIED TO THE BUSINESS AND
  EXPENSES INCURRED BY THE BUSINESS THAT HAVE NOT
  YET BEEN PAID FOR.
• THEY ALSO INCLUDE AMOUNTS BORROWED BY THE
  BUSINESS FROM THIRD PARTIES, SUCH AS A BANK.

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CAPITAL

• CAPITAL IS OFTEN CALLED THE OWNERS EQUITY OR NET
  WORTH. IT REPRESENTS THE AMOUNT OF MONEY OWED BY
  THE BUSINESS TO THE OWNER.
• IT IS EQUAL TO THE FUNDS INVESTED IN THE BUSINESS
  INITIALLY BY THE OWNER PLUS ANY PROFITS EARNED BY
  THE BUSINESS, LESS ANY PROFITS TAKEN OUT OF THE
  BUSINESS BY THE OWNER (DRAWINGS).

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DUALITY CONCEPT

• This concept is the basis of double-entry
  bookkeeping and stems from the fact that every
  transaction has a double effect on the position
  of a business, as recorded in the accounts.
• When an asset is acquired, either another asset
  is reduced or a liability is acquired.

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THE BALANCE SHEET

• The accounting equation is often expressed in a
  financial position statement called the balance
  sheet.
• The balance sheet shows the financial position of
  the business at a point in time (snapshot).

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INTRODUCTION OF CAPITAL

• On 1 May 2007, B. Blake started business and
  deposited 60,000 into a bank account
  specifically for the business.
• B. Blake
• Balance sheet as at 1 May 2007
• ASSETS
• Cash at bank 60,000
• CAPITAL
• Capital Introduced 60,000

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PURCHASE OF AN ASSET BY CHEQUE

• On 3 May 2007, Blake buys a shop for 32,000,
  paying by cheque.
• B. Blake
• Balance Sheet as at 3 May 2007
• ASSETS
• Shop 32,000
• Cash at bank 28,000
• 60,000
• 
  
• CAPITAL
• Capital Introduced 60,000

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PURCHASE OF AN ASSET INCURRING A LIABILITY

• On 6 May 2007, Blake buys some goods for 7,000
  from D. Smith with a view to re-selling them and
  agrees to pay for them some time within the next
  two weeks.
• The effect of this is that a new asset, STOCK of
  goods is created and a liability to pay D. Smith
  is also created.
• A person to whom money is owed by the business
  for goods supplied for resale is referred to as a
  TRADE CREDITOR

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THE PURCHASE OF AN ASSET INCURRING A LIABLITY

• B. Blake
• Balance Sheet as at 6 May 2007
• ASSETS
• Shop 32,000
• Stock 7,000
• Cash at bank 28,000
• 67,000
• Trade Creditor ( 7,000)
• 60,000
• CAPITAL
• Capital introduced 60,000

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SALE OF AN ASSET ON CREDIT

• On 10 May 2007, goods for resale which cost 600
  were sold to J. Brown for the SAME amount, the
  money to be paid at a later date.
• The effect is a reduction in the stock of goods
  for resale and the creation of a new asset.
• The asset is the amount owed by J. Brown to the
  business .
• A person who owes the business money is referred
  to as a TRADE DEBTOR.

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SALE OF AN ASSET ON CREDIT

• B. Blake
• Balance Sheets as at 10 May 2007
• ASSETS
• Shop 32,000
• Stock 6,400
• Trade Debtor 600
• Cash at bank 28,000
• 67,000
• Trade Creditor ( 7,000)
• 60,000
• CAPITAL
• Capital introduced 60,000

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SALE OF AN ASSET FOR IMMEDIATE PAYMENT

• On 13 May 2007, goods which cost 400 were sold
  to D. Daley for the SAME amount. Daley paid for
  them immediately by cheque.
• Effectively one asset, that is stock of goods, is
  reduced, whilst another asset, cash at bank is
  increased.

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SALE OF AN ASSET FOR IMMEDIATE PAYMENT

• B. Blake
• Balance Sheet as at 31 May 2007
• ASSETS
• Shop 32,000
• Stock 6,000
• Trade Debtor 600
• Cash at bank 28,400
• 67,000
• Trade Creditor ( 7,000)
• 60,000
• CAPITAL
• Capital introduced 60,000

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PAYMENT OF A LIABILITY

• On 15 May 2007, Blake pays a cheque for 3,000 to
  D. Smith in part payment of the amount owing.
• The asset of bank is therefore reduced and the
  liability to the creditor is also reduced.

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PAYMENT OF A LIABILITY

• B. Blake
• Balance Sheet as at 15 May 2007
• ASSETS
• Shop 32,000
• Stock 6,000
• Trade Debtor 600
• Cash at bank 25,400
• 64,000
• Trade Creditor ( 4,000)
• 60,000
• CAPITAL
• Capital introduced 60,000

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COLLECTION OF AN ASSET

• On 31 May 2007, J. Brown make a part payment of
  200 by cheque.
• The effect is to reduce one asset (debtor) and to
  increase another (cash at bank).

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COLLECTION OF AN ASSET

• B. Blake
• Balance Sheet as at 31 May 2007
• ASSETS
• Shop 32,000
• Stock 6,000
• Trade Debtor 400
• Cash at bank 25,600
• 64,000
• Trade Creditor ( 4,000)
• 60,000
• CAPITAL
• Capital introduced 60,000

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REVIEW QUESTION

• Does it make sense to sell goods at the same
  amount as the business paid for them?

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MORE DETAILED PRESENTATION OF THE BALANCE SHEET

• B. Blake
• Balance Sheet as at 31 May 2007
• FIXED ASSETS
• Shop 32,000
• CURRENT ASSETS
• Stock 6,000
• Trade Debtor 400
• Cash at bank 25,600
• 32,000
• CURRENT LIABILITIES
• Trade Creditor
  ( 4,000)
• NET CURRENT ASSETS 28,000
• 60,000
• CAPITAL
• Capital introduced 60,000

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CLASSIFICATION OF ASSETS

• FIXED ASSETS are assets purchased not with the
  primary intention to re-sell them, but rather to
  assist in the generation of future income. For
  example, a car is a fixed asset if it is to be
  used by a salesman for the next three years to
  visit potential customers.

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CLASSIFICATION OF ASSETS

• CURRENT ASSETS are assets which are cash or
  within one year will be converted into cash, that
  is stock (assets purchased with the intention to
  re-sell within a short period of time), debtors
  and cash. Using our previous example of the
  purchase of a car, this would be a current asset
  for a car retailer, as the car was purchased, not
  for retention, but primarily for immediate
  re-sale.

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CURRENT LIABILITIES

• CURRENT LIABILITIES are those liabilities which
  have to be paid within one year from the date of
  the Balance Sheet. For example, Trade Creditors
  will expect payment within a relativity short
  period of time.

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NET CURRENT ASSETS

• NET CURRENT ASSETS is also referred to as WORKING
  CAPITAL. It is equal to current assets less
  current liabilities and represents the amount of
  resources the business has in a form that is
  readily convertible into cash.

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LECTURE QUESTIONS

• Q 1.1
• Complete the gaps in the following table
• ASSETS LIABILITIES CAPITAL
• (A) 12,500 1,800 ??????
• 10,700
• (B) 28,000 4,900 ??????
• 23,100
• (C) 16,800 ????? 12,500
• 4,300
• (D) 19,600 ????? 16,450
• 3,150
• (E) ????? 6,300 19,200
• 25,500
• (F) ????? 11,650 39,750
• 51,400

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LECTURE QUESTIONS

• Which of the items in the following list are
  liabilities and which of them are assets?
• Office Machinery
• ASSET
• Loan from C. Shirley
• LIABILITY
• Fixtures and Fittings
• ASSET
• Motor Vehicles
• ASSET
• We (the business) owe a supplier for goods.
• LIABILITY
• Cash at bank
• ASSET

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LECTURE QUESTIONS

• C. Sangster has the following items in his
  balance sheet as of 30 April 2008
• Capital 20,900 Trade creditors 1,600
  Fixtures 3,500 Motor vehicle 4,200 Stock of
  goods for resale 4,950 Trade debtors 3,280
  Cash at bank 6,450 Cash in hand 120.
• During the first week of May 2008
• He bought extra stock of goods for resale at a
  cost of 770 on credit.
• One of the debtors paid him 280 in cash.
• He bought extra fixtures by cheque for 1,000.
• Draw up a balance sheet as on 7 May 2008, after
  the above transactions have been completed.

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• C. Sangster
• Balance Sheet as at
• 30/04/08 07/05/08
• ASSETS
• Motor vehicle 4,200
• 4,200
• Fixtures 3,500
• 4,500
• Stock 4,950
• 5,720
• Trade Debtors 3,280
• 3,000
• Cash at bank 6,450
• 5,450
• Cash in hand 120
• 400
• LIABILITIES
• Creditors (1,600)
• (2,370)