Introduction to Accounting

(1) Differences between Book-keeping and Accounting

Book-keeping	Accounting
Daily Basis	Perform periodically
Recording of Financial transactions	Preparation of financial statements

(2) What are the benefits of using Book-keeping?

• Easy to extract a trial balance
• Easy to prepare a normal income statement to calculate profit for the year
• Easier to monitor the progress of a business

(3) Accounting Equation

Assets = Capital + Liabilities

Ways to calculate Capital

Example: Youn decided to open a business on 1 January 2021 with $25 000 in his bank account and the shop premises cost $50 000 with his inventory of $10 000.

He had also borrowed $20 000 from the bank.

Required:

2. Calculate Capital Employed.

Capital Employed = Non-current assets + Current Assets – Current Liabilities
= Non-current assets + Working Capital
= Capital + Non-current Liabilities
= $65 000 – $20 000
= $85 000

3. Calculate Working Capital.

Working Capital = Current Assets – Current Liabilities
= ($25 000 + $10 000) – 0
= $35 000.

Youn decides to prepare a journal more precisely an opening entries journal, the purpose is to record the asset and liabilities at that date. Therefore, to calculate the opening capital of Youn, the journal can be used.

            Journal Opening Entries

Date	Details	DR($)	CR($)
2021
Jan 1	Premise A/C	50 000
	Inventory A/C	10 000
	Bank A/C	25 000
	Loan A/C		20 000
	Capital A/C		65 000

(4) Source Documents

1. Invoice – This is the demand for payment. It refers to
2. Debit Note – It is issued by the buyer to request a credit note and it can also be issued by the seeler when an invoice is undercharged.
3. Credit Note – It is issued by the seller when damaged goods are received. It can also be used when an invoice is overcharged.
4. Receipts – It is used to acknowledge that a payment has been received by cash.
5. Cheque Counterfoil – It is evidence that a payment has been madee by cheque.
6. Statement of account – It is a monthly summary of a business transaction.

(5) Subsidiary Books

1. Cash Book – It records only cash and bank transactions. It requires the use of a receipt or Cheque Counterfoil or Bank Statements.
2. Purchases Journal – It records only goods brought on credit. It requires the use of a purchases invoice.
3. Sales Journal – It records goods sold on credit. It requires the use of a sales invoice.
4. Purchases Returns Journal – It records goods returned by the business to its credit suppliers. It requires the use of a credit note received or a debit note issued
5. Sales Returns Journal – It records goods returned to the business by its credit customers.
6. General Journal – It records all other transactions as written below and requires an invoice or a statement of account.
   • Purchase and sale of Non-current Assets on credit
   • Correction of Errors
   • Goods Taken
   • Bad Debts and Provision ( can also use a memo as document)
   • Contra
   • Depreciation Charged
   • Interest Charged
     

(6) The Ledger Accounts

1. Purchases Ledger – It records the personal accounts of our credit suppliers.
2. Sales Ledger – It records the personal accounts of our credit customers.
3. General Ledger (Nominal Accounts) – It records all other transactions.
4. Private Ledger – It records Capital and Drawings only.

Advantages of Ledger Accounts.

• Information can easily be retrieved since each ledger contains specific accounts.
• Fraud is more difficult since each ledger is under the responsibility of a different person.
• Speed of recording transaction.

(7) Trial Balance

Advantages