Professional Documents
Culture Documents
Part 1 - Acc - 2016
Part 1 - Acc - 2016
Part 1 - Acc - 2016
Many people mistakenly think that Bookkeeping and Accounting are the same. It should be noted that
accounting involves much more than bookkeeping. As such,
Bookkeeping is described as that aspect of accounting that records transactions and other events either
manually or with computer. It can also be describe as the recording of monetary transactions in a
prescribed manner. On the other hand,
Accounting is the art of recording, classifying, and summarizing, in a significant manner and in terms of
monetary, transaction and events which are in part at least, of a financial character, and interpreting the
results thereof. Accounting also involves designing and implementing systems to produce useful reports
and control the operations of an organization.
There are many types of accounting information. The most common ones are:
1. Financial accounting- refers to the information describing the financial resources, obligations,
and activities of an economic entity (either an organization or an individual). Accounts use the
term financial position to describe an entity’s financial resources and obligations at one point in
time and the terms results of operation to describe its financial activities during the year.
2. Management Accounting- involves the identification, presentation and interpretation of
accounting information used for formulating of strategy, planning and controlling the activities,
decisions making and optimizing the use of resources. It is accounting information intended
specifically to aid management in running the business.
3. Cost Accounting: it is defined by Chartered Institute of Management Accountant (CIMA) as “the
application of accounting and cost principles, methods and techniques in the ascertainment of
costs and analysis of saving and/ or excess as compared with previous experience or with
standards” Thus cost accounting deals with the ascertainment of cost of an activity and control
of that cost by comparing the actual cost with expected cost.
FUNCTIONS OF ACCOUNTING
An analysis of the accounting definition brings out the following functions:
1. Recording: It is concerned with ensuring that all business transactions that are quantified in
monetary terms are recorded in an orderly manner. The recording is done in journal.
2. Classifying: This is referred to as the systematic analysis of the recorded data, with a view to
group transactions or entries of one nature at one place. Classification is done in the book
known as “ledger”
3. Summarizing: This is referred to as the presentation of classified data in a manner which is
understandable and useful to the internal and external end users of accounting statements. This
process leads to the preparation of the Trial Balance.
4. Dealing with financial transactions: Accounting records only transaction and events that can be
measured in monetary terms which are of a financial character. Other transactions that cannot
be measured in measured in monetary terms and not financial character cannot be recorded.
5. Analyzing and Interpreting: The recorded financial data is analyzed and interpreted in a manner
that will enable the end users to make a meaningful judgment about the financial condition and
profitability of the business operations. This is the final function of accounting. It leads to the
preparation of the income statement and the Balance Sheet.
6. Communicating: The accounting information after being analyzed and interpreted has to be
communicated in a proper form and manner, to the appropriate persons. This is done through
preparation and distribution of financial reports such as the income statement, balance sheet,
cash flow statement, and director’s reports and so on.
PURPOSE OF ACCOUNTING
The main purpose of accounting information is to help provide shareholders with information about:
2. Internal Users – these are individuals who have a financial interest in the reporting enterprise
and they are engage in the day to day operations of the enterprise. They include:
a) Board of Directors
b) Shareholders
c) Chief Executive Officer
d) Chief Financial Officer
e) Plant Manager
f) Business Unit Mangers
The Qualitative Characteristics of Useful Financial Information:
1. Relevance
2. Reliability
3. Understandability
4. Comparability
5. Timeliness
BASIS OF ACCOUNTING
The basis of accounting refers to the methodology under which revenues and expenses are recognized in
the financial statements of a business. The following are the general basis of business transactions:
1. Cash basis: under this basis of accounting, a business recognizes revenue when received, and
expenses when bills are paid. This is the easiest approach to recording transactions and is widely
used by smaller businesses. Credit transactions are not recorded in the accounts until cash has
been received or paid.
2. Accrual basis: under this basis of accounting, a business recognizes revenue when earn and
expenses when expenditures are consumed. This approach requires a greater knowledge of
accounting, since accruals must be recorded at regular intervals.
ELEMENTS OF ACCOUNT
In order to maintain complete accounting records, all transactions and events that affect the basic
accounting elements must be recorded. The basic elements of account are:
1. Assets- these are properties owned by the business. They may be divided into two main groups,
namely: Current and Fixed Assets. Current assets are intended to be change into cash during the
course of the business. They are sometimes called floating assets. They are reasonably been
expected to convert into cash within one financial year. E.g. cash, bank, debtors, stock, etc. On
the other hand, fixed assets are assets that are acquired not for resale but to help in running the
business of the firm. Fixed assets would be in the business for more than one financial year.
Thus, they would not be sold at least for the next accounting year. They are used on a
permanent basis in the business. Fixed assets can either be tangible or intangible e.g. land and
building, plant and machinery, motor vehicles, goodwill, patent, copyright, trademark, etc.
2. Liabilities- these are present obligations of a business to pay cash, transfer assets, or provide
services to other entities in the future. In order words, liabilities refer to the claims on the
business. They can either be: Current liability which is any liability that can be settle in less than
a year e.g. creditors, wages due, bank overdraft; and Long-term liability is a liability which is
settle in more than a year e.g. loan, etc.
3. Capital- is the amount of money a proprietor invests to start up a business or the total resource
supplied to a business by its owner(s). Capital is often called owners’ equity.
ACCOUNTING EQUATION
This is an equation that shows the equality between asset with that of the total of capital and liability.
For a business to be in operation it needs resources; and these resources need to be supplied by
someone. Part of these resources may be supplied by the owner and part by some other people other
than the owner. Thus, we will look at the accounting equation from two scenarios:
Firstly, we assume that the owner of the business is the only provided of the resources, then the
accounting equation will be:
Assets= Capital
On the other hand, if the business to be set up requires a lot of resources that can’t be supplied by the
owner alone, he/she will look for resources from other people. In such instances the accounting
equation would be:
Many a times, when a business makes profit it is reinvestment into the business. Thus profit/loss
generated during a period will affect the accounting equation. Also many a time business owners use
the business resource for their personal uses (known as drawings). Drawings also affect the accounting
equation. Below is an extension of the accounting equation to showing the effects of the above (i.e
drawings and profit/loss).
Double entry Principle: this states that for every credit entry there must be a corresponding debit entry
and for every debit entry there must be a corresponding credit entry.
NB: Debit entry refers to any entry made on the debit side of the account while a credit entry refers
to any entry made on the credit of the account.
NB: the double entry rule for liabilities and capital is the same and it exactly the opposite for asset.
Name
Debit (Dr) Credit (Cr)
CLASSIFICATION OF ACCOUNTS
Accounts can be classified into personal and impersonal
i. Personal accounts: these are simply the accounts of those parties that a business deals with.
They are opened in the names of those parties. They are usually the suppliers and customers of
the business. Examples of such accounts include debtors, creditors. Also note that capital
account also comes under the category of personal accounts.
ii. Impersonal accounts: these are used to record transaction other than those relating to people or
business organizations. Impersonal accounts are further classified into:
a) Real accounts: are accounts that refers to the possessions of a business. The possessions
may be tangible or intangible. E.g land and building account, stock account, plant and
machinery account, motor vehicles account, goodwill etc.
b) Nominal Accounts: refers to all those accounts that are in the nature of incomes and
expenses. E.g. discount received and allowed accounts, rent account, sales accounts and
purchase account, etc.
The ledger: is the main book of accounts. It is where all accounts in a business are being kept. There are
many types of ledgers and depending on the size of the business, firms can maintain three, four or five
legers; namely:
Debtors/ sales ledger- where all personal accounts of debtors are being maintained
Creditors/ Purchases ledger- where all personal accounts of creditors are kept
General ledger- in which all other accounts (i.e. neither personal accounts of debtors or
creditors) are maintained
Nominal account- this is where all revenue and expenses are maintain
Private ledger- in this ledger transactions between the proprietor and the business are being
maintained there
At the end of each period, after all transactions have been recorded in the books of accounts, they are
balanced off to give a summary of the transactions for the period. In balancing an account, you add both
sides of it and put the total of the side with the highest amount on both sides, then find their difference
and record it on the smaller side. This balancing figure is called balance carried down (c/d) and when it is
being carried to the next accounting period, it is refer to as balance brought forward/ down (b/f or
b/d ). After the accounts have been balanced, they will either have:
1) A debit balance: occurs where the total of the debit side exceeds the total of the credit side. A
debit balance represents either:
An asset-this is recorded in the balance sheet
An expenses-this is recorded in the profit and loss account
2) A credit balance: is a situation that arises when the total of the credit side exceeds that of the
debit side. A credit balance represent:
A liability- which is recorded in the balance sheet.
An income this is recorded in the profit and loss account.
TRIAL BALANCE
The trial balance is a list of debit and credit balances of accounts extracted from ledger account at a
particular time. The trial balance is not an account. The main purpose of it is to check the arithmetic
accuracy of the double entry. It does this simply by listing all the balances b/d on both the credit and
debit sides and then compare their totals. If the total on both sides agree, then it is assumed that the
posting are correct but it does not mean that the bookkeeping is perfect. This is because a balanced trial
balance may contain errors. Thus, there are some errors when made do not affect the balancing of the
trial balance. Such errors includes error of omission, compensation error, error of original entry, error of
principle, complete reversal of entries, and error of commission. However, some errors do affect the
balancing of the trial balance e.g. error of single entry, error of transposition.
Exercises
1. Show the full effects of the followings transactions on the elements of account by putting
‘X’ on the right effect.
decrease
increase
decrease
No effect
increase
decrease
No effect
No effect
2. Fatou is starting a business. Before actually starting to sell anything, she bought fixtures
for £1,200, a van for £6,000 and a stock of goods for £2,800. Although she has paid in
full for the fixtures and the van, he still owes £1,600 for some of the goods. Binta lent her
£2,500. After the above, Fatou has £200 in the business bank account and £175 cash in
hand. You are required to calculate her capital.
3. From the following transactions, write up the books of accounts, balance off the account and
extract a trial balance as at 31st January, 2000
Jan 1: Musa started business with capital of D10000 cash
3: Bought furniture for D1500 cash
7: Purchase goods for resale cash D3500
9: Received cash from Dawda D5000
11: Sold goods for cash D900
15: bought goods for cash D1000
17: paid rent by cash D500
18: paid salary to assistant D600 cash
20: paid electricity cash D75
23: Bought stationery for office use D150 cash
24: Sold goods for cash D800
26: Bought office tables and chairs D900 cash
29: Withdrew cash for personal use D150
31: Paid wages cash D200
4. Prepare a trial balance as at 30 June 2005 from the following information: rent D1560, capital
D52799, insurance D305, drawings D6278, lighting expenses D516, cash at bank D1134, motor
expenses D 1960, buildings D28000, salaries & wages D4850, fixtures D3960, sales D35600,
debtors D6810, purchases D30970, creditors D3250, sundry expenses D1806, motor van D3500
5. Enter the following information into the double entry, balance off the accounts and prepare a
trial balance as at the end of the period 31 January 2008.
Jan 1: started business with D8000 in the bank
2: Bought stationery by cheque D30
3: Bought goods on credit from Isatou Sinera D900
4: Sold goods for cash D180
5: Paid insurance by cash D40
15: Bought machinery on credit from Mariama Sanneh D500
25: Return goods to Isatou Sinera D70
26: Paid rent by cheque D100
30: Bought equipment by cheque D150
ABC Ltd
Balance Sheet
As at 31 Dec xxx
Liability xxx
Xxxx xxxx
Exercise
1. Show the effects of these transactions on the balance sheet transaction after transaction
i. Starts a business with D500 in the bank
ii. Purchase a building by cheque D300
iii. Purchase goods on credit D50 from Musa
iv. Sold D10 worth of the goods on credit to Fatou
v. Cash sales D10
vi. Paid Musa by cheque D20
vii. Received D5 from Fatou as part payment of her debt.