Topic 1

Accounting
terminology
Lucienne Vella

CER3054 Bookkeeping 1
 Learning Outcomes

Understand what is meant by the terms Explain the accounting equation

Capital
Assets
Liabilities
Income
Expenses

Lucienne Vella CER3054 Bookkeeping 1

 How does it all
start?

It starts with
Capital.

Lucienne Vella CER3054 Bookkeeping 1

 Capital
Capital is the amount of
money that the owner
(investor) puts in the
business, so that the
business can start to
operate.
Sometimes, the owner
adds further capital into
the business after some
time, to help the business
to continue operating.
Lucienne Vella CER3054 Bookkeeping 1
 Capital :
very important note
In bookkeeping it is very
important to keep the owner
completely separate from the
business. The only time we
deal with the owner is when
the owner adds capital or
decreases it. That’s all.

In bookkeeping we are
concerned only about the
business.
Lucienne Vella CER3054 Bookkeeping 1
 Assets
An asset is
something
valuable that a
business owns
and uses to
generate
income.
Lucienne Vella CER3054 Bookkeeping 1
 Premises
(buildings)
Obviously the building
owned by a business
is an asset. It is
valuable and it helps
the business to
operate and generate
income.

Lucienne Vella CER3054 Bookkeeping 1

 Equipment
Any valuable
equipment, for
example a hotel
kitchen, is an asset
since it is valuable and
helps the business to
generate income.

Lucienne Vella CER3054 Bookkeeping 1

 Vehicles
Company cars, hotel
courtesy vehicles and
delivery vans are
assets because they
are valuable and they
help the business to
generate income.

Lucienne Vella CER3054 Bookkeeping 1

 Tables, chairs,
cutlery, crockery,
glassware …
All the furniture,
fittings and soft
furnishings that a
restaurant has are
assets because they
are valuable and they
help to generate
income.
Lucienne Vella CER3054 Bookkeeping 1
 Hotel linen
Hotel linen is an asset
as well. Globally it is
valuable and it is used
to generate income.

Lucienne Vella CER3054 Bookkeeping 1

 Office furniture /
computers /
phones
Office equipment is an
asset because it is
valuable and it helps
the business to
generate income from
it.

Lucienne Vella CER3054 Bookkeeping 1

 Non-Current
Assets
The assets we have mentioned
so far are called Non-Current
assets (also know as Fixed
assets).
Non-current assets are bought
with the intention of lasting a
long time in the business (more
than 1 year).

Lucienne Vella CER3054 Bookkeeping 1

 Current
Assets
On the other hand,
current assets are cash
and other assets that are
expected to be converted
to cash within a year.

Current assets are still

valuable, and are still
used to generate income
for the business.

Lucienne Vella CER3054 Bookkeeping 1

 Cash in hand and
cash at bank
Cash in hand means the
cash we have in our
business (example in
the cash register).
Cash at bank means the
money which the
business has at the
bank (the bank deposits
of the business).
These are current
assets.

Lucienne Vella CER3054 Bookkeeping 1

 Debtors
Debtors are people who
owe money to the
business. The business
sold goods to them on
credit and they still need to
pay.
Debtors are current assets
because they are valuable
to the business, they
generate income, and they
will soon become cash.
Lucienne Vella CER3054 Bookkeeping 1
 Inventory
(Stock of goods)
The stock of goods the
business holds in the store
is a current asset. It is
valuable, and it helps to
generate income. It will
soon be converted into
cash.
The business does not buy
stock to leave it in the
stores for over a year!
Lucienne Vella CER3054 Bookkeeping 1
 Liabilities
A liability is an
amount that the
business owes to
someone else for a
benefit already
received.

Lucienne Vella CER3054 Bookkeeping 1

 Creditors

Creditors are people

to whom the business
owes money for goods
or services received.

Lucienne Vella CER3054 Bookkeeping 1

 Loans

Loans could be from

the bank or from
anybody else.

They are a liability

because the business
has to repay the loan.

Lucienne Vella CER3054 Bookkeeping 1

 Bank overdraft

Bank overdraft is a
facility that the bank
gives whereby the
business can use more
money than it actually
has deposited in the
bank. Obviously, the
business needs to pay
this back, so it is a
liability.

Lucienne Vella CER3054 Bookkeeping 1

 Now that we know
what capital, assets
and liabilities are,
we can move on to
the
ACCOUNTING EQUATION
Lucienne Vella CER3054 Bookkeeping 1
 ACCOUNTING EQUATION

ASSETS = CAPITAL + LIABILITIES

That’s all there is to it!

Lucienne Vella CER3054 Bookkeeping 1
 ACCOUNTING EQUATION
It means that the resources of the business
(assets) are equal to the sources of funding
used to acquire those resources (capital plus
liabilities).

That’s all there is to it!

Lucienne Vella CER3054 Bookkeeping 1
 ACCOUNTING EQUATION
ASSETS = CAPITAL + LIAILITIES
CAPITAL = ASSETS – LIABILIITES
LIABILITES = ASSETS - CAPITAL

ASSETS

minus minus

Pl us
CAPITAL LIABILITIES

Lucienne Vella CER3054 Bookkeeping 1

 Income
Income is money that the
business receives in
exchange for providing a
good or service.

Income is used to fund

day-to-day expenditures.

Lucienne Vella CER3054 Bookkeeping 1

 Examples of Income
Sales – the business receives income
when it sells goods or services to
customers.

Rental Income – if a business rents out

property to someone else, it receives
rental income.

Commission – when the business earns a

commission for selling a good or service
on behalf of someone else.
Lucienne Vella CER3054 Bookkeeping 1
 Expenses
An expense is a cost that
occurs as part of a
company's operating
activities.

NOTE : buying an asset

is not an expense!!

Lucienne Vella CER3054 Bookkeeping 1

 Examples of Expenses
Any kind of bill for services used by the
business, for example
• Water and electricity
• Rent (if the business pays rent)
• Telephone bill
• Cleaning expenses
• Fuel
• Stationery
• Repairs and maintenance
• Salaries
Lucienne Vella CER3054 Bookkeeping 1
 Income minus Expenses can
result in a PROFIT or a LOSS

Income > Expenses = PROFIT

because the business has
earned more money than
what it spent.

Income < Expenses = LOSS

Because the business has
spent more money than
what it earned.

Lucienne Vella CER3054 Bookkeeping 1

 Have we been successful in our learning?

Understand what is meant by the terms Explain the accounting equation

Capital
Assets
Liabilities
Income
Expenses

Lucienne Vella CER3054 Bookkeeping 1