HNTEC IN BUSINESS AND FINANCE 01/07/2021

Rev. No: 3; July 2021

MODULE: BASIC
ACCOUNTING
FOR HNTEC IN BUSINESS AND FINANCE

Rev. No: 3; July 2021

Topics for Basic Accounting:

1. Basic concepts of Accounting and Accounting Equation
2. Trade documents and Books of Original Entry
3. Record business transactions and Cash Books
4. Trial Balance
5. Bank Reconciliation
6. Financial Statement of a Sole Trader with adjustments

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Rev. No: 3; July 2021

What do you understand by the

term “ACCOUNTING”?

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Topic 1: Basic Concepts of

Accounting and Accounting
Equation
Performance Objective:

Explain the basic concepts of accounting and apply the accounting

equation

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Learning Objectives:
1. Distinguish between bookkeeping and accounting.
2. Explain the purposes of accounting and its users.
3. Describe the accounting cycle.
4. Explain the basic accounting concepts.
5. Explain the purpose of analysing and classifying transaction.
6. Explain and classify the five basic account elements.
6.1 Assets
6.2 Liabilities
6.3Owner’s Equity
6.4 Revenues
6.5 Expenses
7. Explain and apply the basic accounting equation and the extended accounting equation

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1. Distinguish between Accounting and Bookkeeping

ACCOUNTING BOOKKEEPING
• The entire process of • The process of
recording, summarizing, recording business
reporting, analyzing and events systematically
interpretation of financial and accurately
information of an according to set rules.
organization.
• This information is useful
• It is therefore just one
for those who need to part of the accounting
make business decisions. process.

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1. Distinguish between Accounting and Bookkeeping

Recording
(Bookkeeping)

Interpreting Classifying

Accounting Process

Analysing Summarizing

Reporting

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2. Explain the purposes of accounting and its users

• To communicate financial information to various interested

parties.
• To help them make financial decisions and take necessary
action.

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Managing Director, Finance Controller and Plant
Manager – all these require all accounting
information for making business decisions and
for the purpose of planning and controlling
activities of the company.
Management Accounting seeks to meet the
needs of the business managers

Potential investors are interested

to assess the likely risks and gains Creditors wish to know whether
from investing in the business. ACCOUNTING the business will be able to pay its
Financial accounting provides INFORMATION debts when they fall due.
information on the profitability, the PERTAINING TO Financial accounting provides
efficiency of funds management A BUSINESS information on the company’s
and growth potential of the liquidity position.
company.

Customers need information in order to assess

the ability of the business in fulfilling warranty
obligations.
Financial accounting provides information in the
stability and the growth of the business.

Rev. No: 3; July 2021

3. Describe the accounting cycle

1. Identify business
transactions through
source documents

8. Prepare Financial 2. Record business

Statements transactions in Journal

7. Prepare Closing 3. Post entries from

Journal Entries Journal to Ledger

6. Prepare adjusted Trial 4. Prepare unadjusted

Balance Trial Balance

5. Prepare adjusting
entries in Journal

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4. Explain the basic accounting concepts

Accounting Entity
Going Concern
Accounting Period
Monetary Assumption or Money Measurement
Accrual Concept
Matching Principle
Consistency
Historical Cost
Objectivity
Prudence or Conservatism

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Rev. No: 3; July 2021

4. Explain the basic accounting concepts

ACCOUNTING ENTITY

• It states that the business is a separate entity from its owner, and that all transactions are recorded from the point view of the
business.

• Personal transactions of the owner are not recorded.

• However, if owner provides resources into the business (capital contribution) or withdraws resources from the business
(drawings), these transactions are recorded.

Examples:
 Insurance premiums for the owner’s house should be excluded from the expense of the business

 The owner’s property should not be included in the premises account of the business

 Any payments for the owner’s personal expenses by the business will be treated as drawings and reduced the owner’s capital
contribution in the business

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4. Explain the basic accounting concepts

GOING CONCERN

• A business is assumed to be operating indefinitely.

• Financial statements should be prepared on a going concern

basis unless management either intends to liquidate the
enterprise or to cease trading, or has no realistic alternative but
to do so.

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4. Explain the basic accounting concepts

ACCOUNTING PERIOD

• The indefinite life of a business entity is divided into accounting

periods for the purpose of preparing financial reports.
• The period may be a month, a half-year, a full year, or any other
length of time, depending on the volume and nature of the
business.

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4. Explain the basic accounting concepts

MONETARY ASSUMPTION OR MONETARY MEASUREMENT

• It states that business will record transactions that can be

measured in monetary terms.

• Therefore, measurements of customer loyalty, employee

morale, and relationships with suppliers are not recorded.

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4. Explain the basic accounting concepts

ACCRUAL CONCEPT

• Revenue is recognized when it is earned and expenses when incurred, regardless if

payment has been received or made.

• Revenue that is received in advance or expenses that is prepaid cannot be recognized.

Examples:

Expenses incurred but not yet paid in current period should be treated as accrual/
accrued expenses under current liabilities.

Expenses incurred in the following period but paid for in advance should be treated as
prepayment expenses under current asset.

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4. Explain the basic accounting concepts

MATCHING PRINCIPLE

• States that the business should match the expenses incurred in

the accounting period to the revenue earned in the same period
to determine the correct profit.

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4. Explain the basic accounting concepts

CONSISTENCY

• The accounting treatment and policy adopted by the business should be consistent and
the same throughout different accounting periods unless there is valid reason for change.

• This will allow meaningful comparison of financial statements over different periods of
time.

• Any changes and its effect on profits should be disclosed in the financial statements.

Example
 If a company adopts straight line method and should not be changed to adopt reducing
balance method in other period.

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4. Explain the basic accounting concepts

HISTORICAL COST

• States that transactions should be recorded at the original cost, i.e.

amount as reflected on the source documents.

Example
The cost of fixed assets is recorded at the date of acquisition cost.
The acquisition cost includes all expenditure made to prepare the
asset for its intended use. It included the invoice price of the assets,
freight charges, insurance or installation costs.

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4. Explain the basic accounting concepts

OBJECTIVITY

• States that transactions are recorded based on the information

that is reliable and verifiable, i.e. supported by source
documents or evidence.

Example
The recognition of revenue should be based on verifiable
evidence such as the delivery of goods or the issue of invoices.

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4. Explain the basic accounting concepts

PRUDENCE OR CONSERVATISM

• Prudence Concept or Conservatism principle is a key accounting principle that makes sure that
assets and income are not overstated and provision is made for all known expenses and losses
whether the amount is known for certain or just an estimation i.e expenses and liabilities are not
understated in the books of accounting.
• The application of the prudence concept ensures that the financial statements present a realistic
picture of the state of affairs of the enterprise and do not paint the better picture than what actually
is.
Example
• The inventory is always valued at lower of cost (original cost) or net realizable value (Inventory
market value - Costs to complete and sell goods), so that inventory may not be overvalued, as the
figure of inventory directly impacts the “cost of sales” figure, because
“Cost of sales = Opening inventory + Purchases – Closing inventory”

 The provision for doubtful debts should be made

 Fixed assets must e depreciated over their useful economic lives

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5. Explain the purpose of analyzing and classifying transaction

What is a business transaction?

• A business transaction is an activity carried out by the business

to provide goods and services in exchange for money.

• In other words, it has an effect on any of the accounting

elements – assets, liabilities, capital or owner’s equity, income
and expenses.

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5. Explain the purpose of analyzing and classifying transaction

Business Transaction
To qualify as an accountable/ recordable business transaction,
the activity or event must:
1. Be a transaction involving the business entity
2. Be of a financial character (in a certain amount of money)
3. Have a dual or ‘two-fold’ effect on the accounting elements
4. Be supported by a source document

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5. Explain the purpose of analyzing and classifying transaction

TYPES OF BUSINESS TRANSACTION

• Cash transactions refer to transactions where cash is received

or paid at the same time of the transaction.

• Credit transactions refer to transactions where cash is received

or paid at a later time from the transaction.

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6. Explain and classify the five basic account elements

• Assets
• Liabilities
• Capital or owner’s equity
• Revenue
• Expenses

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6. Explain and classify the five basic account elements

ASSETS

Assets are owned by a business.

Assets are resources usually owned or controlled by a business to

carry out business activities.

Assets are expected to generate future benefits.

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6. Explain and classify the five basic account elements

There are two types of Assets:

Non - Current Assets such as buildings, equipment, machinery,

furniture and motor vehicles. They are acquired to help in the running of
the business and not for resale. They can be used for more than one
accounting period.

Current Assets are assets that can be converted into cash easily or
will be consumed within an accounting year from the current date. Debts
owed by customers and the amount of money in the office (cash
account) and money in the bank (bank account) are included.

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6. Explain and classify the five basic account elements

LIABILITIES

Liabilities are owed by a business.

Liabilities may refer to amounts owed by a business to other

businesses.

Liabilities may also be business obligations to provide goods or

services to customers in the future.

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6. Explain and classify the five basic account elements

There are two types of Liabilities:

 Non-Current Liabilities are the amount owed by the business for

more than one accounting year to settle. Loans and mortgage
made to the firm are included.

 Current Liabilities are the amounts owed by the business that

have to be settled within an accounting year from the current date.
Examples are creditor and bank overdraft.

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6. Explain and classify the five basic account elements

OWNER’S EQUITY

Equity is invested by the owner of a business.

 Equity is the amount owed by the business to the owners of the business.

In a company, equity is known as shareholders’ equity.

Based on the accounting entity convention, the business is considered an

entity separated from the owner. However, should there be any drawings, the
owner’s equity will be reduced. Drawings refer to withdrawal of assets for
personal use.

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6. Explain and classify the five basic account elements

INCOME / REVENUE

Income or revenue is earned by a business.

 Income is the amount earned from selling goods and providing

services to customers.

 Examples of income or revenues are sales, service fees

received, rent received, commission received and interest
received.

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6. Explain and classify the five basic account elements

EXPENSES

Expenses are spent by a business.

 Expenses refer to the goods or services used up in business

operations to generate income for a given financial period.

 Examples of expenses are purchases, wages and salaries,

rent paid and interest paid.

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7. Explain and apply the basic accounting equation and the

extended accounting equation

This equation must always balance !

Rev. No: 3; July 2021

7. Explain and apply the basic accounting equation and the

extended accounting equation

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