Principle of Accounting

PRINCIPLES OF ACCOUNTING
Structure: 36,18
- Theoretical session: 36 - Discussion: 18
- Self-study session: 96
PRINCIPLE OF ACCOUNTING - CHAPTER 1 1

COURSE OBJECTIVES
Training students with knowledge about principles of financial

accounting. Students can understand and apply the accounting
concepts in order to handle transactions in company; analyse,
evaluate the fluctuation of economic transactions affecting to
financial position and financial performance of company. Using
english fluently to delivery specialism area clearly and easily for
understanding. Analyse, evaluate objectively quality of work and
performance result of members in a group

Course description
This module provides students with the knowledge of accounting

including: the definition of accounting and types of accounting,
accounting assumptions and principle, the qualitative
characteristic of financial information, the accouting equation,
source documents and account, nominal ledger, and
introduction of accounting software and cloud accounting; trial
balance and financial statements

CONTENT OF THE COURSE
Chapter 1: OVERVIEW OF ACCOUNTING

Chapter 2: THE ACCOUNTING EQUATION
Chapter 3: RECORDING FINANCIAL TRANSACTIONS
Chapter 4: THE USE OF LEDGER ENTRY
Chapter 5: TRIAL BALANCE
Chapter 6: THE BASIC FINANCIAL STATEMENTS

References
Prescribe textbook(s)
1. Weygandt, Jerry. J, Kimmel, Paul. D Kieso, Donald. E, Accounting
Principles, 2018, John Wiley & Sons
Recommended textbook(s)
2. Spiceland, J. David, Wayne Thomas, Don Herrmann
Financial Accounting, 2016, McGraw – Hill
3. Accounting, ICAEW, 2021, The Institute of Chartered
Accountants in England and Wales
4. Kieso, Donald. E Weygandt, Jerry. J Warfield, Terry. D,
Intermediate Accounting, 2019, John Wiley & Sons
5. International Financial Reporting Standards, www.ifrs.org
6. Books of prime entry and control accounts,
https://kaplan.co.uk/
7. database, statista.com
Chapter 1:
OVERVIEW OF ACCOUNTING

CHAPTER 1: OVERVIEW OF ACCOUNTING
After studying this chapter, you should be able to:
- Introduction of accounting
- Accounting assumptions and principles
- Qualitative Characteristic of financial information
PRINCIPLE OF ACCOUNTING -
7
CHAPTER 1
CHAPTER 1: OVERVIEW OF ACCOUNTING
1.1. Introduction of accounting
1.2. Accounting assumptions and principles
1.3. Qualitative Characteristic of Financial Information
8
CHAPTER 1
1.1. INTRODUCTION OF ACCOUNTING
1.1.1 Definition of accounting
1.1.2 Types of accounting
1.1.3 The needs of Financial accounting
9
CHAPTER 1
1.1.1. DEFINITION OF ACCOUNTING
What is accounting?
Accounting is a way of recording, analysing and
summarising transactions of an entity (a term we shall use to
describe any business organisation
Transactions
recorded in analysed and summaried in

books of posted to the the financial
original entry ledgers statements
10
CHAPTER 1
1.1.1. DEFINITION OF ACCOUNTING
-Accounting is the systematic and

comprehensive recording of financial
transactions pertaining to a business
-Accounting is a way of recording, analyzing
and summarizing transaction of an entity
11
CHAPTER 1
1.1.2 TYPES OF ACCOUNTING
FINANCIAL ACCOUNTING: is the process of preparing

financial statements that companies use to show their
financial performance and position to people outside the
company, Including investors, creditors, suppliers, and
customers…
MANAGERIAL ACCOUNTING: the practice of

identifying, measuring, analyzing, interpreting, and
communicating financial information to managers for
the pursuit of an organization's goals
12
CHAPTER 1
Users of accounting information
HM Revenue
& Customs
Management
(HMRC)
Owners
Trade contacts
Finance User of financial statement Bodies

provider
Financial
Employees analysts &
advisers
The public Government
agencies
13
CHAPTER 1
1.2 ACCOUNTING ASSUMPTIONS AND PRINCIPLES
1.2.1 Accounting assumptions

1.2.2 Accounting principles
14
CHAPTER 1
1.2.1 ACCOUNTING ASSUMPTIONS
Going concern concept
Concept assumes  The entity is
reviewed as continuing in operation for the Preparing a
foreseeable future. It is assumed that the normal set of
entity has neither the intention nor the accounts
necessity of liquidation or ceasing to trade
Unless:
(i) the entity is being liquidated or has
ceased trading, or BREAK-UP
(ii) the directors either intend to BASIS
liquidate the entity or to cease
trading
(iii) Scale down operations in a material Must disclosure: The basic on which
way. FS are prepared
The reasons why the entity not
CHAPTER 1 consider to be a going concern 15
1.2.1 ACCOUNTING PRINCIPLES
Accounting is the underlying
concepts and assumption for financial
convention framework
GOING
CONCERN
BASIS FOR
PREPARING
FS
ACCRUAL
BASIS
is not an underlying
assumption, but FS should be
prepared on an accrual
basis.
16
CHAPTER 1
Accrual basic
The effects of transactions and other events are recognized when they occur
(and not as cash or its equivalent is received or paid) and they are recorded
in the accounting records and reported in the FSs of the periods to which
they relate.
Entities  record when revenues or expenses are earned or incurred in the

accounting period, to which they relate, not as the cash is paid or received
Accrual assumption  profit/revenue earned must be matched against the

expenditure incurred in earning it. This is the matching convention
17
CHAPTER 1
CONCEPTUAL FRAMEWORK
Accounting concepts and convention
The business entity concept requires that activities of the entity be
kept separate and distinct from the activities of its owner and all
other economic entities.
18
CHAPTER 1
Materiality and aggregation:

• Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions of
users taken on the basis of the financial statements.
• Financial statements result from processing large numbers of
transactions or other events that are then aggregated into classes
according to their nature or function, such as 'revenue',
'purchases', 'trade receivables' and 'trade payables'.
19
CHAPTER 1
Consistency of presentation: the presentation and classification of

items in the financial statements should stay the same from one
period to the next, unless:
 There is a significant change in the nature of the operations,
or a review of the financial statements indicates a more
appropriate presentation.
 A change in presentation is required by an IAS.
20
CHAPTER 1
Historical cost: Transactions are recorded at their cost when they

incurred.
 A basic principle of accounting is that the monetary amount at
which items are normally measured in financial statements is at
historical cost.
21
CHAPTER 1
1.3 QUALITATIVE CHARACTERISTIC OF FINANCIAL INFORMATION
1.3.1 Fundamental Qualitative characteristic
1.3.2. Enhancing Qualitative characteristic
22
CHAPTER 1
- Qualitative characteristics are the qualities or attributes that

make financial accounting information useful to the users
- The objective is to ensure that the information is useful

to the users in making economic decisions
23
CHAPTER 1
24
CHAPTER 1
CHAPTER 2
ACCOUNTING EQUATION
25
CHAPTER 2
CHAPTER 2: ACCOUNTING EQUATION
OBJECTIVE:
 After studying this chapter, you should be able to
 Define accounting equations and the basic elements of

accounting equations
 Analyse the effects of Transaction into accounting
equation
26
CHAPTER 2
CHAPTER 2: ACCOUNTING EQUATION
2.1. The basic elements of Accounting Equation
2.2. The use of Accounting Equation
27
CHAPTER 2
2.1. The basic elements of Accounting
Equation
2.1.1. Assets
2.1.2. Liabilities
2.1.3. Equity
28
CHAPTER 2
2.1.1. Assets
Assets is a resource controlled by the entity

as a result of past events and from which
future economic benefits are expected to
flow to the entity.
29
CHAPTER 2
2.1.1. Assets
CURRENT ASSETS
An asset should be classified as a current asset when it is:

 Expected to be realised in, or is held for sale or
consumption in the entity's normal operating cycle
 Held primarily for the purpose of being traded: goods
 Expected to be realized within 12 months after the
reporting date: finished goods/ product
 Cash or a cash equivalent which is not restricted in its
use
All other assets should be classified as non-current assets
30
CHAPTER 2
2.1.1. Assets
NON- CURRENT ASSETS

Non-current includes tangible, intangible operating and financial
assets of a long-term nature. Other terms with the same meaning
can be used (eg 'fixed', 'long-term').
NOTE:
The term 'operating cycle' is defined by the standard as follows.
The operating cycle of an entity is the time between the acquisition
of assets for processing and their realisation in cash or cash
equivalents PRINCIPLE OF ACCOUNTING -
31
CHAPTER 2
2.1.2. Liabilities
Liabilities is a present obligation of the entity

arising from past events, the settlement of
which is expected to result in an outflow from
the entity of resources embodying economic
benefits.
32
CHAPTER 2
2.1.2. Liabilities
CURRENT LIABILITY vs NON CURRENT
LIABILITY
A liability should be classified as a current liability
when it is:
 Expected to be settled in the entity's normal
operating cycle
 Due to be settled within 12 months of the
reporting date
 Held primarily for the purpose of being traded
All other liabilities should be classified as non-
current liabilities PRINCIPLE OF ACCOUNTING -
CHAPTER 2
33
2.1.3. Equity
Equity is the residual interest in the assets of the entity

after deducting all its liabilities.
Equity is also the amount invested in a business by the
owners.
Asset  inflow economic benefits
Liability  outflow economic benefits
Asset - liability= residual interest of entity (owners)
34
CHAPTER 2
2.2.1. The basic accounting equation
2.2.2 Transaction analysis in
accounting equation
35
CHAPTER 2
DEFINITION of Accounting Equation
The accounting equation is considered to be the

foundation of the double-entry accounting system.
The accounting equation shows on a company's balance

sheet (statement of financial position) whereby the total
of all the company's assets equals the sum of the
company's liabilities and owners' equity.
36
CHAPTER 2
Asset = Equity + liability

Asset = capital introduced+ retained earning + liability
Retained earning = total profit – dividend
37
CHAPTER 2
Accounting equation
EQUITY LIABILITIES TOTAL ASSETS
Equity/ Capital = Capital introduced + Retained profits
Equity/ Capital = Capital introduced + (Earned profit – Drawings)
Profit/Loss = Revenue Drawings are amounts

- Expenditure of money taken out of a
business by its owners
38
CHAPTER 2
2.2.2 Transaction analysis in accounting equation
ASSET = LIABILITIES + EQUITY
1 Increase Increase
2 Reduce Reduce
3 Increase and reduce No change
4 No change Increase and reduce
39
CHAPTER 2
CHAPTER 3: THE ACCOUNTING DOCUMENTATION IN BUSINESS
3.1. Sources of documents
3.2. Books of prime entry
3.3. Computerised accounting systems
PRINCIPLE OF ACCOUNTING
40
CHAPTER 3
CHAPTER 3: THE ACCOUNTING DOCUMENTATION IN BUSINESS
OBJECTIVE: After studying this chapter, you should be able to:
 Identify types of sources of documentation
 Understand the contents of book of prime entry
 Preparation documentations for common transactions in business
41
CHAPTER 3
3.1. Sources of documents
3.1.1.The purpose of Sources of documents
3.1.2.Types of Sources of documents
42
CHAPTER 3
3.1. SOURCES OF DOCUMENTS
Source documents: are the documents which are produced by or input

into a business's accounting system as the starting point to recording the
transactions of a business for accounting purposes
The documents may be hard copy or electronic
43
CHAPTER 3
3.1.1.THE PURPOSE OF SOURCES OF DOCUMENTS
The purpose of source document

Recording financial transactions
TRANSACTIONS RECORDED BY
OCCUR SOURCE DOCUMENT
To support EVIDENCE
Source documents are the source of all information

recorded by a business
44
CHAPTER 3
3.1.2.TYPES OF SOURCES OF DOCUMENTS
Sale system: customer order, dispatch goods, invoice,

receive payment
Purchase system: Purchase order, Receive goods, invoice,

payment
Bank transaction: receipt, remittance advice, ….
Others:
45
CHAPTER 3
SALE SYSTEM
46
CHAPTER 3
PURCHASE SYSTEM
47
CHAPTER 3
3.1.2.TYPES OF SOURCES OF DOCUMENTS
SOURCES DOCUMENTS FOR BANK TRANSACTION:
 Bank statement. is a document (also known as an account statement) that is typically sent by the bank
to the account holder every period, summarizing all the transactions of an account during a period.
 Cash register tape. This can be used as evidence of cash sales, which supports the recordation of a sale
transaction.
 Remittance advice. A document sent to a supplier and the bank with a payment, detailing which
invoices are being paid and which credit notes offset. A remittance advice allows the supplier to
update the customer's records to show which invoices have been paid and which are still outstanding.
It also confirms the amount being paid, so that any discrepancies can be easily identified and
investigated.
 Receipt. A document confirming confirmation that a payment has been received. This is usually in
respect of cash sales, eg a till receipt from a cash register
48
CHAPTER 3
3.2. Books of prime entry
3.2.1. The purpose of books of prime entry
3.2.2. Types of books of prime entry
49
CHAPTER 3
3.2.1. THE PURPOSE OF BOOKS OF PRIME ENTRY
 Books of prime entry (books of original entry) records of source

documents – of transactions – so that it knows what is going on.
 Books of prime entry are books in which we first record transactions.
 The details on these source documents need to be summarised, as
otherwise the business might forget to ask for some money, or forget
to pay some, or even accidentally pay something twice.
The books of prime entry serve to ‘capture’ transactions as soon as
possible so that they are not subsequently lost or forgotten about
50
CHAPTER 3
3.2.2. TYPES OF BOOKS OF PRIME ENTRY
The main books of original entry are:
Sales day book Petty cash book
Purchases day
The payroll
book
Cash book The journal
51
CHAPTER 3
Sales day book
Sales day book: The book of original entry in respect of credit

sales, including both invoices and credit notes
52
CHAPTER 3
Purchases day book
Purchases day book: The book of original entry in respect of

credit purchases, including both invoices and credit notes.
53
CHAPTER 3
Cash book
Cash book: The book of original entry for receipts and

payments in the business's bank account
54
CHAPTER 3
Cash book
• The cash book is used to record money received and paid out
by the business through the business bank account.
• Some cash, in notes and coins, is usually kept on the business
premises in order to make occasional payments for odd items
of expense.
• Accounted for separately in a petty cash book.
55
CHAPTER 3
Petty cash book: The book of original entry for small payments
and receipts of cash.
Most common, petty cash use the imprest system  reimburse/

refund the total amount paid out in a period (i.e. if on 1 Dec
petty cash paid out $100  under imprest system, on 2 Dec
accountant will draw $100 to top-up the amount paid in
yesterday).
Under what is called the imprest system, the amount of money in
petty cash is kept at an agreed sum or 'float' , so that each toping is
equal to the amount paid out in the period.
Although the amounts are small, petty cash transactions still need
to be recorded to prevent fraudulent or misuse of funds (i.e.
IOU).
There are usually more payments
CHAPTER than
3 receipts in petty cash 56
Journal
The final book of original entry is the journal. This is the record
of transactions which do not appear in any of the other books of
original entry. Non-current asset purchases are usually
recorded via the journal.
Journal is also ONE of the books of original entry.
Journal keeps a record of unusual movement between accounts
Record any double entry made but  do not arise from other
books of original entry (i.e. Journal entries are made when
corrected errors or adjustment like prepayment…)
57
CHAPTER 3
3.3. COMPUTERISED ACCOUNTING SYSTEMS
3.3.1.Accounting software package
3.3.2.Cloud accounting
58
CHAPTER 3
computerised accounting systems
59
CHAPTER 3
Accounting software package
The computerised accounting system is a package which contains several different modules
likes:
 payroll, for managing balances owed by credit customers or for maintaining a record of
non-current assets.
 Sale module
 Purchase module,….
One of the modules will be the main accounting record of the business.
The modules interact with each other in such a way that information entered into one
module will automatically update other relevant modules, for example, recording a credit
sale will update both the sales module and the module that manages the balances owed by
credit customers
60
CHAPTER 3
3.3.1.Accounting software package
Key points:
Standing data.
Account codes
Processing
Controls
61
CHAPTER 3
CHAPTER 4: THE USE OF LEDGER ENTRY
PRINCIPLE ACCOUNTING, CHAPTER 4 62

OBJECTIVE:
 Identify the ledger account to recording basic

transactions.
 Have ability to recording basic transactions in ledgers

4.1. The ledger account

4.2. Recording basic transactions

4.1. The ledger account
4.1.1. Classification of ledger accounts
4.1.2. Debits and Credits entry

4.1.THE LEDGER ACCOUNT
An account is the basic recording unit of the
accounting system.
Accounts are the items that are affected by the
transaction and where transactions are subsequently
recorded.
An account records any increase and decrease of
assets, liabilities, revenue, expenses and owner’s
equity

4.1.1. Classification of ledger accounts
The nominal ledger/Ledger is the main accounting record in which financial

transactions are recorded.
The nominal ledger/Ledger contains several ledger accounts that represent each
of the categories of asset, liability, capital, income and expense of a business as
 Asset accounts
 Liability accounts
 Equity accounts
 Revenue accounts
 Expense accounts

Every account classification has:
- Balance brought down (opening balance)
- Balance carried down (closing balance)
- Increase movements
- Decrease movements
Closing balance (CB) = Opening balance (OB) +

Increasing - Decreasing
Opening balance of Year N+1 = Closing balance of
Year N

A ledger account can be shown in T-account format. Its name comes
from its shape like the letter T
T account: There are two sides to a ledger account, and an account
heading on top, and so they are often referred to as T-
accounts.
(a) On top of the account is its name.
(b) There is a left-hand side, or debit side.
(c) There is a right-hand side, or credit side.

The rules of double entry
bookkeeping
A debit entry will:
increase an asset decrease a liability
increase an expense decrease capital
decrease income
A credit entry will:
decrease an asset increase a liability
decrease an expense increase capital
increase income
4.2. Recording transactions
4.2.1. Purchasing transactions
4.2.2. Sales transactions
4.2.3. Journal entries

Double-Entry Bookkeeping
Each transaction has an equal but opposite effect. Every accounting event must
be entered in ledger accounts both as a debit and a credit.
=> Double-entry bookkeping demands the accounting equation remain in

balance, which means that for each transaction:
- At least two accounts are involved, with at least one debit and
one credit.
- Total amount debited must equal total amount credited.

Introduction: When purchasing on cash
1. Increase assets (inventories, fixed assets, tools, raw material…)
2. Decrease cash
• DR PURCHASING
• CR CASH

Introduction: When purchasing on credit
1. Increase assets (inventories, fixed assets, tools, raw material…)
2. Increase Trade accounts payable
• DR PURCHASING
• CR ACCOUNT PAYABLE

Introduction: When sale on cash:

1. Increase cash
2. Increase Sales revenue
• DR Cash
• CR Sales revenue
When make a sale: Matching concepts:

1. Decrease cost of goods sold
2. Decrease goods
• DR Cash

Introduction: When sale on credit:

1. Increase Trade accounts receivable
2. Increase Sales revenue
• DR Accounts receivable
When make a sale: Matching concepts:

1. Decrease cost of goods sold
2. Decrease goods
• DR Cash

4.2.3. Journal entries
The journal is the record of prime entry for transactions which are
not recorded in any of the other books of prime entry, for example:
capital, depreciation, loan and correction of errors transactions. These
transactions are excluding purchasing, sales, cash and payroll one
Remember that one of the books of prime entry is the journal.

These transaction will be post to the General Journal

CHAPTER 5
THE TRIAL BALANCE
PRINCIPLES OF ACCOUNTING - CHAPTER 5 78

CHAPTER 5: THE TRIAL BALANCE
LEARNING OBJECTIVES
After studying this chapter, students are able to:
+ Having the basic knowledge of Trial balance as: the purpose of a trial balances
and content a trial balance
+Distinguish the initial trial balance and the extended trial balance
+Know basis steps of preparing trial balance

CHAPTER 5: THE TRIAL BALANCE
5.1 Overview of trial balance
5.1.1. Purpose of Trial balance
5.1.2. Content of Trial Balance
5.2. Preparing the trial balance
5.2.1. The initial trial balance
5.2.2. Adjustment journals

5.2.3. The extended trial balance

5.1 Overview of trial balance
5.1.1. Purpose of Trial balance

5.1.2. Content of Trial Balance

• Trial balance: A list of nominal ledger account balances shown in
debit and credit columns at a point in time, usually the end of the
accounting year. The trial balance is not part of the double entry
system, it is extracted from the double entry system
• Trial balance is the starting point to preparing the financial
statements
• A trial balance can be used to test the accuracy of the double entry
accounting records. It works by listing the balances on ledger
accounts, some of which are debits and some credits. Total debits
should equal total credits.

A trial balance includes a list of all general ledger account totals
it should state the final date of the accounting period for which the
report is created.
the trial balance only shows the account totals, not each separate
transaction.

When constructing a trial balance, we must consider a few
formatting rules, akin to those requirements for financial statements:
The header must contain the name of the company, the label of a
Trial Balance (Initial or Adjusted trial balance), and the date.
Accounts are listed in the accounting equation order with assets
listed first followed by liabilities and finally equity.
Amounts at the top of each debit and credit column should have a
dollar sign.



Trial balance: A list of nominal ledger account balances shown in debit
and credit columns at a point in time, usually the end of the accounting
year.
At the end of a reporting period (usually the year end), a balance is
extracted for each nominal ledger account.
 All debits and credits on the account, including opening balances, are
totalled.
 If total debits exceed total credits there is a debit balance on the
account.
 If total credits exceed total debits the account has a credit balance

• Example: As at 31.3.20X7, Hawk Ltd, has the following nominal ledger account
balances.

• To draw up an initial trial balance we may split the original balances into debit
and credit balances

The trial balance is balance when the total of the debit column equals the total of the credit column.
In a manual accounting system the trial balance provides a good check that the rules of double entry
have been maintained.
In a computerised accounting system this is less of a concern as the system will only accept the entry
of transactions in which the debits equal the Credits
However, there are several errors may still have arisen in the ledger account so the trial balance may
be imbalance or also still misstated.
We often need to make adjustments (eg, for omissions, errors or period end journals) after the
initial trial balance has been extracted.
These adjustments must be recorded in the nominal ledger accounts using adjustment journals.
After the adjustment journals have been posted, rather than extracting another trial balance, we can
instead adjust the initial trial balance already extracted to produce a final trial balance or
adjusted trial balance.

An alternative way of presenting the adjustments is using a columnar approach whereby

an additional debit column and an additional credit column are created alongside the
initial trial balance. A final trial balance is then created by adding across.
• To a debit balance in the trial balance, add debits and subtract credits. If the result is
positive, insert it in the debit column of the final trial balance. If it is negative, insert it
in the credit column of the final trial balance.
• To a credit balance in the trial balance, subtract debits and add credits. If the answer is
positive, insert it in the credit column of the final trial balance. If it is negative, insert it
in the debit column of the final trial balance.

Example: the extended balances from Hawk Ltd:

CHAPTER 6:
THE BASIC FINANCIAL STATEMENTS

CHAPTER 6:
THE BASIC FINANCIAL STATEMENTS
OBJECTIVE:
 Identify the complete set of financial statements

 Having basic knowledge of preparation of financial
statements

CHAPTER 6: THE BASIC FINANCIAL STATEMENTS
6.1 Overview of financial statements
6.2 Preparing basic financial statements

6.1 Overview of financial statements
6.1.1 Definition of financial statements
6.1.2 Types of financial statements

6.1.1 Definition of financial statements
Financial statements are reports prepared by a company’s management to
present the financial performance and position
A general-purpose set of financial statements usually includes a Statement Of
Financial Position, Statement Of Comprehensive Income, Statement Of Changes
in Equity, and Statement of Cash flows.
These financial statements are prepared mainly to give financial information for
users outside of the company, like investors and creditors, bank, government,…

6.1.2 Types of financial statements
1. Statement Of Financial Position - SOFP (Balance Sheet)
2. Statement Of Total comprehensive Income - SOCI –

(Income statement)
3. Statement Of Cash Flows – SOCF
4. Statement Of Changes in Equity - SOCE

6.2. Preparing basic financial statements
6.2.1 Statements of financial position
6.2.2 Statements of total comprehensive income

6.2.1.Statements of Financial position
• A list of all the assets controlled and

all the liabilities owed by a business
as at a particular date: it is snapshot of
Statement of the financial position of the business
Financial at a particular moment. Monetary
position amounts are attributed to assets and
liabilities. It also quantifies the
amount of the owners’ interest in the
company: equity.

FORMAT OF SOFP (suggested by IAS 01)

FORMAT OF SOFP (suggested by IAS 01)

6.2.2. Statements of total comprehensive income
• A statement displaying items of

income and expense in a reporting
period as components of profit or
Statement of total loss for the period.
comprehensive income/
• The statement shows whether the
Profit or Loss business has had more income than
expense (a profit for the period) or
vice versa (a loss for the period)
The link between the statement of financial position and the statement of
profit or loss is provided by the statement of cash flows and the statement
of changes in equity
Sales
Minus Cost of Goods Sold
= Gross Profit
Minus Operating Expenses
Selling expenses
General and Administrative expenses
Depreciation and Amortization Expense
= Operating income (EBIT)
Minus Interest Expense
= Earnings before taxes (EBT)
Minus Income taxes
= Net income (EAT)
EBIT = Earnings before interest and taxes;

EBT = Earnings before taxes; EAT = Earnings after taxes
Revenue
There are important rules on revenue recognition and
these are the subject of IFRS 15. We will look at this in detail
in later in this chapter.
Cost of sales
This represents the summary of the detailed workings
we have used in a sole trader's financial statements.
Expenses
Notice that expenses are gathered under a number of
headings. Any detail needed will be given in the notes to the
financial statements. PRINCIPLES OF ACCOUNTING - CHAPTER 6 104
Finance cost
This is interest payable during the period. Remember
(from the previous chapter) that this may include accruals
for interest payable on loan stock.
Income tax expense

This represents taxation as detailed in Section 3.7
below. Once again, this will include accruals for the tax due
on the current year's profits. However, it may also include
adjustments for any over- or underprovision for prior
periods

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PRINCIPLES OF ACCOUNTING

PRINCIPLE OF ACCOUNTING - CHAPTER 1 1

Training students with knowledge about principles of financial

PRINCIPLE OF ACCOUNTING - CHAPTER 1 2

This module provides students with the knowledge of accounting

PRINCIPLE OF ACCOUNTING - CHAPTER 1 3

Chapter 1: OVERVIEW OF ACCOUNTING

PRINCIPLE OF ACCOUNTING - CHAPTER 1 4

PRINCIPLE OF ACCOUNTING - CHAPTER 1 6

After studying this chapter, you should be able to:

- Accounting assumptions and principles

- Qualitative Characteristic of financial information

1.1. Introduction of accounting

1.2. Accounting assumptions and principles

1.3. Qualitative Characteristic of Financial Information

1.1.1 Definition of accounting

1.1.2 Types of accounting

1.1.3 The needs of Financial accounting

recorded in analysed and summaried in

-Accounting is the systematic and

FINANCIAL ACCOUNTING: is the process of preparing

MANAGERIAL ACCOUNTING: the practice of

Finance User of financial statement Bodies

1.2.1 Accounting assumptions

Entities  record when revenues or expenses are earned or incurred in the

Accrual assumption  profit/revenue earned must be matched against the

Materiality and aggregation:

Consistency of presentation: the presentation and classification of

Historical cost: Transactions are recorded at their cost when they

1.3.1 Fundamental Qualitative characteristic

1.3.2. Enhancing Qualitative characteristic

- Qualitative characteristics are the qualities or attributes that

- The objective is to ensure that the information is useful

 After studying this chapter, you should be able to

 Define accounting equations and the basic elements of

2.1. The basic elements of Accounting Equation

2.2. The use of Accounting Equation

Assets is a resource controlled by the entity

An asset should be classified as a current asset when it is:

NON- CURRENT ASSETS

Liabilities is a present obligation of the entity

Equity is the residual interest in the assets of the entity

DEFINITION of Accounting Equation

The accounting equation is considered to be the

The accounting equation shows on a company's balance

Asset = Equity + liability

EQUITY LIABILITIES TOTAL ASSETS

Equity/ Capital = Capital introduced + Retained profits

Equity/ Capital = Capital introduced + (Earned profit – Drawings)

Profit/Loss = Revenue Drawings are amounts

ASSET = LIABILITIES + EQUITY

3 Increase and reduce No change

4 No change Increase and reduce

3.1. Sources of documents

3.2. Books of prime entry

3.3. Computerised accounting systems

OBJECTIVE: After studying this chapter, you should be able to:

 Identify types of sources of documentation

 Understand the contents of book of prime entry

 Preparation documentations for common transactions in business

3.1.1.The purpose of Sources of documents

3.1.2.Types of Sources of documents

Source documents: are the documents which are produced by or input