BUSINESS STUDIES - PRINCIPLES OF ACCOUNTS

Revision of Introduction to Accounting

• Distinguish between Bookkeeping and Accounting.

Bookkeeping is the part of accounting that is concerned with the day-to-day recording of financial
transactions and data. It is designed to generate data about the activities of an organization.

Accounting the process of recording, classifying, summarizing and communicating financial

information about the activities of a business to end users in a meaningful way.

• Users of Accounting Information

User – a person or organization that is interested in the activities of a business and utilizes it for their
own purposes.

Users can be divided into two categories: Internal and External.

Internal users are individuals who run, manage and or operate the daily activities of the inside area of
an organization. These include:
● Owners of a business – They want to be able to see whether or not the business is
profitable/ In addition they want to what the financial resources of the business are.
● Manager.
● Employees.
● Directors.
External users are individuals who take interest in the accounting information of an organization but
they are not part of the organization’s administrative process. These include:

● A prospective buyer – When the owner wants to sell a business the buyer will want to see such
information.
● The bank – If the owner wants to borrow money for use in the business, then the bank will need
such information.
● A prospective partner – If the owner wants to share ownership with someone else, then the
would-be partner will want such information.
● Investors – They want to know whether or not to invest their money in the business.
● Government.
● Creditors.
● General public.
● Journalists.

• Explain terms related to Accounting: Assets (Non-current, current), Liabilities (Non-current, current),
Capital.

Assets are anything valuable that your company owns. These consists of property of all kinds, such as
buildings, machinery, stocks of goods and motor vehicles, also benefits such as debts owing by
customers and the amount of money in the bank account.

Assets can be divided into two categories:

Current Assets – These are assets that can be converted into cash within a year. For example; Cash in
hand, Cash in the Bank, Stock of goods etc.

Non-current Assets – These are long-term assets. These are the assets that are not expected to turn
into cash within one year. These include; Machinery, Buildings, Motor Vehicles etc.

Liabilities are obligations that a business needs to fulfill. Liabilities are things that a business owes.
These consist of money owing for goods supplies to the firm and for loans made to the firm.

Liabilities can be divided into two categories:

Current Liabilities – These are the debts of the business that are expected to be paid off within one
year, e.g., Short term loans, Creditors, Outstanding dues.

Non-Current Liabilities – These refer to the long-term debts of the business that are not expected to be
paid off within one year, e.g., Lease obligations, Mortgages, Long-term loans, Debentures, Bonds.

Capital is often called Owner’s Equity and is the money or resources invested in the business by the
owner.
• The Accounting Equation

The whole of financial accounting is based on the accounting equation. This can be stated to be that for
a firm to operate, it needs resources and that these resources have had to be supplied to the firm by
someone. These resources possessed by the firm are known as Assets, and obviously some of these
resources will have been supplied by the owner of the business. The total amount supplied by him is
known as Capital. On the other hand, some of the assets will normally have been provided by
someone other than the owner. The indebtedness of the firm for these resources is known as
Liabilities.