MAKERERE UNIVERSITY

MECHANICAL ENGINEERING
RECORD KEEPING/AccoUNTING CLASS

November 18, 2022

What is accounting?
The process of recording, summarizing, reporting and interpreting of financial transactions of any business entity.
It is divided into two stages:

I. Bookkeeping- First stage of accounting where you identify, measure, record and classify financial
transactions as they occur.
II. Accountancy - final part that involves summarizing, interpreting, and communicating the fînancial data
for third party users

A. Record Keeping Terms (what)

Debits record all the money flowing into an account

Credit record all the money flowing out of an account

B. Classing Transactions (Why)

1. Income/Revenue
ncoma
statement
2. Expenses

3. Assets

An asset, in business terms, is a resource of value that you own or lease that helps you run your business
by providing future economic benefit. These resources can be tangible items, or non-physical things such as
goodwill, reputation, and brand

4. Liabilities

Liabilities are what you owe other parties

5. Equity
Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by
the difference between liabilities and assets recorded on the balance sheet of a company. I represents the value
that would be returned to a company's shareholdersif all the assets were liquidated, and all the company's
debrs were puid off.

NB: Classes 1 & 2 are what form the profit and loss/statement ofcomprehensive income, while 3- 5 are whatform
the Balance Sheet/ Statement of financial position
C. Debits and credits chart (Nature & Effects of Dr & Cr) (How)

Debit Credi it
Decreases an asset account
Inereascs an asset account

Decreases an expense account

Inereases an expense account

Decreases a liability account

Increases a liability account

Decreases an equity account

Increases an equity account

Decreases revenue Increases revenue

recorded the left Always recorded on the right

Always on

COMMON SELF ASSESSMENT RATIO'S

Liquidity ratios
These ratios are used to calculate how capable your company is of paying its debts, usually by measuringcurrent
short-term
This determines how likely it is that your business will be able to pay off
liabilities and liquid assets.
debts. These are some common liquidity ratios:
Current ratio = current assets+ current liabilities. The purpose of this ratio is to measure if your
assets.
company can currently pay off short-term debts by liquidating your
that
liabilities. This ratio is similar to the current ratio above, except
Quick ratio= quick assets current
+

plus cash plus marketable

to measure quick" assets, you only consider _your accounts receivable
securities.
assets current liabilities) + total assets. By calculating the net
working capital ratio (current
-
=
Net
your assets. An increasing net working capital ratio
working capital ratio, you're calculating the liquidity ofassets
in liquid than fixed assets.
indicates that your business is investing more

Cash ratio =cash ++current liabilities. This ratio tells you how capable your business is of covering its
considered
No other assets are in this ratio.
debts using only cash.
age ratio =(earnings
before interest and taxes + depreciation) +interest. The cash coverage
Cash co is that your business can pay interest on its debts.
ratio is like the cash ratio, but it calculates how likely it
flow + current liabilities. This ratio tells you how your
Operating cash flow ratio operating cash
=

current liabilities are covered by cash flow.

Profitability ratios
These are some common
Accountants use these ratios to measure a business's earnings versus its expenses.
profitability ratios:
Return on assets =
net income *
average total assets. The return-on-assets
ratio indicates how much
profit companies make compared to their assets.

equity. This ratio shows your business's

Return on equity =
average stockholder
net income +

profitability from your stockholders' investments.