Accounting Basics

Types of Businesses

• Trading businesses purchase goods to resell at a higher price for profit
• Service businesses provide services for fees, commissions, aiming to achieve profit

Financial Statements

• An income statement includes income and expenses, calculating the profit or loss after a year of trading
• A statement of financial position (S.O.F.P) shows what the business owns and owes at year-end

Capital Employed

• Capital employed refers to the money invested in the business through capital invested by the owner and long-term loans

Double Entry Bookkeeping

• This system enters each transaction twice: once on the debit side and once on the credit side of separate accounts
• Advantages include less risk of error and fraud, easier reference to transactions and statement preparation

Business Entity Concept

• The business entity concept treats the owner and the business as separate entities

Advantages of Preparing Financial Transactions Regularly

• Ensures no transactions are forgotten
• Enables accurate profit or loss calculation
• Facilitates calculation of total assets and liabilities

Trial Balance

• A trial balance lists accounts with debit and credit balances to verify the arithmetic accuracy of the double entry bookkeeping system
• It locates arithmetic errors, helps prepare financial statements, and checks bookkeeping accuracy

Discounts

• Cash discounts are offered for speedy payment on credit sales
• Trade discounts are offered for large quantity purchases

Cash Book

• A contra entry in the cash book occurs when excess money in the cash till is transferred to the bank account
• Dishonored cheques are those received from trade receivables but rejected by the bank

Overdraft

• Overdrafts can be avoided by introducing additional capital, reducing owner's drawings, or obtaining long-term loans

Cash Balance

• A credit balance for cash in hand is impossible

Petty Cash Book

• A petty cash book saves space in the main cash book for large transactions, reduces entries in the general ledger, and saves time for the chief accountant

Imprest System

• In an imprest system, the petty cashier restores spent money at month-end

Imprest System Advantages

• The total of vouchers and remaining money equaling the imprest amount prevents fraud

Cash Book and Bank Statement

• Reasons for differences between cash book and bank statement balances include timing differences or unrecorded items

Standing Order

• A standing order instructs the bank to pay fixed amounts regularly to specific entities, like rent

Direct Debit

• Direct debit authorizes the bank to pay unfixed amounts on irregular dates, such as electricity bills

Bank Reconciliation Statement

• The debit side includes interest received, direct credits, and dividends
• The credit side includes bank charges, interest loans, standing orders, direct debits, and dishonored cheques
• Bank reconciliation statements update the cash book, locate errors, and assist in discovering frauds

Updated Bank Statement

• Uncollected cheques/amounts are added and unpresented cheques/amounts are subtracted
• Correction of error in the bank statement

Expenditure and Receipts

• Capital expenditure is for purchasing and installing non-current assets (S.O.F.P)
• Revenue expenditure is for daily business operations to generate revenues (I/S)
• Capital receipts are money received from non-current assets or loans (S.O.F.P)
• Revenue receipts are money received from regular sales of goods/services (I/S)

Net Realizable Value

• Net Realizable Value (NRV) is the estimated selling price minus selling expenses like carriage outwards, selling expenses, and advertising

Formulas

• NRV = Estimated selling price – Selling expenses
• Cost = Cost Price of Purchases + Carriage inwards

Depreciation

• Causes of depreciation include depletion, physical deterioration, economic reasons, and passage of time
• Depreciation accounting follows the matching and prudence concepts

Straight Line Depreciation

• Straight line method: (Non-current asset cost × Depr. Rate %) or (Non-current asset cost – Residual value/Scrap / Useful life)

Reducing Balance Depreciation

• Reducing balance method: (Non-current asset cost – Accumulated Depr.) × Depr. Rate %

Revaluation Depreciation

• Revaluation method: Value of NCA Beginning of the year – Value of NCA End of the year

Disposal Account

• A disposal account determines gains or losses from selling a non-current asset
• Gains appear on the debit side, losses on the credit side

Disposal Account Figures

• Figures needed include the asset's cost, accumulated depreciation, and selling price

Reducing Loss

• Losses on non-current asset sales can be reduced/avoided by increasing depreciation, assuming a shorter life or employing a different depreciation method

Labor and Factory Expenses

• Direct labor includes wages for factory workers making goods
• Indirect factory expenses are operating costs not directly linked to the product

Work in Progress

• Work in progress refers to partially completed goods at year-end, to be finished and sold the following year

Purchasing Finished Goods

• A manufacturing business purchases goods, rather than producing them when production does not meet demand, it is cheaper to buy them, or it cannot make a particular item

Partnership Business

• Advantages of partnership: more capital, knowledge, shared risks, and better decision-making
• Disadvantages: shared profits, slower decisions, disagreements, and personal liability for debts

Business Documents

• Invoice issued (sales invoice): records credit sales in sales day book
• Credit note issued: records sales returns in sales returns day book
• Invoice received (purchases invoice): records credit purchases in purchases day book
• Credit note received: records purchases returns in purchases returns day book
• Voucher: records petty cash expenses in petty cash book
• Paying-in slip counterfoils: record money deposited into bank account in the cash book/bank column
• Cheque counterfoils: record money paid by business via cheque in cash book/bank column
• Receipt issued: records money business received in cash in cash book/bank column
• Receipt received: records money paid by the business to others in cash in cash book/bank column

Debit Note

• A debit note requests the supplier to reduce the original invoice total due to overcharges or returned goods

Debit Note Exception

• Debit notes are used to record undercharges in the sales invoice to inform that trade receivable account will be debited

Statement of Account

• A statement of Account reminds the trade receivable of the amount owed at the end of each month
• It is a summary of each credit customer transactions and sends it to each trade payable to review for any errors

Accounting Errors

• An error of omission is when a transaction is not recorded
• An error of commission is when the transaction is recorded on the correct side but wrong name of account
• An error of principle is when the transaction is recorded on the correct side but wrong class of the account
• A compensating error is when two errors occur in different accounts with the same amount, canceling the error
• Error of complete reversal of entries is when an account is debited when should have been credited by mistake
• An error of original entry is when a transaction is recorded on the correct side, correct type and name of account, but with a wrong value

Suspense Account

• A suspense account is a temporary account used when the trial balance sides do not agree

General Journal

• Anything which is not entered in one of the Day Books must be entered in the General Journal before being recorded in the T accounts

Raising Funds

• Clubs can raise funds by increasing subscriptions, donations, parties and events, match arrangements, and trading activities

Surplus and Deficit

• The surplus or deficit is the outcome of the income and expenditure account, while the bank balance is the outcome of the receipts and payments account

Receipts and Payments

• There are no adjustments made for prepayments and accruals and capital and revenue receipts and expenses are included

Income and Expenditure

• Capital and revenue receipts are not included for only revenue receipts are included and only revenue expenditures are included

Accumulated Funds

• Accumulated funds replaced capital in the S.O.F.P of the club. It is the accumulation of surpluses year after year

T.R and T.P accounts

• Total T.R account Dr side includes Balance b/d, credit sales, interest charges, bank dishonored and bank or cash refund
• Total T.R account Cr side includes balance b/d, Sales return, cash or bank, discount allowed, bad debts and contra purchase ledgers
• Total T.P account Dr side includes Balance b/d, purchases returns, bank, discount received, and contra sales ledger
• Total T.P account Cr side includes Balance b/d, credit purchases, interest and cash refund

Contra Entry

• A contra entry occurs when a trade receivable is also trade payable and this creates two accounts with the same name in the books

Prudence Concept

• Never anticipate a profit, but provide for all possible losses

Business Entity Concept

• The owner and the business are treated as two separate entities

Cost Concept

• Non-current assets are recorded at original cost, regardless of market value, unless the business is sold

Going Concern Concept

• Assumes the business will continue operating forever

Matching Concept

• Expenses are recorded in the year they occur, regardless of when paid, to match income, for accurate profit/loss

Duality Concept

• Every transaction affects at least two accounts: one debit, one credit

Money Measurement Concept

• Accounting only records items measurable in money terms

Consistency Concept

• The same accounting method should be used each year to avoid profit manipulation

Realization Concept

• Sales are recorded when goods reach the customer and ownership transfers

Materiality Principle

• Items that don't significantly affect profit or assets don't need separate recording