Financial Literacy and Accounting Basics

Financial Literacy

• Financial literacy is the ability to understand and apply different financial skills effectively.

Accounting

• Accounting is the process of record keeping, interpretation, and communication of economic/financial information.
• It provides information about a business's finances.
• It helps a business keep track of all present and past financial activities.

Capital

• Capital is the money invested in a business or used to get it up and running.
• Sources of capital include own (equity) capital and borrowed (foreign) capital.

Own (Equity) Capital

• Own capital is money that the entrepreneur/owner already owns and intends to use to start the business.
• This can be the owner's own savings or inherited money.

Borrowed (Foreign) Capital

• Borrowed capital is money borrowed from banks, financial institutions, family, or friends.
• Loans must be repaid with interest.

Assets

• Assets are anything that adds value to a business.
• Assets increase the wealth of a business.
• They can be money or items of value that the business owns.

Fixed Assets

• Fixed assets are items that are purchased and used in the normal course of business.
• They have a lifespan of more than 1 year and are not purchased with the intention of reselling.
• Examples include land, buildings, vehicles, and equipment.

Current Assets

• Current assets are expected to be converted into cash within 1 year or are assets whose value fluctuates within the period of 1 year.
• Examples include inventory, receivables, and cash.

Liabilities

• Liabilities are the money a business owes to other people or businesses.
• Liabilities are also known as debt and must be paid.
• Liabilities shrink or reduce the wealth of a business.

Long-term Liabilities

• Long-term liabilities are loans that need to be repaid over a long period of time.

Short-term Liabilities

• Short-term liabilities are debts that need to be repaid within a short period of time, such as creditors and overdraft facilities.

Income and Expenses

• Income is the money a business receives or earns on a regular basis.
• Income can be generated through operating activities, financing, and investment activities.

Types of Income

• Examples of income include interest on savings, rent income, services rendered, sales, rental income, interest earned, and discounts/rebates.

Expenditure

• Expenses are costs incurred by a business to generate income.
• Examples of expenses include telephone bills, water and electricity, wages and salaries, rent expense, stationery, advertising, and repairs and packaging materials.

Accounting Concepts

Budgets

• A budget is an estimate of income and expenditure for a set period of time.
• A budget is a plan to ensure income is spent wisely.
• It identifies and defines financial goals and manages money.
• Following a practical budget can help develop better financial habits, relieve emotional stress, and achieve financial goals.

Seven Keys to an Effective Budget

• Identify and develop personal goals
• Evaluate and record current trends in income and expenses
• Determine priorities
• Develop a timeline for the month
• Keep it simple
• Be flexible
• Review

Savings

• There are two types of savings: short-term and long-term savings.