Session 1: Accounting Concepts and Equations

Session 1: Accounting Concepts and Equations

• Accounting is more than just bookkeeping; it involves identifying, measuring, recording, reporting, and analyzing business events, aiding in economic decisions.
• Bookkeeping is the recording of financial transactions.
• Accounting categories include managerial accounting (for decision-making, planning, and controlling) and financial accounting (for published financial statements).
• External users of accounting information include lenders, shareholders, governments, customers, and external auditors—interested in the firm's ability to repay debts, operate profitably, meet tax obligations, offer services and fulfill contracts, and comply with accounting standards.
• Internal users such as marketing, production, and purchasing personnel within the organisation use accounting data to make decisions. Human resource personnel use accounting data to assess employee performance and compensation.
• Accounting is an integral part of the overall business process, connecting economic activities with decision-making through accounting information.
• The accounting process is an information system utilising business data, principles and rules, to generate accounting information.
• Common business accounting activities include sales and receipts, accounts payable (A/P), purchasing, inventory management, accounts receivable (A/R), salary payments, depreciation, and others, all flowing through a double-entry system (debit and credit).
• Management and owners utilise accounting reports for analysis, closing entries, trial balances, and financial reporting.
• Accounting functions within a business are broadly categorised under revenue and expenditure areas, with roles such as revenue auditors, cash control, credit management in revenue, and cost control, purchasing, salary, general accounting responsibilities in expenditure, all overseen by an Accounting Manager and Director of Finance.

Importance of Accounting

• Accounting offers crucial information for decision-making.
• It facilitates business negotiations to optimise outcomes.
• It reflects business performance.
• It enables performance analysis.
• It supports forecasting.
• It facilitates communication with external authorities.

Benefits of Accounting

• Records transactions.
• Acknowledges business performance.
• Determines financial status.
• Collects information and statistics.
• Prevents errors and mistakes.
• Aids planning and decision-making.
• Determines the ability to meet debt payments.
• Supports tax calculations.

Recap 1

• Key questions for review: What is accounting? Who are the main users of accounting? What is the accounting process? Explain the accounting functions in a business. Why does a business need a proper accounting system?

Accounting Equation

• Assets = Liabilities + Owner's Equity.
• Resources (Assets) = Owner (Equity + Liabilities)

What do Resources mean?

• A resource is a source or supply that generates a benefit and has utility.

Resources in a Business

• Assets are resources controlled by an entity due to past events and expected to generate future benefits.
  • Tangible assets (e.g., cash, inventory, equipment, land, building, etc.)
  • Intangible assets (e.g., trademarks, patents, goodwill, leases, franchises, etc.)
• Current vs. Long-term assets are categorised by how long they are anticipated to be used.

How does a business get resources?

• Business operations (buy, exchange, or sell) determine the acquisition of resources.

Liabilities

• Liabilities are an obligation to pay (a debt) to individuals or organizations outside the business, arising from past events and expected to result in an outflow of resources.
  • Current Liabilities (e.g., creditors, advance receipts)
  • Long-term Liabilities (e.g., bank loans, mortgages, business loans)

Equity

• Equity represents the owner's claim on the business's assets.
  • Capital (owner's investment)
  • Withdrawals (owner's deductions)
  • Retained Earnings (profits or losses)

Revenue

• Revenue is an increase in economic benefit. It comes from inflows or enhancements of assets or decreases of liabilities, which increases equity.
  • Examples: Service revenue, sales revenue, interest income, gains on sale.

Expenses

• Expenses are a decrease in economic benefits. They come from outflows or depletions of assets or increases in liabilities, which decreases equity.
  • Examples: Rent, salaries, administration, cost of goods sold (COGS), interest expense, taxes, losses, sale discounts.

Recap 2

• Key questions for review: What is the accounting equation? Describe the business assets, liabilities, equity, revenue, and expenses.

End of Session

• Next session will cover Business Transactions.

This quiz explores key accounting concepts and equations essential for understanding the role of accounting in business. It covers the differences between managerial and financial accounting, as well as the importance of accounting information for both internal and external users. Test your knowledge and comprehension of the foundational elements of accounting.