FINANCIAL ACCOUNTING

Accounting to Harold Berman accounting may be defined as identifying, measuring,

recording, and communicating financial information.
According to American”AICPA” accounting is the act of recording classifying and
summarizing in different manners in terms of money, transaction event which are part at
least.

BUSINESS FIRMS AND THEIR TRANSACTIONS

Business Transaction: this is any business dealing which result into exchange of goods
and services usually for some money/worth. E.g. buying stocks, sale of stocks, offering of
service etc. The transaction can either be cash or cheque is used or credit payment/
receipt are deferred or delayed.

Difference between accounting and Book keeping

Book keeping: is part of accounting that is concern with recording, it is just a component
of accounting and a book keeper normally poses lower academic qualification.
Accounting: is wider or broader with its scope extending to financial reporting which also
analysis and statements.

Objective of Accounting
Accounting help in recording of transaction as they occur to assist the owner of business
in determining:
o Amount owing to the business by debtor
o Amount of profit or losses in a period
o Flow of cash and goods into or out of business
o Nature and asset business own
o Nature and amount of what business own
o Determine the amount of owners’ capital or equity.

Importance of Accounting
o It keeps systematic permanent record of financial dealings
o It keep records of income and expenses in such a manner that net result of any
period can be determined.
o It keeps the records of assets and liability in such a way that financial position of
the business can be determined.
o It makes tax assessment easy and it advantageous to both business and tax
authority as over and under assessment.
o Accounting helps share holders, management and other stakeholders to monitor
and evaluate the performance of the organization.

User of Accounting information

o XXX
o XXX

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 o XXX
o XXX
o XXX

Accounting Concepts/ Conventions

These are ground rules and basic assumption that covers the preparation of financial
statements. Some of these include:
o Business entry concepts
o Accrual concept
o Duality ( Dual aspect) concept
o Materiality concept
o Monetary ( money measurement) concept
o Historical cost concept
o Consistency concept
o Conservatism / prudence
o Going concern
o Matching concept
o Objectivity concept
o Realization

THE FUNDAMENTAL ACCOUNTING EQUATION

The fundamental accounting equation is a very important equation in accounting and the
entire recording system is base up on it. The equation is a valuable basis from which to
begin understanding the whole process of accounting. The equality is base on the duality
or dual aspect. The accounting equation is stated as follows:

Asset= Liability + Capital

A=L+C

Assets
Assets are tangible and intangible resources owned that are controlled by the entity and
expected to generate economic f

Types of Assets
1. Current Assets: short term assets which have a useful life of only one financial
year. E.g. stock/ inventory, cash in hand or in bank, debtor (accounts receivable),
prepayment. The balance from the current assets is normally carried forward to
the next financial year.
2. Fixed Assets: These are long term assets that can be used for the benefit of the
organization for many financial years, E.g. Land, building, furniture (furniture
and fittings, plants and machinery, motor vehicles.

Liabilities

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These are legal obligations that are to be paid, they are arrived when organization
borrows.

Types of Liabilities
1. Current Liabilities: these in nature are paid in one year in which it was incurred
e.g. nine month loan, accrued expenses, bank overdraft, creditors (accounts
payable)
2. Long term Liabilities: These are obligation that requires settlement after one
financial year. They bear interest which depends on the amount and period or
other terms. E.g. long term loans, debentures, bonds.

Capital
This is amount owned by a business to the owners of the business. It represents the
amount initially invested by the business plus any profit accumulated in the business. If
the business is solely financed by owners funds, then;

A=C

However this situation is very rare since business needs to borrow in order to expand.

Illustrations of Accounting Equations

BOOK KEEPING SYSTEM

In the book keeping system series of short simple source document are recorded ( income
statements in balance sheet).

Source Document

Book of Prime Entry

Ledger

Trial Balance

Financial Statement

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Books of Prime Entry
These are first book to record transaction. They are designed to show more details
relating to transaction that appears in the ledgers. The following are some of the books of
prime entry.

1. Sales day books: It’s a book of original entry used to record credit sales

Format of sale day book

Date Debtor’s account name Invoice Number Folio Amount

Total xxxxx

E.g. A company sold goods on credit for the following: On September 02 nd to Paul 1.5 m
invoice No. 101, On September 05th to Sarah 2m invoice No. 102 and on the 25th
September to John 900000 invoice No. 104.

Company X Sale day book

Date Debtor’s account name Invoice Number Folio Amount

02nd Paul 101 1500,000
05th Sarah 102 2000,000
25th John 104 900,000
Total 4,400,000

2. Purchases Day book: it’s a book used to record purchases on credit purchases

Format of purchase day book

Date creditor’s account name Invoice Number Folio Amount

Total xxxxx

3. Sales Return day Book: This is to record goods that are return by customers; the
format is just the same as the day’s sales book.

4. Purchases Returns Day book/Outward return: This book entry records

purchases returned to suppliers. It is the same as purchases day book.

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Format of Purchases return day book

Date creditor’s account name Invoice Number Folio Amount

Total xxxxx

The reason for drawing day book reduce the number of posting to the ledger since only
total credit sell and credit purchases are posted to the ledger in block.

5. Cash Book: Is a book in which cash and cheque transaction are recorded.
i. One column cash book: this has record of cash transactions.

Format of one column cash book:

Date Particula Cash Dat Particular Cash

r e

ii. Two Column Cash Book: This records both cash and ch
transactions and it derives its name from the money column.

Format of two column cash book:

Dat Partic Foli Cash Bank Date Particul Foli Cash Ban
e ular o ar o k

iii. Three Column Cash Book: