TOPIC 1 THE FUNDAMENTALS OF ACCOUNTING 2020

The difference between book-keeping and accounting

-Book-keeping refers to the maintaining of all double entry records whereas Accounting
refers to the preparation and interpretation of financial statements.
-Bookkeeping is the detailed recording of all the financial transactions of a business whereas
Accounting uses the book-keeping records to prepare financial statements at regular intervals.
-Book-keeping involves preparing accounts from business documents whereas Accounting
involves identifying, measuring and communicating financial information.
-Book-keeping is the process of recording data whereas Accounting provides information for
decision making.

The purposes of measuring business profit and loss

-The aim of business is to make a profit. This is calculated in the financial statements which
are usually prepared at the end of a financial year.
𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑰𝒏𝒄𝒐𝒎𝒆 – 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
- A business can also make a loss wherein the expenses are greater than the income. Loss=
negative profit.
- By measuring the profit and loss of a business, one can:
- Understand the progress of the business
-Use ratios and compare the profit of a business to other figures in the financial
statements to get a more comprehensive view of the business’ progress.
-Compare the progress of the business to the progress of similar businesses.
-Comparing the business to itself from year to year.
- Base the business’ future and make decisions based of the profit/loss figure.

N:B The role of accounting is to provide information for monitoring business progress and
decision-making.

Reasons why book-keeping records are maintained

-A record of all transactions
-Detailed record of each customer, supplier, expense or income.
-Reference can easily be made to the detail in each account.
-Financial statements can be prepared at regular intervals.
-The profit can be ascertained.
-Aid management and decisions can be made.

Benefits/ advantages to a business of maintaining a full set of double entry accounts

-Individual accounts e.g. of trade receivables are maintained
-Balances are available at all times- Balance of assets, liabilities, trade receivables (debtors),
trade payables (creditors) can readily be obtained.
-Individual transactions will be recorded and can be located easily.
-Accuracy of the accounts can be checked at regular intervals.
-Profit can be calculated at points in the accounting year.
-The accounts can be presented to the bank in order to obtain a loan or overdraft facility.

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Benefits of using Information Communication Technology (ICT) in book-keeping and

accounting
-More accurate/reduction in errors
-Reduced storage space required-Large amounts of information can be stored on disk
-Speed of processing/Saves time
-Information available at all times
-Security of information/Use of passwords limits access
-Automatic backup
-Can produce financial statements/ reports automatically
-Can process multiple transactions
-Saves money as less staff are employed
-Manage high volume of data
-Prepares automatic trial balance and financial statements

Ledger ‘T’ format

An alternative format to Ledger ‘T’ accounts

-Running balance format
Running balance format

Benefits of Running balance format compared with ‘T’ accounts

-Balance of account always available- Balance shown after each transaction so Lesser Errors.
-Format can be used in computerised accounting.

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Assets, liabilities and owner’s equity

-Assets- are things/resources the business owns or that belongs to the business e.g Motor
vehicles, plant and machinery, cash/cash in hand, bank/cash at bank, land and buildings,
Equipment, inventory, Accounts receivables and prepayments.

-Liabilities-are what the business owes to other people or businesses. The business is liable to
pay for the items borrowed e.g. Accounts payables, Bank overdraft, loan and accruals.

-Capital or Owner’s Equity -is the amount the business owes to its owner. These are
resources used by the owner o f the business to start a business. When a business begins
operation, the owner of the business invests capital, which can be any resource such as: Cash,
bank or cash equivalents, Motor vehicles and Inventory (the stock of goods).

The accounting equation

𝑨𝑺𝑺𝑬𝑻𝑺 = 𝑪𝑨𝑷𝑰𝑻𝑨𝑳 + 𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺

-An increase in liabilities results in an increase in assets, for e.g. cash if borrowed increases
the cash in hand, but also increases the amount the business owes to other entities.

Difference between a Trading business and a Service business

A trading business is involved with buying and selling goods.
A service business provides services which benefit others.

Reasons why professional ethics in accounting is important for the clients

-Clients consider the business trustworthy, not sharing commercial information.
-Clients assume the business acts competently so accounts should be correct.
-Clients accept that any advice given by the business is for their best interests and not for the
business.
-Clients expect that any decisions taken by the business will not be damaging to tem.

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Formalise yourself with the current names

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Explain the accounting entity principle.

(ii) Accounting entity means that the business is treated as being completely separate from
the owner of the business.

Explain three types of errors not shown by a trial balance.

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Trial balance
-is a list of debit and credit balances.

State the use of a trial balance

To check the arithmetical accuracy of the double entry
To identify errors in the ledger
To check the debits equal credits
To provide a basis for the preparation of financial statements

Errors that are not revealed by a trial balance

-Error of omission-Transaction is omitted completely from books.
-Error of commission-The correct amount is posted to the correct side of the ledger in the
same class of account.
-Error of principle-Correct amount is recorded on the correct side in the wrong class of
account.
-Error of original entry-The original figure is incorrectly entered in the books of prime entry.
-Error of complete reversal-A transaction that should be debited is credited or vice versa.
-Compensating errors-errors that cancel out each other. One error cancels out another error of
the same amount.

Errors that are revealed by a trial balance

-Arithmetic error
-Error of mispost
-Error of single entry

State differences between ordinary shares and preference shares

Preference have fixed rate of dividend, ordinary have variable dividends.

Preference have fixed dividend, ordinary depend in profits/ may receive nothing
Preference receive dividend first, ordinary receive dividend last.
Preference shareholders have no voting rights, ordinary shareholders do have voting rights.
Preference receive payout first on winding up, ordinary receive payment last.

State differences between preference shares and debentures

Preference holders are owners/shareholders, debenture holders are long term loan creditors
Debenture holders paid interest, preference holders receive dividend
Debenture holders are guaranteed interest, preference may not receive dividend.
Debenture holders are paid interest before preference receive dividend.
Debenture interest is an expense, preference dividend is an appropriation of profit.

State reasons why International Accounting Standards are used

Facilitates fair comparison of company’s financial statements in different countries.
To improve reliability of financial statements produced in different countries.
To improve understanding of financial statements produced in different countries.
Reference must be made to international/world wide different countries

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Less Returns

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