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    34 views380 pages

    Acounting and Finance (Level 7 Diploma), 2022

    Uploaded by

    Enekwa Victoria
    Nice.

    Copyright:

    © All Rights Reserved
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    aaa Peery Unit 1 Introduction Numbers! Numbers! Numbers! Wherever you go, you are bound to see them. On addresses, license plates, phones, prices, and of course, money! Numbers connect us all to each other in many more ways than we might imagine. Essentially, our world revolves around numbers. Some of us enjoy dealing with numbers while others may have a fear of them, or even a phobia. For those of you who have already recognized and appreciate the impact that numbers actually have on just about everything, you deserve ‘a cookie. Welcome to Basic Bookkeeping! otto, ge ee ori” Workshop Objectives Research has consistently demonstrated that when clear goals are associated with learning, the learning ‘occurs more easily and rapidly. With this in mind, let’s review our goals for today. By the end of this workshop, participants will be able to: © Understand basic accounting terminology. Identify the differences between the cash and accrual accountingmethods. ‘Keep track of your business by becoming familiar with accounts payable and accounts receivable. ‘+ Use a journal and general ledger to document business financials. + Utilize the balance sheet. © Identify different types of financial statements. Uncover the reasons for and actually create a budget. Be familiar with internal and external auditing. Page2 |i Basic Terminology (I) So the good thing about accounting is that you can start out wherever you want, at the beginning, the middle, or the end and you will still wind up at the same place, nowhere (Just kidding). You really have to start at the beginning, or you will get lost. So let's start there, with some basic terminology. Some of this stuff may ring a bell for those of you who took accounting previously, were hired to keep the books at the corner Mom & Pop's shop, or, were too cheap to hire a “real Accountant” and tried to do your own books. (How did that work out for you?). Either way, when we are done here, you are bound to be familiar with a lot of these basic bookkeeping and accounting terms. PS y Balance Sheet Abalance sheet is a financial statement that shows the assets, liabilities, and owner's equity at a specific point in time. Assets and liabilities are usually listed first, followed by the equity which is the difference between the assets and the liabilities. The balance sheet will ultimately provide a snapshot of the company’s current financial condition. Page3 |i Balance Sheet Business Title: Bob & Tons Crunchy Cookie Co Date: Assets Liabilities Current assets $ Current Liabilities cash 3 “Accounts Payable 3. Notes Payable 5 Petty Cash 3 Interest Payable 8 ‘counts Receivable $ Taxes Payable Federal Income Tax § inventory 3 Self-Employment Tax Stateincome Tox §, Short-terminvestments | § Sales Taxccrual —§ Property Tax s Prepaid Expenses 3 page Payroll Acrual Long-term investments | $ Long-term tiabilities Tes aesote . Notes Payable Land (Valued at Cost) [5 8 Buildings $ L.cost 2 Lessace, Depr. Tnproverents 3 “otal Liabilities $ L.cost Net Worth (Equity) Proprietorship 8 Ztess ace. Depr or Partnership Equipment $ (Name equity §, 1. cost (Name emuty 5 — or 2 less acc, Depr ‘corporation Capitol stock s Furniture 3 ‘Surplus Paid in 8 1. cost Retained Earnings s 2 Les ace. Depr “Ratomobles 3 1. cost 2.tess acc. opr ‘Other Assets $ Total Net Worth § 1 2 Assets ~ Lables = Net Worth 2 a “Total Assets LUabilties + Equity =Total Assets Pagea|u Assets Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Anything that has an economic value and can be owned or controlled to produce value has the potential to produce such future economic benefits. Whether tangible or intangible, ownership of any form of value such as cash money or stock is considered to be an asset. Liabilities Probable future sacrifices of income or assets, arising from present obligation to a particular entity. If liabilities are settled, they may become transferred assets or provide services to other entities in the future as a result of past transactions or events. A liability isa duty or responsibility to another in return for some form of debt such as a business loan which would entail the settlement of that loan. Equity ‘Ownership in assets after all debts owed for that asset has been paid off. Assets such as stock and home ‘ownership can be considered equity if no associated debts remain. Once a house or automobile is paid off, the asset is now the owner's equity. Equity is any asset that can be sold for monetary gain without any attached debts being owed. The owner should gain 100% of the revenue from the sale of an asset if that asset is his or her own equity. % PageS |i eet Income Statement {financial statement is used to summarize the amounts of revenues earned, and the expenses incurred by a business or entity over a period of time. It is used to measure a business's financial performance. This statement includes a summary of how a business typically incurs its revenues and expenses over a fiscal quarter or year. Revenue The fee paid to a lender for a loan or all transactions for which monies are received. It can be the income from products and services sold and the use of investments, Revenue can also be a transaction and the resulting income for which monies are received, however, loan funds and equity deposits are not considered revenue. A Cost of Goods Sold ‘The cost of producing products that are delivered to customers to create revenue or the cost of inventory sold during an accounting period. This includes the cost of purchases made during an i period minus the ending inventory for that period. This term is often abbreviated as COGS. Page6 |i Peery Expenses Expenses are the cost of producing revenue through the sale of goods or services. They can come in many forms such as salaries or wages, and depreciation of assets. An expense can be almost anything that is incurred when doing business. ‘Accounting Period The Accounting period is the amount of time in which income statements and other financial statements are utilized to track and report operating results. They usually run for twelve months between January to December, but can begin and end anytime depending on the businesses needs or wants Basic Terminology (II) In this unit, we will finish up with the basic accounting terms that are bound to impress at the next corporate fundraiser for the IRS. | know what you're thinking. There is no such thing as a corporate fundraiser for the IRS because the only funds the IRS will be raising are those out of our wallets. Below are the next few terms you will need to know! Page? |i Accounts Receivable This type of record is used to keep track of money that is owed to a business. Such money can come from extending credit to a customer who purchases the businesses products or services. The best way to keep track of these figures is to set up a separate accounts receivable record for each customer. ‘Accounts Payable This type of record is used to keep track of debts owed by a business to creditors for purchased goods or services. Though the business wil likely be billed regularly by its creditors for the balance on the account, having its own records will allow the business to be aware of their financial standing with the creditors at any given time, Depreciation Involves both the decline in value of assets, usually due to unfavorable market conditions as well as the allocation of the costs of tangible assets over their useful lifetime to the periods in which the assets are actually used. The decline in value will have an effect on the value of business and entities while the allocation of cost effects net income. Pages |i Pee General Ledger In double-entry accounting, these are forms used for the accounts on separate sheets, in a book or binder and are called the general ledger. This is considered to be @ permanent, classified record for each business account. Interest Interest is a sort of compensation to a lender for taking a risk of principal loss when money or another asset is loaned. When money is borrowed the, borrower usually pays a percentage of the total amount ‘owed also known as the principal, as a fee, along with a certain amount of the original balance for each billing period. itis a sum amount charged for borrowing. Inventory Inventory can be described as either a list of goods and materials or the goods and materials themselves. Itis considered an asset and usually refers to materials held in stock by a business. Inventory is one of the most important assets that a business possesses because they are ready or will be ready to be sold thus; inventory is often a primary source for revenue. Page9 |i Journals A journal is used to record the financial transactions made by a business. Whether the transactions are credits or debits, they should be input into a journal at the time and date which they occur. These recordings can then be used for future reference and reconciling and can be transferred to other official records such as the general ledger. All journal entries should include the transaction date, type, and amount, Payroll Payroll can refer to either the total sum in compensation that a business owes to its employees for a set period of time, or the actual list of employees the business must pay along with the amount owed. Itis usually @ major expense for businesses but will likely differ from time to time depending on the business’ need of its employees at the time, amongst other things. Trial Balance ‘A worksheet usually prepared at the end of each recording period. The balances of all ledgers are recorded into two columns labeled “debits” and “credits”. This worksheet helps to ensure that all numerical data entered into the business’ bookkeeping system is correct. Ifthe total debits are in fact equal to the total credits, the trial balance is balanced. This worksheet method is also referred to as a T- Account due to the shape the data takes on with the two column format. Page1o|a Account Name Debit Credit Paget Introduction to U N 1c sl Accounting By the end of this unit the learner will be able to: ¥ Understand the meaning and definition of Accounting. ¥ Discuss objectives, functions, importance and limitations of Accounting. v Understand methods of Accounting, kinds of Accounts, and Accounting rules. Y Explore various branches of Accounting. Copyrights © BOLC (Brentwood Open Learning College). All Rights Reserved. Unit Code: 1001-V1 Page 1 Unit 1 Introduction to Accounting Accounting is required to account for the economic resources in all business and non-business activities, in business organizations such as, manufacturing or trading entities and in non-business organizations such as, schools, colleges, hospitals, libraries, etc. Language serves as a means of communication; therefore, accounting is the language of business. Terminology There have been some changes made in the International Accounting Terminology but in the workplace in the UK, British terminology is still very much used. For that reason, it’s important that you are familiar with both. At this level, we will mostly use British terminology but you will be reminded about international terminology throughout your learning. In the following sections we will use the UK terms for: UK terminology Profit and loss account Balance sheet Debtors (customers who owe us money) Creditors (suppliers who are owed money) Stock (goods for sale) Capital (owners’ investment) Table 1.1 International terminology Statement of profit or loss " Statement of financial position ‘Trade receivables Trade payables Inventory Equity Copyrights © BOLC (Brentwood Open Learning College). All Rights Reserved. Unit Code: 1001-V1 Page 2 @ According to the American Institute of Certified Public Accountants (AICPA), accounting is “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events, which are, in part, at least, of a financial character and interpreting the results thereof”. Objectives of Accounting Accounting fulfils different objectives depending on the specific requirements of businesses. However, some basic accounting objectives are as follows: To keep Systematic Records: A business is involved in various business transactions on a daily basis and accounting keeps track of these transactions by recording them in books of accounts. To Ascertain the Results of the Operation: Accounting ascertains any profit earned or loss incurred by a business during a particular period through Trading Profit and Loss account or an Income and Expenditure account. These accounts match the revenue earned by the business with the ‘expenditure during the same period to calculate the profit orloss. To ascertain the financial position of the business: A business’ financial statements reflect its financial position with regard to cash, assets, liabilities, capital, etc. They help the business owner to determine the health of his enterprise. iii, To portray the liquidity position: A business obtains and spends cash for numerous purposes such as lending, repayment of loans, capital transactions, paying cash dividends to shareholders and distribution of resources among owners. This information, along with other factors that determine ‘an entity's liquidity and solvency, is portrayed in financial reports. iv. To protect business properties: Accounting keeps an updated record of the business’ assets and liabilities to prevent false claims against the entity's properties. To facilitate rational decision ~ making: Financial statements and records help a business owner analyse different aspects of his business and decision-making. Vi. To satisfy the requirements of law: Laws, such as, the Companies Act, Societies Act, Sales Tax Act, Income Tax Act, etc. which govern business operations required by companies, public trusts, and other business entities to maintain up to date accounts. Copyrights © BOLC (Brentwood Open Learning College). All Rights Reserved. Unit Code: 1001-V1 Page 3 Scope of Accounting ‘The figure below is the diagrammatic representation of the scope of accounting. Data creation and collection provides the basis for financial statements and accounting records. Historic data refers to the transactions that have already occurred. In the past, accounting relied more on data rather than predicting for the future. Once data is collected, its recorded in the books of original entry, which is also called journals and ledgers, in accordance with Generally Accepted Accounting Principles. These principles provide a framework and standards according to which data has to be recorded. The recording and processing of data can be manual, mechanical, or electronic. Data evaluation controls the business activities through budgets and standard costs, evaluating the performance of the business, analysing financial statements, analysing cash flows, and choosing alternative courses of action for decision-making process. Evaluation of data is one of the most important business activities, The analytical and interpretative aspect of accounting has a wide range of internal and external uses, from producing snap answers to elaborate reports based on extensive research. It also includes capital project analysis, budgetary projections, financial forecasts, and research based analysis for reorganization, takeovers, and mergers. Copyrights © BOLC (Brentwood Open Learning College). All Rights Reserved. Unit Code: 1001-V1 Page 4 Audit is the verification of financial transactions as recorded in account books and the authentication of financial statements. Professional accountants and auditors are hired for auditing the financial accounts of businesses to keep track of financial flows and point out any lapses or fraud. Data reporting can be internal or external. Internal data reporting is the communication of financial statements, analysis, and evaluation to the management for decision-making. External data reporting ‘communicates the business's financial position and its earnings to outside parties such as the government, shareholders, regulatory bodies, other businesses, etc. The primary purpose of Accounting Theory is to match the costs (efforts) and revenues (accomplishments) of a business within a particular period. However, modern day accounting has moved beyond the sole purpose of record keeping and ‘emphasizeson evaluation and forecasting of financial information. Fun Ins of Accounting a) Record Keeping Function: Journalising, posting, and preparation of final statements are the primary tasks in accounting, which fulfils the function of recording, classification, and summary of financial transactions. This function is used for reporting financial statements and helps us to know accurate financial position of entities. Hence, accounting, while giving us a clear picture of the ‘company’s past performance, assists in making decisions, and devises strategies for future. bb) Managerial Function: Making decisions and performing managerial tasks without the help of ‘accounting can often lead to critical mistakes. To perform managerial function efficiently, some predetermined standards and performance parameters are setup, against which the daily ‘operations are measured. Accounting facilitates in making the analysis and studying the ‘comparison of actual operations and the performance standards. <) Legal Requirement function: Registered firms are legally obligated to carry out auditing. Auditing cannot take place without accounting. Therefore, in order to meet legal requirements accounting is mandatory. Accounting is a foundation, which can help to generate returns, documents, statements, etc.

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