For Bianca Zizhou

Accounts Notes. by Leeroy Zizhou

Wednesday 19-04-23

Introduction to book-keeping
Copy ALL Notes Time: Home hours Due: 1300hrs Attempt example questions

What is Accounting?

Accounting is the process of recording, reporting and interpreting financial information pertaining to an
organization.

Book-keeping is the systematic recording of business transactions in the books of accounts.

Book-keeping is the work of a Book-keeper whilst accounting has many fields of jobs that look into each of
the underlined categories of the former’s definition.

Transactions an economic event that that affects the financial condition of the business and must be
systematically entered into the business records e.g., “Purchase of goods for $10 000 cash” is a typical business
transaction.

There are 2 groups of transactions:

1. Cash Transaction – for which cash is paid or received immediately.
2. Credit Transaction – for which payment is postponed for a future date.

Books of Accounts special books with special ruling for recording business transactions. There are 3 main

books of accounts VIZ:

1. Ledger
2. Cash Book
3. Journal.
The need for Book-keeping:

A business needs to communicate financial information to both internal and external parties to show:

1. How the business is progressing (its profit or loss.)

2. What properties belong to the business (its assets.)
3. What the business owes other people/businesses (its creditors and liabilities.)
4. What other people/businesses owe our business (its debtors.)
5. What the owner has invested into the business (capital)

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Accounting information may be used by external users e.g., investors, learners, government, suppliers, etc. and
internal users e.g., managers.

The entire accounting flow or process is summarized as follows:

Transaction

Records

Report

Interpretation of financial statements

Decision made by internal/external users

Types of Business Organizations

There are 3 types of business organizations:

1. The sole proprietorship- a business that is owned by one person.

2. Partnership- a business that may be formed by two up to a maximum of twenty people as partners.
3. Company- an enterprise formed by two or more persons with a maximum of fifty people for a Private
Limited Company and no maximum for a Public Limited Company.
The accounting cycle:

Step 1: Transactions are analyzed by examining source documents. (e.g., invoices, receipts, vouchers, etc.)

Step 2: Details from source documents are entered into subsidiary books of accounts.

Step 3: Subsidiary books entries are posted into various accounts in the Ledger.

Step 4: A trial balance is prepared to check for the (arithmetic) accuracy of the ledger.

Step 5: Adjustments are made into the accounts to comply with accounting concepts.

Step 6: Ledger accounts are closed and closing stock valued.

Step 7: Final Statements are prepared, analyzed and interpreted (Trading and Profit and Loss Account, and the
Balance Sheet.)
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Common Accounting Terms

1. Transaction- This is the act of receiving and giving which affects the financial position of the business
concurrently.

e.g., “February 1.- Bought goods from A-B Wholesalers worth $5500.00.”

There are five things that ought to be taken note of when looking at a transaction:

a. Date- In the above example, the transaction place on the 1st of February.
b. Amount- This refers to the balance that is meant to be paid or received; in the example, it is $5500.00.
c. Type of transaction- Whether it is a cash or credit transaction (see previous lesson); in the above
example, it is a credit transaction.

How did we determine the nature of the transaction when nothing has been mentioned about that
specifically in the above transaction? - The presence of the name of our supplier of the goods we bought
is the first hint; that also shows that there’s going to arise a need to record the name of the creditor. The
second and final hint is the absence of the any mention of the nature of transaction, meaning that the
business did not buy using cash or cheque.

d. Receiving aspect- Looking at the example above, the business is receiving, and it is receiving goods
meant for resale, so we’ll call that transaction’s receipt Purchases.
e. Giving aspect- Looking at the above example, A-B Wholesalers is the one giving goods, and since the
transaction was on credit, we as the business ought to record the name of our creditor- i.e. A-B
Wholesalers as the giving aspect of that transaction.

2. Goods- Refers to the item which the business is involved in buying and selling to make profit; e.g. C.
Mutasa runs a textbook company called Text Book Services.

From the above example, we are able to decipher the fact that the business run by C. Mutasa is definitely
involved in buying and selling textbooks.

This means that in the case of C. Mutasa’s business, the example we looked at above from when we
were looking at what a transaction is above may be written as:
“February 1.- Bought books from A-B- Wholesalers worth $5500.00”

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This implies that the word “goods” may be substituted by the name of the item the business is buying
and selling.

When goods are bought for the purpose of resale, we call that Purchases. The vice versa is true, i.e.,
when goods bought are sold to make profit, we call that Sales.

When goods are bought, and are still yet to be sold from the business, we call that Stock. Stock that the
business is unable to sell at the end of the trading period is called Closing stock. Closing stock graduates
into what is then called Opening stock in the next trading period.

3. Account- This is the name given to the domain into which a certain category of transactions is recorded.
All accounts are recorded a book called the Ledger. Most accounts ought to be recorded and balanced
on one-month intervals in the ledger depending on how frequent the business’ transactions occur. The
name of an account should begin with a capital letter.

e.g., whenever the business buys goods meant for resale, we record that in an account called the
Purchases Account.

e.g., whenever the business buys, sells, receives or pays for goods or an item using cash in hand, we
record those transactions in the Cash Account.

e.g., whenever the business sells goods either to receive cash or does this on credit, we record that in the
Sales Account.

e.g., whenever a new business is started, the entity ought to have a list showing the value of cash in
hand, properties and other assets and liabilities the owner used to begin that business. We record such
transactions in the Capital Account.
This situation also arises when the business restarts a new trading period and need to ascertain the
amount of goods, cash in hand, cash at bank, properties, debts, etc. it owns or owes from the previous
trading period- ultimately, that value is called Capital as well.
Other account names include Bank, Furniture, Drawings, Loan, Stock,
Other common accounting terms include capital, debtors, balance, creditors, assets, liabilities, ledger, journal,
cash book, etc. which will look at as we go on with our lessons.

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Starting a Business

Certain resources are needed to start a business, e.g., cash, land, buildings, machinery, etc.

These resources are obtained from two main sources:

1. owner’s contribution (“Capital”)

2. borrowing
Hence resources = owner’s contribution + borrowing.

The above equation gives rise to what is known as the Accounting Equation, i.e.:

Assets = Capital + Liabilities OR as: A = C + L

The accounting equation’s terms, just like any Maths equation, can be rearranged or re-written as:

A=C+L C=A–L L = A- C
e.g., Ques. Copy and complete the following table by applying the accounting equation:

Assets Capital Liabilities

$2 500 $700
$2 300 $1 700
$2 300 $1 500
$17 300 $5 800
$5 500 $4 200
Capital that is solely contributed from the owner’s own savings is called Equity.

Capital that is considered as to be the first owner’s contribution just after he founded the business is called
Principle.

The Double Entry Principle.

There are two aspects involved in every transaction, i.e.

1. The Receiving Aspect- This is the name of the account which, if we were to impersonate, would be
receiving and whose value/balance would be increased by the transaction. We debit this account in the
ledger,
e.g. Feb 1- Received Cash $400 from John.
The receiving aspect is cash because it’s the item that has been increased by this receipt. Hence, we
debit/add the Cash in the Cash Account in the ledger.

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2. The Giving Aspect- This is the name of the account whose value is reduced by the transaction.
e.g. in the same transaction above, we credit/subtract from John’s balance, hence we credited the
account called John Account in the ledger.
The recording of two aspects of a transaction in the books of accounts is called Double Entry Book-keeping:

e.g. Question: C. Moyo opened his books on 1 February 2012. Determine which accounts will be debited and
which ones will be credited in each transaction below:

February 1 Started business with cash $15 000.

`` 2 Bought motor vehicle for cash $5000.

`` 3 Received $789 cash from John.

`` 6 Paid |$600 c ash to Paul.

`` 12 Bought goods for $2 000cash.

`` 16 Sold motor vehicle on credit to Ford Motors for $7 895.

`` 19 Sold goods worth $980 and received cheque.

`` 24 Paid for $560 wages in cash.

Solution:

Date Transaction Account Account

Debited Credited

February 1 Started business with cash $15 000. Cash Capital

`` 2 Bought motor vehicle for cash $5000. Motor Vehicle Cash
`` 3 Received $789 cash from John. Cash John
`` 6 Paid |$600 c ash to Paul. Paul Cash
`` 12 Bought goods for $2 000cash. Purchases Cash
`` 16 Sold motor vehicle on credit to Ford Motors for $7 895. Ford Motors Motor Vehicle
`` 19 Sold goods worth $980 and received cheque. Bank Sales
`` 24 Paid for $560 wages in cash. Wages Cash

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NB: Whenever someone, either the business or a debtor or creditor receives cash, assets or goods, we debit their
account with the value exchanged in that transaction.

If it’s the business that is receiving cash, goods, or an asset, we debit the Cash, Purchases or the asset’s
accounts respectively, but if it’s another business that is in a similar situation, we simply write that business
account, and then credit the item they are receiving as the name of the account credited.

In buying, there are two reasons:1. For resale- known as Purchases. 2. For use- these are what we call assets.

For queries, questions, suggestions, additions and deductions, call, WhatsApp, or text message me at:

0773442263

OR visit me at 6288 Westlea, Harare.

OR email me at zizhouleeroy@gmail.com