UNIT 1

Chapter 1: Role and Purpose of Accounting

1. What is accounting?
Accounting is about recording, analysing and communicating information.
2. Financial Accounting and Management Accounting

Financial Accounting Management Accounting

User External User Internal User
Scope Whole of the business Parts of the business
Objective Preparation of financial statements Planning and control

Law Required by law Not required by law

Data Past Past and Future

3. Need for financial accounting

a. To assess the trading activities of a business
b. To enable external owners to see how managers are performing
c. To control the activities of a business
d. To plan future activities
e. To assist in raising finance
f. To report on the activities of the business to interested parties
4. Users of Financial Accounts
a. Owners (Internal)
b. Employees (Internal)
c. Management (Internal)
d. Trade creditors (External)
e. Long-term creditors (External)
f. Bankers (External)
g. Customers (External)
h. Competitors (External)
i. Analyst (External)
j. Governments (External)
k. Other official agencies (External)
l. The public (External)
Chapter 2: Double-Entry System 1
1. Classification of Accounts

Assets: Current assets: Non-current assets:

Items of value that a business a. Inventory a. Buildings
possesses b. Trade receivables b. Motor vehicles
c. Cash in bank c. Office equipment
d. Cash on hand d. Plant and machinery
e. Accrued income
f. Prepaid expenses
Liabilities: Current liabilities: Non-current liabilities:
Amounts due by the business a. Short loan a. Long term loan
b. Trade payables b. Mortgage
c. Accrued expenses
d. Prepaid income
Revenue (Income): a. Sales
Derived from the receipt of b. Interest received
money for goods or services c. Rent received
provided d. Commission received
Expenses: a. Purchases
Payments that must be made b. Rent paid
when running a business c. Wages
d. Electricity
e. Motor expenses
Capital:
Amount of owner’s interest
in the business
Drawings:
Withdrawal of money or
goods by the owner of the
business

2. Accounting equation
Assets = Capital – Drawings + Liabilities
3. Double Entry

DEBIT (Dr) CREDIT (Cr)

Assets + -
Expenses + -
Liabilities - +
Income - +
Capital - +
Drawings + -

4. Ledger

5. Types of Ledger Accounts

a. Subsidiary Ledger (Trade Receivable and Trade Payable)
b. General Ledger
6. Balancing of Ledger Accounts
a. Transferred to Profit or Loss (Income, Expenses)

b. Carry Forwards (Assets, Liabilities, Capital, Drawings)

Chapter 3: Double-Entry System 2
1. Books of prime entry

Book of prime entry Transactions recorded

Purchases day book Credit purchases
Purchase returns (return outwards) day book Returns of purchases
Revenue day book Credit sales
Revenue returns (return inwards) day book Returns from sales
Cash book Bank and cash transactions
The journal Other transactions

2. General Journal

a. End of period transfers and adjustments

b. Irrecoverable debts

c. Allowance (provision) for irrecoverable debts

Increase:

Decrease:

d. Recovery of irrecoverable debts

Reinstate the debt:

Record the payment:

3. Information and Communication Technology

Benefits of ICT accounting systems Limitations of ICT accounting systems

Increased accuracy High initial capital cost
Faster High maintenance cost
Information provided timely Risk of data loss
Improved security Not all errors will be removed
Single entry accounting transactions Low staff morale
Chapter 4: Accounting Concepts and Conventions
1. Fundamental Concepts
a. Going Concern
- An entity will continue its present operation for the foreseeable future
b. Prudence
- Assets and income are not overstated, liabilities and expenses are not understated
c. Consistency
- Must treat similar items in the same way
d. Accruals
- The accounts should show the revenues earned in an accounting period matched against the
expenses involved in earning those revenues
2. Other Concepts
a. Historic cost
b. Money measurement
- All items can be measured in money terms
c. Business entity
- Financial affairs of the business should remain separate from the financial affairs of the owner
d. Materiality
- Every items recorded should be material to influence the users’ decision
e. Realisation
- Revenue should only be recognized when the exchange of the goods and services is certain
3. Qualitative Characteristics
a. Relevance
- Financial information relevant to the decision-making needs of the users
b. Comparability
- Financial information to be comparable between different periods or businesses
c. Understandability
- Financial information to be clearly understood by users with reasonable knowledge
d. Materiality
- Financial information to focus on that which is expected to affect the decisions of the users
e. Timeliness
- Financial information is provided when it is needed and not delayed
4. International Accounting Standards (IAS)
a. Enables financial statements to be produced in the same format and able to be compared
between companies
b. Ensure that the qualitative characteristics of accounts are maintained at all times
c. Eliminate the differences in accounting rules between countries
Chapter 5: Capital Expenditure and Revenue
Expenditure
1. Difference between capital expenditure and revenue expenditure
Capital expenditure
The benefit of the asset is derived for more than
one year
Includes initial costs and upgrades to non-current
assets
Includes spending to increase the value of a non-
current asset
Normally a one-off purchase
Items are purchased with the intention to keep
and use within the business, not to sell and make
a profit
Items appear on the financial position under non-
current assets
Revenue expenditure
The benefit of the asset is used up within a year
Includes maintenance and repairs to non-current
assets
Includes spending to maintain the value of a non-
current asset
Normally recurring expenses (day to day)
Items such as inventory are purchased and with
the intention to sell and make profit
It appears on the statement of profit or loss
under expenses.

2. Impact of errors in classification of expenditure

a. If capital expenditure is treated as revenue expenditure, profit will be understated, as the expenses
will be wrongly increased, while the non-current assets will be understated.

b. If revenue expenditure is classified as capital expenditure, then profit will be understated as expenses
will be lower, while the non-current assets will be overstated.

3. Capital income and revenue income

Revenue income are from the normal operating activities of the business, such as sales of inventory, rent
received, commission received

Capital income are generally non-recurring and would include capital introduced by the business owner
and loans
Chapter 6: Non-Current Asset Depreciation
1. Causes of Depreciation
a. the condition of an asset progressively getting worse over a period of time
b. technical obsolescence
c. reduction of natural resources
d. the passage of time in the case of leasehold property
2. Methods of depreciation
a. straight line method

b. reducing balance method

c. revaluation method

3. Non-Current Assets and Provision for Depreciation

4.Disposal of Non-Current Assets

Step 1: Remove the cost of the non-current asset sold

Step 2: Remove the accumulated depreciation on the asset

Step 3: Enter the revenue from the sale

4. Part exchange of an asset

5. Schedule of Non-Current Assets

a. Additions
b. Disposals
c. Revaluations
d. Depreciation
Chapter 7: Trial Balance
1. Purpose of a trial balance
a. To check the arithmetical accuracy of the ledger account.
b. The account balance from the trial balance can be used to prepare the financial statements.
2. Limitations of a trial balance
a. A trial balance gives only summarized information on each account, but no details
b. Does not provide information on the profits or losses of the business
c. Some errors made in the double-entry system will not be revealed by the trial balance

Chapter 8: Control Accounts

1. Advantages of control accounts
a. Accuracy
b. Improve the speed of decision making
c. Internal control (prevention of fraud)
2. Limitations of control accounts
a. Not all errors can be detected
b. The control account may contain errors
c. Cost
3. Trade receivables control account

Transaction Debit or Credit Book of prime entry

Opening balance Dr or Cr
Credit Sales Dr Revenue day book
Receipts from trade Cr Cash book
receivables
Discount allowed Cr Cash book
Dishonoured cheque Dr Cash book
by a customer
Irrecoverable debts Cr General journal
Interest charged to Dr General journal
customers
Credit sales returns Cr Revenue returns day
book
Transfer of debit Cr General journal
balances in the trade
receivables account
to trade payables
account
4. Trade payables control account

Transaction Debit or Credit Book of prime entry

Opening balance Dr or Cr
Credit purchases Cr Purchases day book
Payments to trade Dr Cash book
payables
Discount received Dr Cash book
Dishonoured cheque Cr Cash book
to a customer
Interest charged by Cr General journal
suppliers
Credit purchase Dr Purchases returns
returns day book
Transfer of debit Dr General journal
balances in the trade
receivables account
to trade payables
account

3. Contra Accounts

4. Balances on both sides

Trade receivables
a. Trade receivables accounts have overpaid the account
b. They returned goods after they paid their account
c. A customer may make a deposit payment before sales have taken place

Trade payables
a. return of goods after payment
b. overpayment of the account
Chapter 9: Correction of Errors
1. Types of Errors
a. Errors of commission
b. Errors of omission
c. Errors of principle
d. Complete reversal of entries
e. Errors of original entry
f. Compensating errors
2. Suspense account
a. a single entry
b. entering two debits or two credits
c. entering different amounts for the debit and credit
3. Statements of revised profit
a. Expense Increase or Income Decrease, Profit Decrease
b. Expense Decrease or Income Increase, Profit Increase

Chapter 10: Financial Statements of Sole Traders

1. The statement of profit or loss and other comprehensive income
Revenue
Less: Returns inwards

Less: Cost of Sales

Opening Inventory
Purchases
Less: Return outwards
Carriage in
Less: Inventory drawings
Less: Closing Inventory
Gross Profit
Add: Other Income
Less: Other Expenses
Profit for the year
2. Statement of Financial Position
Chapter 11: Year-End Adjustments
1. Accruals
a. Accrued Expenses

b. Accrued Income

2. Prepayments
a. Prepaid expenses

b. Prepaid income

3. Irrecoverable debts

4. Allowance/Provision for irrecoverable debts