ITA - CHAPTER 1

ACCOUNTING HEADS

ASSETS

● Present economic resource

● Controlled by an entity

● Due to past events

Provides economic future benefits (that are not ‘expected,’ certain or even likely but
‘potential’)

CA NCA

Provide economic benefits in short term Provide economic benefit in long term

● Cash ● Property

● Bank ● Plant

● Stock ● Equipment

● Debtors ● PPE

Intention to carry out business Intention to use

LIABILITIES

● Present obligation of an entity

● To transfer economic resource

● Due to a past event

Obligation to transfer economic resource and not the outflow of economic benefits and is
not ‘expected.’
CL NCL

Amount payable within one year or normal Amount payable after 12 months after
operating cycle whichever is longer. reporting date.

● Short term loan ● Long term bank loan

● Accrued expense

● Unearned income

● Creditor (payable)

● Bank overdraft

EXPENSES

● Arise from decrease in assets or increase in liability → decrease in equity.

● Other than distributions (drawings or dividends) to owners.

COST OF SALES OTHER EXPENSES

● DM ● Rent exp

● DL ● Electricity exp

● DE ● Insurance exp

● POH ● Business (tax) exp

● Abnormal / normal losses ● Depreciation exp

● NRV write down ● Interest exp

INCOME

● Arise from increase in assets or decrease in a liability, → increase in equity.

● Other than contribution from owners (more capital)

 SALES OTHER INCOMES

Income course of business from main Income not from main or ordinary course of
business

EQUITY

● Equity is the residual interest in the assets of the entity after deducting all its
liabilities.

● Equity claims are claims against the entity that do not meet the definition of a
liability e.g. the obligation to pay its profits to its shareholders but most of the
profitable companies do that to gain investor confidence.

● Owner’s capital (in sole trader businesses)

● Net assets

C=A-L

A=C+L

DRAWINGS

● Anything taken away by the owner from business entity.

FINANCIAL STATEMENTS

Reports of an entity to provide its stakeholders with necessary information for their decision
making needs.

BUSINESS ENTITY CONCEPT

Business entity is separate from its owners.

ACCOUNTING PERIOD

Financial statements relate to a given period of time, known as ‘financial year’, ‘accounting
year’ or ‘reporting period.’

COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements usually comprises

● Statement of FINANCIAL POSITION

● Statement of COMPREHENSIVE INCOME

● Statement of CHANGES IN EQUITY

● Statement of CASHFLOWS

● Notes to the financial statements

RECOGNITION

Putting an item into a book keeping system (performing double entry on it.)

GROSS AMOUNT

Presenting an asset, liability, income or expense without deducting related amounts.

NET AMOUNT

Result after adding a positive and negative number together. Might be net asset, net liability,
net income or net expense.
SOCI

Reports performance of an entity. Has two parts:

● Statement of Profit and Loss

● Statement of Other Comprehensive Income

Name of Entity

Statement of Comprehensive Income for the year ended 30 June 2021

Sales XXX

Less: Cost of sales (XX)

GROSS PROFIT XXX

Other income: Gain on disposal XXX

Less: Operating expenses:

Salaries (XX)

Repair and maintenance (XX)

Depreciation (XX)

Other expenses (XX)

Less: Financial costs

NET PROFIT XXX

SOFP (Or ‘balance sheet)

Reports financial position of entity at particular date.

Name of Entity

Statement of Financial Position at the 30 June 2021

NON CURRENT ASSETS

Land and Building XXX

Plant and machinery XXX

Furniture and fixture XXX

XXX

CURRENT ASSETS

Inventories XXX

Trade receivables XXX

Cash and bank XXX

XXX

CAPITAL

Op Capital XXX

Add: additional capital XXX

Add: net profit XXX

Less: drawings XXX

XXX
NON CURRENT LIABILITIES

Bank loan XXX

Loan from friend XXX

XXX

CURRENT LIABILITIES

Trade Payables XXX

Salaries payables XXX

Unearned income XXX

Accrued expenses XXX

XXX
BOOK KEEPING

Book keeping is the process of recording financial transactions in the accounting records
(the ‘books’).

All transactions are analysed into different types and are then recorded in series of individual
records called accounts.

There is a separate account for each type of transaction → A, L, C, Y, E

ACCOUNTING

Accounting is the process of recording, classifying, summarising the information of financial

nature and interpreting the results thereof.

There are two kinds of accounting

● FAR

○ Maintaining a system of accounting records for business transactions and

other items of financial nature.

○ Reporting the financial position and financial performance (P&L) of an entity

in a set of financial statements to the stakeholders.

● CMA

○ Recording and communication of economic information to management for

planning, control and decision making.

ACCOUNTING CYCLE

Transactions (Books of accounts)

→ Books of prime entry: According to type of transactions

→ Ledgers: Transaction totals entered into appropriate accounts in ledgers

→ Trial Balance: List of balances extracted from ledger

→ Financial Statements
TRANSACTION

Action involving 2 entities that affect or influence each other

BUSINESS TRANSACTION

Transaction involving business entity

FINANCIAL TRANSACTION

Business transaction of financial nature

SIMPLE TRANSACTION COMPLEX TRANSACTION

ONE-OFF TRANSACTION ONGOING TRANSACTION

CAPITAL TRANSACTION REVENUE TRANSACTION

Of short term nature involving ‘capital items’ Of long term nature involving ‘revenue
items’

CAPITAL EXPENDITURE REVENUE EXPENDITURE

Acquire or improve. Repair or maintenance.

CAPITAL RECEIPTS REVENUE RECEIPTS

Bank loan, capital invested, long term. Sales, interest received, short term.
RESPONSIBILITY OF PREPARING FINANCIAL STATEMENTS

● Sole trader/partnership

○ No obligation

○ Tax purpose

○ Obtaining bank loan

● Companies

○ Obligatory

○ Responsibility of directors

○ Delegated to employees

REGULATION

● Sole trader/partnership

○ Private

○ Tax authorities

○ Lending bank

○ Don’t need to confirm to accounting standards

● Companies

○ For shareholders

○ Require audit

○ Must be filed with govt agency, SECP

○ Public

○ Even required to make financial statements available on their websites

○ Must confirm to GAAPs

GAAPs (Generally Accepted Accounting Principles)

The concepts, conventions, laws, rules, regulations to prepare financial statements.

● Sources of GAAPs

○ Companies Act 2017

○ International financial reporting standards (IFRS) → issued by IASB International

Accounting Standards Board

INFORMATIONAL NEEDS

Useful to most users but may not necessarily satisfy all their needs.

○ Investors - to decide to buy, hold or sell company shares

○ Lenders - to cheek ability to pay interest and principle in time

○ Suppliers - to check how much credit they can safely allow

○ Government - to create business and taxation regulations

○ Public - IASB framework comments: ‘Entities may make a substantial

contribution to local economy in many ways including the number of people
they employ and their patronage of local suppliers.

○ Employees - to check financial stability and profitability of their employer

(high wage rate, job security or more job opportunities)

○ Customers - if they rely on that entity for long term supply of key
goods/services.

○ Managers - responsible for producing the financial statement and hence are
interested in the information it contains.

Profit - revenue expenditure only

Capital expenditure → asset

Trade payables → Related to inventory only