07/11/2023

Financial Accounting is the process of identifying, recording, summarising and analysing an

entity’s financial transactions and reporting them in the financial system.
The transactions are recorded using the ledger system.

Accounting provides an understanding of how your business grows, makes money, where the
profit goes, and what your cash flow is.

Three financial statements:

1. Statement of income and expenditure (profit and loss statement)
2. Balance sheet (statement of financial position)
3. Statement of cash flow (most important)

They provide info about the financial position, performance, and changes in the finances of an
entity. These statements should be useful to a wide range of users in making economic
decisions. Financial statements are prepared on the basis of established concepts and must
adhere to rules.

Current assets should always be greater than current liabilities. The ratio should be greater than
1.5.

There are 5 principles of ethics in accounting:

1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional Behaviour

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Financial Statements are meant to give investors and lenders a feel for businesses’ financial
health.

Profit and loss:

What you’ve earned minus what you’ve spent
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Double entry bookkeeping is the stage of bookkeeping called double entry.

Assets = Liabilities + Capital (Owner’s equity)

This equation is expressed in the financial position or the balance sheet.

28.11.2023

Types of books of original entry

Day Books:

Sales day book (or Journal) - for credit sales

Purchases day book (or Journal) - for credit purchases
Returns inwards day book (or Journal) - for returns inwards
Returns outwards day book (or Journal) - for returns outwards
Cash Book - for receipts and payments of cash and cheques

General Journal for other items

We show the ‘trial balance’ in two forms:

Ledger form - where the trial balance is cast in the form of an account with credit and debit
sides. Both sides have the first column having the account name, amount column, folio column,
etc.

Journal Form - where the trial balance takes the journal form with a column for serial numbering,
account name, debit/credit amounts, ledger folio details, etc., including the page number on
which the account is entered in the ledgers.
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Some of the primary uses of the Journal are:

- The purchase and sale of fixed assets on credit.
- Writing off bad debts.
- The correction of errors in the ledger accounts.
- Opening entries. These are the entries needed to open a new set of books.
- Adjustments to any of the entries in the ledgers.

Bad Debt

Scenarios:
- The debtor might be refusing to pay one of number of the invoices
- The debtor may refuse to pay part of an invoice
- The debtor may owe payment to a number of invoices and has indicated the only a
promotion of the total amount due will ever be paid because the debtors business has
failed.
- The debtor’s business has failed, and nothing is ever likely to be received.

Provision for doubtful debt:

Doubtful debt refers to debt that is unlikely to be repaid. Bad debt, however, is debt that will
definitely not be repaid and so needs to be written off.
Debt may start off as doubtful, and then transition to bad debt in the future, if it becomes clear
that payment cannot be collected.

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Management accounting is a method that creates statements, reports, and documents that help
management in making better decisions related to their business’ performance. It is primary
used for internal purposes.

Accounting information is used in decision making for Planning and Control.

Planning describes the process and steps by which organisation achieves its objective
Control is the process of implementing those plans and evaluating if objectives are achieved.

Management accounting is the process of identifying measuring accumulating analysing

preparing interpreting and communicating information used by managers.

Financial accounting develops information for external decision makers - stockholders,

suppliers, government