Maple Leaf International School

Date: 26 February 2024

Study Note
Chapter: The background and the main features of financial accounting

Study Note: 3
Session : January 2024 (BOY’S) Subject : Accounting
Term : 1st Monthly 2024 Subject Code : 4WAC1/01

Chapter: The background & the main features of financial accounting

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Accounting began as business needed to record transactions and to know how much it owed others and
how much others owed the business that enables a business to track its financial information and to
calculate profits or losses accurately. Therefore, you should understand the following terms –

Bookkeeping Accounting Asset Equity Liability

Bookkeeping – is the process of recording business transactions.

Transaction - financial activities of business occurred in the business that changes financial position
of the business.

Accounting – involves the preparation of financial summaries and statements from bookkeeping
records.

Asset – resources own by a business e.g premises, motor vehicle, furniture & fittings, cash in hand, cash
at bank and so on.

Assets are two types of, such as –

Non-current Assets – resources with economic value that exists in a business organisation for more
than one year. For example – premises, motor vehicle etc.
Current Assets – resources with economic value that exists in a business organisation up to one year.
For example – cash in hand, cash at bank etc.

Capital (also known as Equity) – the total of resources invested and left in a business by its owner.
For example, Mr. Poltu started his business by investing £5000 in cash and a motor vehicle valued by
£1000. Therefore, Mr. Poltu’s equity should be (£5000+£1000) = £6000.
Liability – total of funds owed for assets supplied to a business or expenses incurred not yet paid.
For example – loan taken by the business from bank or goods bought on credit by the business from
Mr. Boltu.
Liabilities are two types of, such as –
Non-current Liability – is debts owed by the business for more than one year e.g loan from bank.
Current Liability – is debts owed by the business for up to one year e.g suppliers (who are known as
accounts payable).

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Accounting Equation – is a basic principle of accounting and the foundation of double-entry
accounting system. It states that the total assets for a certain period of time e.g one year should be equal
to total equity plus total liabilities i.e –

Asset Equity Liability

USUALLY WE DENOTE AS

A E L

OR

E A L

For Example, if total assets are £5000 and total liabilities are £1500 then equity should be £3500 i.e

A E (?) L
£5000 £3500 £1500

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Let’s see, how to draw a statement of financial position?

A statement of financial position is a statement where all assets, liabilities and equity are shown in a
manner for a certain period of time. It shows the true & fair position of a business for that certain period.
Usually, a statement of financial position is prepared at the end of a year.

Good to know: ‘Balance sheet’ is a local term, you

You must follow ‘IAS’ i.e must not use this term. According
International Accounting Standards, to ‘IAS’ it should be ‘Statement of
you must not use any local terms. financial position.’

Sample Question:
Draw up G. Cook’s statement of financial position as at 30 June 2019 from the following items:

Details £
Equity 20010
Equipment 9720
Accounts payable 3380
Bank loan 5000
Inventory 6430
Accounts receivables 9280
Bank overdraft 2000
Cash in hand 2410
Motor vehicle 2550

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Sample Answer:
Statement of financial position of G. Cook as at 30 June 2019
Details £ £
Assets:
Non-current Assets:
Equipment 9720
Motor vehicle 2550
12270
Current Assets:
Inventory 6430
Accounts receivables 9280
Cash in hand 2410
18120
Total Assets 30390
Equity & Liabilities:
Equity 20010
Liability:
Non-current Liability:
Bank loan 5000
Current Liability:
Accounts payable 3380
Bank overdraft 2000
5380
Total Equity & Liabilities 30390

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