PRINCIPLES OF ACCOUNTS

What is accounting?
The process of recording, Interpreting, classifying Information in order to make decisions.

What are assets? Two types of assets:

Resources owned by the business. 1. Fixed/non-current assets.
2. Current assets.
Fixed assets/non-current assets: are permanent in nature.

Permanent assets: 1) land/building/premises, 2) fixtures & fixtures, 3) machinery, 4) motor vehicle.

Current assets: These are liquid in nature. Liquid = easily turned into cash.

In order of permanent: Stock/Inventory, Debtors/account receivables, prepayments, bank, cash.

In order of liquidity: Cash, bank, prepayments, debtors/account receivables, stock/inventory.

What are liabilities?

Are resources we the business owes for others.

Two types of liabilities

Long-Term: Loan over a year. Short-Term: accruals/less than a year.

Capital/Owner’s Equity: Money used to start the business.

Expenses: are all payables.

Revenues: are money received, main form of revenue is sales, other forms are anything received
commission,discount,interest received.

Sales are always credit

Capital always credit
Purchases always debit

Double entry: This is when two T-accounts are affected for one transaction when more comes in we debit
and when money goes out credit.

decrease increase

Expenses debit credit

Assets debit credit

Revenue debit credit

Liability debit credit

Capital debit credit

Trial balance: a list debit and credits, this is to check accuracy, all the bal b/d is transferred to the trial
balance on the same side.

Capital - Credit
Assets - Debit
Expense - Debit
Liabilities - Credit

Income statement/Trading profit or loss accounts: shows whether the business made a profit or loss. It
basically calculates the sales figure subtracting how much we paid for goods.

Balance sheet: balance sheet shows financial position of the business; it is a list of all our assets, liabilities
and capital.
The users of accounting information
The following table lists the main users of accounting information
Internal users of accounting information
Owner(s) Will have invested personal savings in a business and be dependent on
the success of the business (that is, profits, survival) for his or her
livelihood.
Managers Will be concerned about the performance of the business and will wish
to identify any weaknesses and problems so that steps can be taken to
rectify these and to capitalize on business opportunities
Employees Dependent on the success of the business for job security, increases in
pay and promotion opportunities
External users of accounting information
Customers Dependent on the success of the business to ensure that the goods or
services they wish to buy are of good quality and available when they
are needed
Suppliers Will be concerned that the business can pay for goods or services on
time. And about the possibility of repeat and growing orders
Banks May have lent funds to a business and will therefore wish to ensure that
interest payments and loan repayments can be made when due
Potential Will carefully consider the possible returns on any investment made and
investors the risks involved
Government/ Will want to know the profit being made by the business so that
Tax authorities accurate tax assessments can be made
Competitors Will wish to compare their own results with those of the business
Local Will consider the impact of the business on the environment, the
community contribution made to the local economy and the possibility of
employment opportunities.
 Main responsibility Examples
Bookkeeping The recording of financial
● Preparing accounts by entering
information, particularly
transactions, in a systematic way and posting transactions
(probably using a computer
software program)
● Preparing trial balances

● Checking the records for

Accounting The selecting, classifying and
summarizing of financial data in
ways that provide owners of business ● Preparing budgets
and others with useful information to
help them assess performance and
make informed decisions
accuracy
● Preparing payroll and
inventory records
● Assisting the work of the
accountant(s)
● Preparing financial statements
● Supervising the work of
bookkeepers
● Analysing financial statements

● Making recommendations and

providing advice on how to
improve performance
● Preparing tax assessments

Concepts and conventions

These are the principles that guide the accounting process:
The Prudence Concept- this means that the accountant will be cautious about declaring a
profit but will anticipate and provide for losses.
Consistency Concept- this means that accountant will follow chosen policies every time
reports are prepared unless there is a good reason to change.
The Accruals or Matching Concept- this means that revenues and expenses are recognized
as they are earned or incurred, not as money is received or paid.
The Going Concern Concept- this assumes that the business will continue in operational
existence for the foreseeable future and there is no intention for the business to close.
The accounting principles are:
The Principles of Separate Entity- the business is regarded as clearly defined, separate from
the owners, and appears to make its own decisions.
The Principle of Periodicity- the accountants prepare reports for clearly stated periods of
time- usually the length of one calendar year.
The Principle of Money Measurement- determines that only business features that can be
reported in money terms, example, dollars
The Principle of Double Entry- each transaction has two sides a debit (DR) and a credit
(CR).
 Books of Transactions Recorded Source Documents Used
Original Entry
Sales day book Credit sales of inventory (stock) Sales invoices
Purchases day Credit purchases of inventory (stock) Purchases invoices
book
Cash book All cash and bank transactions, for Bank deposit and
example, cash sales receipts from withdrawal slips, cheque,
debtors (accounts receivables), payment debit and credit card receipts
to creditors
Return inwards Goods returned by customer Credit note sent; debit note
journal received
Return outwards Goods returned to suppliers Credit note received; debit
journal note sent
Petty cash book Cash transactions of small value Petty cash vouchers, cash
bills
General Journal All transactions which cannot be Bills, receipts, vouchers,
recorded in any other book of original cancelled cheques
entry

Business Name
Trial Balance as at (date)

Details Debit ($) Credit ($)

Machinery X

Furniture X

Debtors X

Creditors X

Loan/Mortgage X

Capital X

Drawings X

Purchases X

Returns outwards/ Purchases returns X

Sales X

Return inward/ Sales returns X

Carriage inwards X
 Carriage outwards X

Wages X

Electricity X

Stationery X

Discounts allowed X

Discounts received X

Bad debts X

Provision for bad debts X

Provision for depreciation X

Stock (opening) X

XXX XXX

All assets and expenses are entered under the debit column.
All liabilities, revenue, capital and provisions are entered under the credit column.
Business organizations
Sole trader one individual owns and controls the business. If successful, the profits made by the business
belong to this individual; If unsuccessful, the Individual can lose whatever has been invested as well as
private resources. Much of this book is concerned with the accounting records of sole traders.
Partnerships several individuals own the business. Partners jointly control the business, sharing profits
between them. They are also jointly responsible for the debts of the business and can lose their private
resources If the partnership Is unsuccessful.
Limited liability companies (corporations) owned by shareholders who:

● contribute the funds needed to establish and run the company.

● are rewarded with some of the profits made by the company if successful.

● carry a responsibility for the debts of the company that is limited to the amount they have invested.

● are not at risk of losing their private funds if things go wrong. unlike sole traders and partners.

Co-operatives are organisations that are formed and controlled by members. They are run to provide their
members with goods and services rather than to make a profit. \II/hen successful. co-operatives may reward
their members in a number of ways including some share of any surplus made, but usually surpluses are
reinvested in the organisation.
Non-profit organisations include clubs and societies that are formed by their members so that they can
meet for particular activities: perhaps social or sporting activities. These organisations do not aim to make a
profit but have to be financially viable in order to survive.
Errors not revealed by the trial balance
 ● Error of commission- the debit or credit entry is made in the wrong account but within the same
class.
● Error of omission- a transaction has been overlooked where no entries were made in any account.

● Error of principle- where the debit or credit entry is made in the wrong class of account.

● Error of original entry- when a mistake is made transferring an amount from a source document to
a subsidiary book.
● Compensating/ Compensatory Error- where two or more errors cancel each other out.

See Errors which do not affect the trial balance

The accounting cycle
The accounting cycle is the name given to the sequence of events and processes that are used to develop the
financial records of a business.
Stage1: the collection of source documents that provide details for the financial records
Stage 2: listing the key details in books of original entry. There are separate books of original entry for
credit sales. Credit purchases, returns, cash and bank transactions, petty cash transactions, and other
miscellaneous transactions.
Stage 3: posting the information shown in the books of original entry to ledger accounts. There are separate
ledger accounts for each aspect of a business’s finances. Bookkeeping involves the process of making two
entries for every transaction in ledger accounts; this is often referred to as double entry bookkeeping.
Stage 4: checking and control systems to ensure arithmetical accuracy.
Stage 5: summarising financial information, at least annually, in the form of income statements, statements
of financial position.
Balance sheet
Cost ($) Accumulated NBV ($)
Dep. ($)
Fixed Assets / Non-Current Assets XX (XX) XX
Premises / Land XX (XX) XX
Motor Vehicle XX (XX) XX
Office Furniture XX (XX) XX
Other Fixed Assets XX (XX) XX
Total Fixed Assets XX
Current Assets
Stock (Closing) XX
Debtors XX
Less: Provision For Bad Debt (XX) XX
Prepaid Expenses XX
 Accrued Revenue XX
Bank XX
Cash XX
Total Current Assets XX
Less: Current Liabilities
Creditors XX
Bank Overdraft XX
Accrued Expenses XX
Prepaid Revenue XX
Total Current Liabilities (XX)
WORKING CAPITAL XX
XX
Financed By:
Long Term Liabilities
Loan XX
Mortgage XX
Total Long Term Liabilities XX
Owner’s Equity
Capital XX
Add: Net Profit/ loss XX
XX
Less: Drawings (XX)
XX
XX

Trading profit and loss

$ $ $

Sales XX

Less: Return Inwards/Sales Returns (XX)

Net sales XX

Less: Cost Of Goods Sold

Opening stock X
Add: Purchases XX

Add: Carriage Inwards XX

Gross purchases XX

Less: Return Outwards/ Purchases Returns (X)

Net purchases XX

Cost of goods available for sale XX

Less: Closing Stock (X)

Cost of goods sold (X)

Gross profit XX

Add: Additional Revenues XX

Commissions received XX

Rent received XX

Discount received XX

Interest received XX

Profit from the sale of assets XX

Decrease in the provision for bad debts XX

Adjusted Gross Profit XX

Less: Expenses

Discounts Allowed XX

Carriage Outwards XX

Wages/ salaries/ pay XX

Water XX

Electricity XX

Telephone XX

Rent expense XX

Bad debts XX

Other expenses XX

Increase in provision for bad debts XX

Depreciation of fixed assets XX

Accrued expenses XX

Less: prepaid expenses XX

 Total Expenses (X)

Net Profit XX

Adjustments in red
Provision for Depreciation
Straight line method- where the annual depreciation charge is based on the cost of the non-current asset and is the
same amount each year.

cost of asset−salvage value

useful life
Reducing balance method- where the annual depreciation charge is based on the value of the non-current asset at
the beginning of the year under review.

cost of asset ∧depreciation rate

Provision for bad debt

Writing off a bad debt
Debit bad debt account; credit accounts receivables
Create a provision for doubtful debts
Debit income statement; credit provision for doubtful debts (increase in provision)
Debit provision for doubtful debts; credit income statement (decrease in provision)

Bank reconciliation
As at:

Balance as per cash book $

Add: unpresented cheques

Less: bank logement

Bank statement balance

Debit - bank logements

Credit - unpresented cheques

Control accounts: To locate errors, prevent fraud, information for management.

Debtors/accounts receivable/sales control account:

credit sales Receipts from debtors

 Interest on overdue a/c Return Inwards

refunds Discount allowed

dishonoured cheques Bad debt

Creditors/accounts payable/purchases control account:

Payments to creditors credit purchases

Return outwards Interest overdue accounts

discount received refunds

set off dishonoured cheques

Partnerships Format:

A and B Partnership
Appropriation Account for the year ended 31 December 2022
Net profit for the year XX
ADD:: Interest on Drawings:
A (10% X amount of money drawn) XX
B (10% X XX) XX
XX
XX
Less: interest on capital:
A (5% X amount of capital invested) XX
B XX
XX
Less: Salary
A ($XX) XX
B XX
XX
(XX)
Balance of profits to be shared XX
Share of profits :
A (2/5 X XX) XX
B (55% X XX) XX
XX

Partnership: A partnership is owned and operated by 2 or 20 persons

Advantages: Multiple skills and knowledges, More capital & sharing of workload

Disadvantages: conflict, decision making will be more difficult & unlimited liability

The deed of partnership: The agreement may be spoken or written. If written it is called a deed, It will
consist of: how much capital is contributed by each partner, responsibilities of each partner, limit on each
partner drawings & how profit and losses are shared.
Current account:

bal b/d $ $

+ salary

+ Interest on capital

+ share of profit

- drawings

- Interest of drawings