INTRODUCTION TO ACCOUNTING

Table of Contents
CHAPTER 1: INTRODUCTION TO PRINCIPLES OF ACCOUNTING.............................................................3
DEFINITION OF TERMS.......................................................................................................................3
Importance of accounting..................................................................................................................4
Users of accounting information.......................................................................................................8
Ethics in accounting...........................................................................................................................9
BUSINESS ORGANISATION...................................................................................................................11
Types of organisations.....................................................................................................................11
DATA PROCESSING..............................................................................................................................14
ACCOUNTING PRINCIPLES /CONCEPT..............................................................................................17
QUESTIONS..........................................................................................................................................20

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CHAPTER 1: INTRODUCTION TO PRINCIPLES OF
ACCOUNTING

DEFINITION OF TERMS

Accounting

It is the process of recording financial transactions pertaining to a business.

Accounting. The language of business. The system that measures business

activities, processes information into financial statements.

Book-keeping is an art of recording financial business transaction in a set of books

in terms of money or money worth. Bookkeeping involves the recording, storing and
retrieving of financial transactions for a company, Non-profit making organization and
individuals

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Importance of accounting

Accounting equation. The most basic tool of accounting is the equation: Assets =
Capital (Owner's Equity) + Liabilities.

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Account payable. A liability backed by the general reputation and Credit standing
of the debtor, these are our trade creditors.

Account receivable. An asset, a promise to receive cash from customers to whom

the business has sold goods or for whom the business has performed services.

Assets

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Liabilities

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Other types of capital

Drawings

Revenue

Expenses

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Sales

Sales returns

Business documents
Receipt A receipt is a written acknowledgement of money received and acts as
proof of payment. Since a cheque passes through the banking system it can act
as a receipt, so many businesses do not issue receipts if accounts have been paid
by cheque. Where goods are sold for cash the customer is usually provided with
a receipt.

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Invoice When a business sells goods on credit it will issue an invoice to the
purchaser. Each business has its own style of invoice, but they all contain the
following information:
● the name and address of the supplier
● the name and address of the customer
● the date
● full details, quantities and prices of the goods supplied

Debit Note The customer should check that goods received are in a satisfactory
condition and that they are exactly what was ordered (in respect of price,
quantity and quality). The supplier must be informed of any shortages,
overcharges and faults. This is done by issuing a debit note to the supplier.
Each business has its own style of debit note, but they all contain the following
information:
● the name and address of the supplier
● the name and address of the customer, the date

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● full details and quantities (and sometimes the prices) of the goods returned
or overcharged

Credit Note When goods are returned, reported faulty, or where there has
been an overcharge on an invoice, the supplier may issue a credit note. As with
all documents, each business has its own style of credit note, but they all
contain the following information:
● the name and address of the supplier
● the name and address of the customer
● the date
● full details, quantities and prices of the goods returned or overcharged To
distinguish them from invoices, credit notes are sometimes printed in red.

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Statement of Account At the end of each month, a supplier will usually issue
each customer with a statement of account. This is a summary of the
transactions for the month. The style of a statement of an account may vary,
but they all contain the following information:
● the name and address of the supplier
● the name and address of the customer
● the date
● the balance owing at the start of the period
● invoices and credit notes issued
● payments received
● any cash discounts allowed
● the balance owing at the end of the period

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Cheque Many accounts are paid by means of a cheque. Other methods of
payment through the banking system are credit transfers and standing orders.
A cheque is a written order to a bank to pay a stated sum of money to the
person or business named on the order. A book of pre printed cheques is
issued by the bank, and the customer is only required to complete the
necessary details of date, amount and payee (the person or business to whom
the money is to be paid).

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Books of original entry/prime entry
These are the first books of accounts where transactions are recorded before
being posted to the ledger. These books include: sales journal, sales returns
journal, purchases journal, purchases returns journal, cash book and general
journal, petty cash book.
1. Cash book
The cash book is used to record cash and cheque transactions. It is a
combination of the cash and bank accounts.
2. The sales daybook/Sales journal
The sales day book is used to record sales on credit for goods initially bought
for resale. It is written from the credit sales invoices issued to customers.
3. The purchases day book/Purchases journal
This book is used to record purchases on credit for goods bought for resale. It is
written from suppliers’ credit invoices.
4. Sales returns day book/Sales returns journal/Returns inwards
journal.
This book is used to record credit notes issued when customers return goods or
when they have been overcharged.
5. Purchases returns daybook/Purchases returns journal/Returns
outwards journal.
This book is used to record credit notes received from suppliers relating to
goods that were initially bought for resale now returned back to suppliers.
6. The journal (General Journal)
It is used to record the following transactions:
a) Opening entries which are records prepared for the first financial period.
b) Accounting adjustment e.g. corrections of errors and year end adjustments.
c) Transfers between Ledger accounts.
d) It is also used to record transactions that are not appropriate to any other
book of prime entry eg. the Purchase or sale of non-current assets on credit.
The ledger
A ledger is a main book of accounts. This is because all the other books of
original entry are posted to the ledger at the end of each period for example at
the end of every month.

The Trial balance

It is a list of all ledger balances at the end of a particular period. Each ledger
account is balanced at the end of the month and the total transferred to the trial
balance. The trial balance is therefore used as a control to check errors in the
ledger

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Users of accounting information

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