Accounting

Information
and Financial
Statements
We hope you enjoy!
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 What is
accounting?
“Accounting is defined as the
systematic recording,
summarising, analysing and
reporting of business and
financial transactions. It is
imperative that individuals
and businesses keep proper
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 1.
Why are
accounting
records needed?
Accounting in business is very important for
five main reasons:
✘ Measure the performance and evaluate the progress of the
business.
✘ Show details of each transaction between buyers and sellers.
✘ Provide necessary information for management and owners.
✘ Provide information for taxation purposes.

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 Users of accounting
Information
Accounting records are important to keep for
stakeholders. They come in two categories:
Internal and External.
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 Differences between and types of Internal
and External Users.
Internal
Managers, Employees, and Internal
Auditors
● People affiliated directly in the
business.
● Has access to exclusive
information about the business.
External
Investors, Lenders, Government,
company creditors, consumers,
competitors, community, and trade
unions.
● People Indirectly affiliated in
the business
● Information is not as detailed,

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 The Accounting
Formula
This is a simple formula used to calculate the
worth of a business and to keep track of its
general profits.

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 The Accounting Formula

It looks like this: However, with no liabilities it

Capital: Assets-Liabilities will look like this:
Assets: Capital+Liabilities Assets=Capital

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The Double Entry
System
This system requires that
both sides of transaction are
to be recorded if the books
are to be balanced
accurately.

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Types of Journals
 ● Cash Book
● Sales Book
● Purchases Day Book
● Return Inwards Day Book
● Return Outwards Day Book
● General Journal

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 Cash Book

A cash book is a subsidiary of the general ledger

in which all cash transactions during a period are
recorded.

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 Sales Book
A sales journal entry records a cash or
credit sale to a customer.

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 Purchases Day Book
the journal entry passed by the company in the
purchase journal of the date when the company
purchases any inventory from the third party on
the terms of credit, where the purchases account
will be debited.

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 Return Inwards Day Book

Return inwards is a receipt back of goods by the

seller, originally sold to the buyer, due to sale of

defective, excess or incorrect goods.

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 Return Outwards Day Book

Return outwards is the return back of goods

by a buyer to the seller from whom they were
originally purchased.

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 General Journal

The general journal is the journal of the company

in which initial record keeping of all the transaction
is done which are not recorded in any of the
specialty journal maintained by the company like
purchase journal, sales journAL

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 Trial Balance
This is a statement showing the list
of balances of all the accounts. The main
purpose of the
trial balance is to check the mathematical
accuracy of the
accounts that have been prepared. Once all
the account
balances are listed in the trial balance, both
the debit and
credit sides must be equal. After this book is
completed, 20the Income
 Financial Statements
Firms need to follow a prescribed
standard when
presenting their financial statements.
The objective of this is
to provide users with vital
information about the financial
position and performance of the firm
in addition to its cash
flows.
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 The Income Statement
This is a financial statement that assesses the firm’s financial
performance over an accounting period (usually a year).
It shows how revenues are earned and expenses incurred
by the business.

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 Balance Sheet
It is referred to as a ‘statement of financial
position’ by the IAS. As stated, it shows the financial position
of the firm at a given point in time – that is, its assets (what
it owns) and its liabilities (what it owes). The balance sheet
is organised under headings such as ‘Non-current assets’
(Fixed assets), ‘Current assets’, ‘Current liabilities’ and
‘Share capital’.

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 Components of a balance sheet
Non-Current Assets Current Assets Current Liabilities
This is the non durable equipment and These are assets that can be easily Monies owed by a company that can
are used for business operations. It is converted to cash within a one-year be repaid within 12 months.
ordered by most permanent to least period. It starts from least liquid to
permanent. most liquid.

Working Capital Non-current Liabilities Net Assets:

Monies used on a day-to-day business. These are monies not expected to be This is the total of Fixed and Current
Low working capital is a result of paid within 12 months. assets minus Current and Long-term
liquidity problems. liabilities.

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 Cash Flow
Statement Sourcing finance – most financial institutions will
require a breakdown of the firm’s cash flow statement,
showing how it will repay the money borrowed
A cash flow statement shows the
Monitoring and control – the statement will enable
movement of cash into and out of the
the firm to monitor its income and expenditure on a
business.
monthly or annual basis, matching them to the actual
The main reasons for preparing a figures
cash flow statement are: Provides timing for large expenditures – the firm can
budget to purchase capital equipment in times when
large amount of funds are available.

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Advantages of cash flow statements
Advantages of the cash flow statement
Fosters proper judgement on the amount, timing and
degree of certainty of future cash inflows or outflows
Provides information on the firm’s liquidity and
financial viability
Is not easily manipulated and so is not affected by
judgements or accounting policies
Allows for comparison of the present and future values
of fund passing through the business
Shows the relationship between profitability of the firm
and its ability to generate cash.
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DisAdvantages of cash flow statements
Disadvantages of the cash flow statement
While cash flow is necessary for short-term operations,
the firm needs profit in order to be viable in the long
term. As a result, it may need to sacrifice cash flow for
large investments
Since they are based on past data, cash flow statements
may not provide accurate information about future cash
flow.

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Possible Solution
To CASH
SHORTFALL
 A cash shortfall can pose a number of problems for a
business; ex: firms not being able to pay for their
expenses; which can lead to bankruptcy. Firms must find
the best ways to manage such a shortfall of cash.

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 Solutions
✘ Raising cash from a new issue of shares
✘ Reducing capital expenditure
✘ Disposing of non-productive assets
✘ Switching debt from short term to long term
✘ Tightening credit to debtors while delaying payment
to creditors

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 THANKS!
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