DPB2012:

ENTREPRENEURSHIP
CHAPTER 6 - BASIC OF ACCOUNTING
 LEARNING OUTCOMES
At the end of this chapter, students should be able to;
1. Define the accounting system
2. State the importance of financial management in business
planning and controlling
3. Categorize of assets, liabilities, owner equity, expenses and
revenue
4. Identify the functions and elements of financial statements
 WHAT IS BOOKEEPING?

“Bookkeeping is a process of classifying, recording, and summarizing

business transactions.”
 WHAT IS ACCOUNTING?

Accounting can be defined as:

“a process of identifying, classifying, recording and summarizing
of business transactions in monetary terms, and then interpreting
and communicating the results to the interested parties to enable
them to make decisions”
 Interpreting Communicating
Recording Summarizing
Identifying Classifying

Identify the Classify all source Record all Periodically The result of the Communicate
economic events documents, i.e. business summarize the analysis is used the accounting
to ensure only invoice, transactions in accounting as a guide to information to
transactions that vouchers, credit books of record in the final make a decision the various users
relate to a notes & others account, i.e. accounts; income in assisting them
business are journals & statement, to make
taken into ledgers balance sheet decisions
account
USERS OF ACCOUNTING INFORMATION

• Management • Banks/ creditors

• Managers • Employee unions
• Staff • Suppliers/ creditors
• Shareholders • Government

Internal External
Users Users
 WHAT IS FINANCIAL MANAGEMENT?

Financial management - to the efficient and effective management

of money (funds) in such a manner as to accomplish the objectives of
the organization. It is the specialized function directly associated
with the top management.
 THE IMPORTANCE OF
FINANCIAL MANAGEMENT

1. Profit maximization occurs when marginal cost is equal to

marginal revenue. This is the main objective of Financial
Management.
2. Wealth maximization means maximization of shareholders'
wealth. It is an advanced goal compared to profit maximization.
3. Survival of company is an important consideration when the
financial manager makes any financial decisions. One incorrect
decision may lead company to be bankrupt.
 THE IMPORTANCE OF
FINANCIAL MANAGEMENT

4. Maintaining proper cash flow is a short run objective of financial

management. It is necessary for operations to pay the day-to-day
expenses e.g. raw material, electricity bills, wages, rent etc. A good
cash flow ensures the survival of company.
5. Minimization on capital cost in financial management can help
operations gain more profit.
 ACCOUNTING EQUATION

Business need resources to ensure that their operations run smoothly.

Initially, the resources will be supplied by the entrepreneurs. This can
be expressed in the accounting equation.

ASSETS = CAPITAL (Resources supplied by the entrepreneur)

 ACCOUNTING EQUATION

However, if the entrepreneur is unable to supply sufficient capital to

the business, he/she will get additional capital from outsiders, such as
banks, relatives, friends or other financial institutions.
Then, the equation will be expressed as shown:

ASSETS = CAPITAL + LIABILITIES (Resources supplied by outsiders)

 ACCOUNTING EQUATION
In the following period, since the business has started its operation
and made a profit, the accounting equation will be expanded as
depicted below, showing the financial position of the business

Assets = Owner’s Equity + Liabilities

Owner’s Equity = Assets – Liabilities

Liabilities = Assets – Owner’s Equity

 Non-current Assets
Assets acquired/bought not for sale but to be
used in the operations of the business with
useful life of more than 1 year
Tangible Non-current assets
• Have physical substance
• Land and building, machinery, office equipment,
motor vehicles etc.
ASSETS Intangible Non-current assets
Properties owned • Do not have physical substance
by a business • Franchise, goodwill, patent, trademark

Investment
• Sum of money placed in other organizations
in the hope getting returns

Current Assets
Either cash or those that can be converted into
cash within 1 year
E.g.: inventory, cash in hand, cash at bank,
accounts receivable (debtors)
 LIABILITIES

Financial obligations of the business to

external parties

Non-current Liabilities Current Liabilities

 Amounts owed by the business  Amounts owing by the business
that are not repaid within 1 year that are to be paid within 1 year
 E.g.: long-term loan, debenture,  E.g.: bank overdraft, creditors,
mortgage accounts payable
 OWNER’S EQUITY

Owner’s equity represents owner-supplied fund to the business

for the acquisition of assets for the business. It is the financial
obligations of the business to the owner.

 Profit will increase the capital of the business - therefore increases the owner’s
equity
 Whereas losses and drawings will reduce the capital of the business – therefore
decreases the owner’s equity
 Drawings occur when the owner uses whatever assets of the business for personal
means.

Owner’s Equity = Capital + Profit - Drawings

 REVENUES
Related to the income earned by a business, which results in an inflow
of assets such as money or debtors.
Business gains revenues mainly form providing goods or services to its
customers.

Commission earned
Interest received
Rent received
Discount received
 EXPENSES

Costs incurred to operate a business, e.g. administrative expenses,

finance expenses and selling & distribution expenses

Salaries and wages Interest on loan

Water and electricity Carriage outwards
Rates and rent Insurance
Stationery Sundry expenses
General expenses
 FINANCIAL STATEMENTS
The main objectives of these statements are to provide information
regarding the financial position, performance and cash flows of a
business to entrepreneurs.
A complete set of financial statements comprise the following
components:
a) Statement of comprehensive income
b) Statement of financial positions
c) Statement of cash flow
d) Statement of changes in equity
 STATEMENT OF COMPREHENSIVE
INCOME

Also known as trading, profit and loss account.

This statement is maintained to calculate profit or loss of a business for a
given accounting period.
The accounting period consists of 12 months
It comprises 2 main accounts; trading account & profit and loss account
 TRADING ACCOUNTS

Used to ascertain the gross profit of a business for a particular

accounting period

Net Sales – Cost Of Goods Sold = Gross Profit

 PROFIT AND LOSS ACCOUNT

Profit and loss account is prepared to calculate the net profit of a

business for a particular accounting period

Gross Profit + Revenues – Expenses = Net Profit

Format of Statement of Comprehensive Income

 STATEMENT OF FINANCIAL POSITION
Also known as balance sheet.
Is a statement that disclose the total of assets, liabilities and owner’s
equity of a business for a particular financial period.
Format for Statement of Financial Position
 STATEMENT OF CASH FLOW

Purpose:
Enable the financial statements’ users to evaluate the ability of a
business to generate cash and cash equivalents, and
How the business utilized cash in their daily operating
Disclose the information regarding cash inflows and cash outflows for a
given accounting period.
Consists of 3 major activities – operating, investing & financing
 STATEMENT OF CASH FLOW

Operatin
Investing Financing
g
Related to the Transactions occur
transaction of due to the changes
Principal revenue-
acquisition and in the size and
producing activities
disposal of long- composition of the
term assets equity capital
THANK YOU