FINANCIAL ACCOUNTING

UNIT ONE
What is Accounting?

• Accounting is a system of collecting,

organizing, reporting and interpreting
information about those activities of
business that can be described in money
terms ( Self study Guide CXC).
• These activities are called transctions.
Transactions involve an exchange of value
between a business and another party.
Users of accounting information
INTERNAL USERS
Owners-
• is my business profitable?
• What is my share profit?
• How does my profit compare
to others in the same
business?
• Are the value of my resources
increasing?
• What are the chances that my
business will survive?
Managers-
• As a manager, am I meeting my
responsibility to the owners?
• Is there enough money to meet
our obligations?
• Is the stock moving fast
enough?
• Are the expenses higher than
the revenue?
• Are the resources being utilized
to expand the business?
Users of Accounting Information

Employees and their representatives

• Can the business afford to pay

acceptable wages and salaries?
• Is there potential for growth?
• Is there a future for me with this
business?
External users of accounting

Investors and Financial Advisors

• Should I invest in the business?
• Is the business making profits?
• How does it compare to others?
• How much has the business shared out recently?
• Are the value of the resources increasing?
• What are the chances of survival?
• What are the chances of growth?
Users of Accounting information
Government
Regulators
• How much tax is the
business due to pay?
• Can the business contribute
to nation building?
• Is the business meeting its
obligations to the public?
Lenders and Creditors
• Will the business be able
to pay its debts?
• Will the business be able
to cover interest payments
on time?
• Can I give the business
goods and services on
credit?
( Self study Guide CXC)
Accounting concepts and conventions

The Going Concern

Money Measurement
Accounting only covers those The assumption is that
transactions that : the business will
a) Can be measured in money continue for a long
b) Most people will agree to the time.
money value of the
transactions.
Accounting concepts and conventions

The Matching / Accrual Concept

The business Entity/ Separate
Entity Concept
• the business and the
owner are separate
entities.
• Recognize revenue
only when it is earned
and match it with the
expenses incurred in
earning that revenue
Accounting concepts and Conventions

Consistency Concept Realization

• Use the same Profit is said to be earned at the
time when:
accounting
• Goods and services are passed
principles and to the customer
methods from year • The customer then incurs
to year liability for the goods and
services
Accounting concept and conventions

Prudence concept Materiality

When in doubt OVERSTATE
losses and UNDERSTATE profits
Ensure that profit is not shown
to be too high or assets shown at
too high a value.
Recording something in a special
way only if the amount is not a
small one
Accounting concept and conventions

Dual Concept Cost Concept

• The concepts of dealing with • Assets are recorded at cost
both aspects of a transaction price
Test your understanding

1. Which concept distinguishes the business from the owner?

2. Mark’s Furnishing Store uses the FIFO method of stock valuation every year but
decided to change to LIFO. After using the LIFO he decided to switch back to
FIFO. Which concept is he going against?
3. Jason Williams is a teacher and also a certified electrician who has a store on
Half Way Tree Road. His accountant warns him that his account that his salary
from the Ministry of Education goes to should not be used for his business.
What principle of accounting justifies his advice?
4. Which concept acts to restrain how certain business results are treated?
5. Marlon is the owner of Logistics Hub, with the hike in online shopping and
deliveries , he decided to expand his business this year based on his
projections of profits he planned to earn next year. Which concept is this
going against?
Test your understanding: KEY

1. Business or Separate Entity Concept

2. Consistency
3. Separate entity
4. Prudence
5. Realization
Double System

Assets = Liabilities + Capital

• Assets – what the company OWNS
• Liabilities- What the company OWES
• Capital- What the OWNER invest in the business

Mark starts his business with $ 500,000 in cash, a van valued

at $ 800,000, a loan from his uncle for $200,000. Calculate
his Assets.
Double Entry System
Identify assets and
Liabilities • Debtors
• Cash in Hand • Creditors
• Machinery • Office Machinery
• Premises • Negative Bank balance
• Owing to Bank
• We owe Marlon James for
• Stock of goods
goods
• Buildings
• Mark Miller owes us for goods
• Loan from J. Williams
• Fixtures
Double Entry System

Debit Side- Left hand side of the account

Credit Side- Right hand side of the Account

Assets Increase Debit

Decrease credit
Liabilities Increase Credit
Decrease Debit
Capital Increase Credit
Decrease Debit
The Balance Sheet

• Vertical Style
The arrangement is Assets – Liabilities = Capital

Horizontal Style
The arrangement is Assets = Liabilities + Capital
The Vertical Format
J. Graham
Balance Sheet as at September 2008 1
FIXED ASSETS: $ COST $ACC DEP $ NBV
Motor Van 6000 3100 2900
Office Equipment 8000 3350 4650
TOTAL FIXED ASSETS 14000 6450 3 7550

CURRENT ASSETS:
Stock 27475
Debtors 12300
Bank 3115
Cash 295
Prepayments 510 43695

LESS CURRENT LIABILITIES:

Creditors 8870
Accruals 385 9255 3 34440
Working Capital 41990

FINANCED BY:
Capital 25955
Net Profit 18955
Drawings 8420 10535
Loan from P. Parkins 5500
Horizontal Format
ASSIGNMENT one

• Review the double entry system

• Read review lesson 1 and 2 from Moodle

• Read up on the books of original of original

entry
UNIT ONE LECTURE ONE- TRIAL BALANCE
Sales 36,000
Purchases 25,000
Return Inwards 820
Return Outwards 400
Stock at 1.1.1992 2,500
Wages 4,000
Rent and Rates 1,600
Carriage Inwards 750
Carriage outwards 925
Interest Income 600
Premises 20,000
Provision for depreciation of
premises 2,000
Motor Vehicles 8,000
Provision for depreciation of motor
vehicles 4,000
Trade debtors 4,500
Trade creditors 1,250
Provision for doubtful debts 200
Assignment two

• Unit one Lecture one

Redo the trial balance for Columbo
Columbo question
DR CR
Premises 80,000
Plant and Machinery 65,000
Office Furniture 15,000
Provision for Depreciation: Plant and
Machinery 35,000
Provision for Depreciation: office
furniture 10,000
Stock at 1.1.1999 6,000
Stock at 31.12.1999 7,200
Debtors 5,500
Creditors 2,700
Purchases 47,000
Carriage Inwards 1,200
Carriage outwards 2,100
Sales 90,000
Return inwards 2,600
Return outwards 1,400
Provision for doubtful debts 500
Selling and distribution expenses 20,800
Administration expenses 15,400
Discounts received 2,000
Discounts allowed 1,800
Drawings 12,600
Capital 133,400
306,600 250,600
Depreciation

Unit one – lecture two

Depreciation is the difference between the cost of an asset and its sale
or scrap proceeds on disposal.
• Depreciation is spread over the useful life of an asset by one of the
following methods in order to match the cost of the use of that asset
to the revenue earned by it.

Depreciation Methods
• The two main methods of depreciation are the Straight Line Method
and the Reducing Balance Method.
Depreciation

• Straight Line Method

The depreciation charge is calculated by dividing the cost of the
asset by the number of estimated years of useful life. For example if
a Computer was bought for $22,000 and we estimate that it would
be kept for four years then sell it for $2,000 the yearly depreciation
charge would be:
Cost – Estimated Disposable Values
number of years of expected use
22,000 – 2000 / 4
= $5000 per year
Depreciation
• Reducing Balance Method
A fixed percentage of depreciation is deducted from
the cost in the first year. In the second or later years
the same percentage is taken of the reduced balance
(i.e. cost less depreciation already charged). This
method is also known as the diminishing balance
method.

Example: If a fax machine is bought for $10,000 and the

depreciation is to be charged at 20% the calculations
for the first three years would be as follows:
Depreciation
$

Cost 10,000

1st Year: Depreciation (20% of cost) (2,000)

Net Book Value at end of year 1 8,000

2nd Year: Depreciation (20% of $8,000) (1,600)

Net Book Value at end of year 2 6,400

3rd Year: Depreciation (20% of $6,400) (1,280)

Net Book Value at end of year 3 5,120

Depreciation
• Accounting for Depreciation
• Accounting for depreciation involves maintaining each fixed asset at its cost in the ledger
account while operating another ledger account where the depreciation is recorded. This
account is known as the accumulated provision for depreciation account.
• The depreciation is posted directly to the accumulative provision for depreciation account. The
double entry is:
• Dr: Profit and Loss account
• Cr: Accumulated provision for depreciation account
•
• The annual charge for depreciation is an attempt to match a proportion of the cost of an asset
to revenue earned by it in a year. It is a bookkeeping entry. It does not involve any payment of
the money; it is a non-monetary item in the Profit and Loss account.
• In the balance sheet, deduct the balances on the Provisions for depreciation accounts from the
relevant assets in order to show the net book (or written down) values of the fixed assets.
Assignment three

A firm bought a machinery for $8000. It will be kept in use for four
years and then it will be disposed of for an estimated value of $500.
a) Using the Straight line method calculate the value depreciation
annually. Show through calculation the disposal value at the end of
the 4 years.
b) Assume that depreciation is charged at 50% . Calculate the
disposal value at the end of the 4 years.