ELEMENT OF ACCOUNTING 1

(ACC 101)
Ifeanyichukwu Arthur Onyiah
B.Sc, ACMA, M.Sc, PDE,RT (TRCN), (Ph.D in view)

Dean, Student’s Affairs Unit,

Accounting Programme
Co-ordinator
Department of Management
ifeanyi.onyia@ccu.edu.ng

www.ccu.edu.ng
 LEARNING OBJECTIVES
At the completion of this Study, students are
expected to understand the following:

 Explain what accounting is about.

The objectives of financial accounting.
Explain the relationship between bookkeeping and
accounting.
List the main users of accounting information and what
accounting information they are Interested in describe
the main difference between financial accounting and
management accounting present and explain the
accounting equation explain the relationship between
the accounting equation and the layout of the
statement of financial position (balance sheet).
Explain the meaning of the terms assets, capital,
liabilities, accounts receivable (debtors), and accounts
payable (creditors)
Definition of Accounting
Accounting can be defined as:

The process of identifying, measuring, and

communicating economic information to
permit informed judgments and decisions
by users of that information.
 The Objectives Of Financial
Accounting

Financial accounting is the branch of

accounting that is concerned with
(i) recording business transactions,
(ii) preparing financial statements that
report on how an entity (a business,
charity, club, society, government
department, etc.) has performed and,
(iii) reporting on its financial position.
 The Objectives Of Financial
Accounting
It has many objectives, including letting people
and entities know:
• if they are making a profit or a loss;
• what the entity is worth;
• what a transaction was worth to them;
• how much cash they have;
• how wealthy they are;
• how much they are owed;
• how much they owe;
• enough information so that they can keep a
financial check on the things they do.
Bookkeeping
What is bookkeeping?
Until about one hundred years ago, records of
all accounting data was kept manually in
books. This is why the part of accounting that is
concerned with recording data is often known
as bookkeeping.
Nowadays, although handwritten books may
sometimes be used (particularly by very small
entities), most accounting data is recorded and
stored electronically.
Bookkeeping is the process of recording data
relating to accounting transactions in the
accounting books.
 OBJECTIVES OF BOOKKEEPING

1. To show the result of business transactions, that is whether a

business has made any profit or loss for a period of time.
2. To show also the financial position of business at a certain
date.
3. To help in efficient management of business (that is it aids
management in the decision making process).
4. It shows at anytime the value of sales and purchases of the
business.
5. It reveals to the owner new & profitable means of running his
business.
6. Where proper records are kept, it is possible to find out how
the business stands in relations to its customers.
 REQUIREMENT OF GOOD RECORDING
SYSTEM

A good recording system must satisfy

the following requirements:
1. It must be easy to use.
2. It must be easily understood.
3. It must be timely.
4. It must be accurate.
5. The information presented must be
reliable.
6. It must be consistent with sound
accounting principles.
 Users of financial accounting
information

Possible users of financial accounting information

include:
1. Managers. These are the day-to-day decision-
makers. They need to know how well things are
progressing financially and about the financial
status of the business.
2. Owner(s) of the business. They want to be
able to see whether or not the business is
profitable. In addition they want to know what
the financial resources of the business are.
3. A prospective buyer. When the owner wants to
sell a business the buyer will want to see such
information.
 Users of financial accounting
information
4. The bank. If the owner wants to borrow money for
use in the business, then the bank will need such
information.
5. Tax inspectors. They need it to be able to
calculate the taxes payable.
6. A prospective partner. If the owner wants to
share ownership with someone else, then the
would-be partner will want such information.
7. Investors, either existing ones or potential
ones. They want to know whether or not to invest
their money in the business.
8. Creditors. They want to know if there is any risk
of not being paid what they are due.
 THE ACCOUNTING EQUATION

The whole of financial accounting is based

on the accounting equation. This can be
stated to be that for a firm to operate it
needs resources, and that these
resources have had to be supplied to the
firm by someone.
 THE ACCOUNTING EQUATION

The resources possessed by the firm are known

as Assets, and obviously some of these
resources will have been supplied by the owner
of the business. The total amount supplied by
him is known as capital. If in fact the owner was
the only person who had supplied the assets
then the following equation would hold true.
CAPITAL = ASSETS
 THE ACCOUNTING EQUATION

On the other hand, if some of the assets will

normally have been provided by someone
other than the owner. The indebtedness of
the firm for these resources is known as
LIABILITIES.

The equation can now be expressed as

CAPITAL + LIABILITIES = ASSETS
 Meaning of Assets, Liabilities and
Capital

• Assets consist of property of all kinds,

such as buildings, machinery, stocks of
goods and motor vehicles, also benefits
such debts owing by customers and the
amount of money in the bank account.
• Liabilities consists of money owing for
goods supplies to the firm and for
expenses, also for loans made to the
firms.
• Capital is often called the owner’s equity
or net worth.
A summary of the effect upon assets, liabilities
and capital of each type of transaction you've
been introduced to so far is shown below:

Example of transaction Effects

(1) Owner pays capital into the bank Increase asset Increase capital
(Bank)

(2) Buy inventory by cheque Decrease asset Increase asset

(Bank) (Inventory)

(3) Buy inventory on credit Increase asset Increase

T (Inventory) liability
(Accounts
payable)
(4) Sale of inventory on credit Decrease asset Increase asset
(Inventory) (Accounts
receivable)

(5) Sale of inventory for cash (cheque) Decrease asset Increase asset
(Inventory) (Bank)

(6) Pay creditor by cheque Decrease asset Decrease

(Bank) liability
(Accounts
payable)
A summary of the effect upon assets, liabilities and
capital of each type of transaction you've been
introduced to so far is shown below:

Example of transaction Effects

(7) Debtor pays money owing by Increase asset Decrease asset
cheque 1 (Bank) (Accounts
receivable)
(8) Owner takes money out of the Decrease Decrease
business bank account for own asset (Bank) capital
use
(9) Owner pays creditor from Decrease Increase capital
private liability
money outside the firm (Accounts
payable)

Every transaction affects two items in the statement of

financial position.
Non-current Assets (Fixed Assets)

Non-current assets (fixed assets) are

assets which have a long life bought with
the intention to use them in the business
and not with the intention to simply resell
them, e.g. buildings, machinery, fixtures &
fittings (e.g. shelves), motor vehicles.
 Current Assets
Current assets are assets consisting of
cash, goods for resale or items having a
short life (i.e. no more than a year remaining
on the date of the statement of financial
position). For example, the amount (and so
the value) of inventory goes up and down as
it is bought and sold. Similarly, the amount of
money owing to a business by debtors will
change quickly, as the business sells more
to them on time and when they pay their
debts. The amount of money in the bank will
also change when it is received or paid out.
Current liabilities

Current liabilities are those liabilities

which have to be paid within no more than
a year from the date on the statement of
financial position, e.g. accounts payable
for goods purchased.
 The Cash Account
We have treated cash account, two column cash
book and Double entry.
You've learnt that under double entry
bookkeeping:
• for each debit entry there is a credit entry
• for each credit entry there is a debit entry.
We also treated Asset of stocks via the following
sub topics:
I. Purchases of goods on credit;
II. Purchases of goods for cash;
III. Sales of stock on credit;
IV. Sales of goods for cash. You have the notes.
Books of original entry

When a transaction takes place, we need

to record as much as possible of the
details of the transaction.
For example, if we sold four computers on
credit to a Mr De Souza for £1,000 per
computer, we would want to record that
we sold four computers for £1,000 each to
Mr De Souza on time.
We would also want to record the address
and contact information of Mr De Souza
and the date of the transaction.
Books of original entry
Some businesses would also record information like
the identity of the person who sold them to Mr De
Souza and the time of the sale.
Books of original entry are the books in which we first
record transactions, such as the sale of the four
computers. When we enter transactions in these
books, we record: the date on which each transaction
took place - the transactions should be shown in date
order;
and details relating to the sale (as listed in the
computer example above), which are entered in a
'details' column.
 Books of original entry

• Also,

a folio column entry is made cross-

referencing back to the original 'source
document', e.g. the invoice; and the
monetary amounts are entered in columns
included in the books of original entry for
that purpose.
Types of books of original entry

Books of original entry are known as either

'journals' or 'day books'. However, in the
case of the last book of original entry
shown below, it is always a 'journal' and
the second last is always known as the
'cash book'.
The term 'day book' is, perhaps, more
commonly used, as it more clearly
indicates the nature of these books of
original entry - entries are made to them
every day.
 Types of books of original entry

The commonly used books of original entry are:

I. Sales day book (or Sales journal) - for credit sales.
II. Purchases day book (or Purchases journal) - for
credit purchases.
III. Returns inwards day book (or Returns inwards
journal) - for returns inwards.
IV. Returns outwards day book (or Returns outwards
journal) - for returns outwards.
V. Cash book - for receipts and payments of cash and
cheques.
VI. General journal (or Journal if the term 'day book' is
used for the other books of original entry) - for other
items.
 Ledgers
Types of ledgers
The different types of ledgers most businesses
use are:
1. Sales ledger. This is for customers'
personal accounts - the accounts
receivable.
2. Purchases ledger. This is for suppliers'
personal accounts - the accounts payable.
3. General ledger. This contains the
remaining double entry accounts, such as
those relating to expenses, non-current
assets, and capital.
 Capital and Revenue Expenditure

• We have also treated Capital and revenue

expenditure; as well as Capital and
revenue receipts.
• We have treated Trial balance; Errors not
affecting trial balance agreement and
Errors affecting trial balance agreement.
• This revision is refresh our memory. You
have the notes with you.
STUDY THOSE CACULATIONS WE DID
IN THE CLASS
 TRIAL BALANCE

• Trail balance is the testing of the arithmetical

accuracy of the entries in the ledger. This is done
by taking out the list of balances in the ledger,
including of course, the cash balance.

• Examples / illustrations to be solved in the

class together with the principles of making
entries.
 ERRORS NOT AFFECTING
TRAIL BALANCE AGREEMENT
• Errors of omission
• Errors of commission
• Errors of principle.
• Compensating Errors.
• Errors of original entry.
• Examples / illustrations to be solved in
the class together with the principles of
making entries.
 REASONS WHY A TRAIL
BALANCE MAY NOT AGREE

• REASONS WHY A TRAIL BALANCE MAY NOT

AGREE
• Error in casting in either the books of original entry
or the ledger accounts.
• Omission of some ledger balances (including the
cash cashbook) when extracting the trial balance.
• Some items not posted from the books of original
entry to the ledger.
• Ledger balances entered on the wrong side of the
trial balance.
• Figures misplaced or transposed in accounts. For
instance entering N78 as N87.
 CORRECTION OF TRAIL
BALANCE ERRORS
• CORRECTION OF ERRORS
• Efforts must be made always to trace the
mistake(s) leading to such disagreement. The
following steps could be adopted.
• Check the addition again carefully in both the
books of original entry and the ledger.
• Check the ledger accounts including the
cashbook carefully to see that all the balances
have been entered in the trail balance.
• If all the efforts made to locate the mistake
fails, then a suspense account could be
raised.
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