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Financial Accounting

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Definition of Accounting
The process of identifying, measuring, and communicating economic information to users of the information to permit informed judgements and decision making A discipline which provides financial and other information essential to the efficient conduct and evaluation of the activities of an organisation

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History of Accounting

Seven key ingredients were required for the development of a formal system of accounting:
Private property Capital Commerce Credit Writing Money Arithmetic

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The objectives of accounting

Accounting has many objectives, including letting people and organisations know: If they are making a profit or a loss What their business 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 someone else Keeping a financial check on the things they do

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The difference in Classification

Double entry bookkeeping, consists of maintaining a record of the money values of the transactions of a business Accounting may be defined as the process of designing and operating an information system for collecting, measuring and recording business transactions, and summarizing and communicating the results of these transactions to the users.
Accounting= book keeping + financial statements

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What is Accounting used for?

Internal function To control the activities of the organization To plan future activities To assist in raising finance To report upon the activities and success of the enterprise to interested parties

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What is Accounting used for?

External function To provide financial information to the people outside the enterprise To evaluate what the management has done with the money invested in the business

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Types of accounting information

Financial accounting = accounting system that tries to meet the needs of the various user groups especially for external users e.g Annual report = Balance sheet, income statement , cash flow statement Management accounting = accounting system is used for internal decision making e.g budgets ,cost accounting

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Users of accounting information

Possible users of accounting information include:

Managers Owner(s) of the business A prospective buyer The bank Tax inspectors A prospective partner Investors

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Accounting Concepts

Business Entity Concept Going Concern Concept Cost Concept Money Measurement Concept Accrual Concept Matching Concept Accounting Period Concept Conservatism Materiality Concept Realization Concept Dual Concept or Double entry Concept

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Classes of accounts

Business transactions are all the transactions that occur in the normal trading activities. Of all the transactions they are to be classified into different classes of account as follows: i) Capital ii) Liabilities iii) Expenses iv) Assets v) Revenues = CLEAR

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Asset Something valuable which business owns.

a) Fixed asset
(intention to be used more than one year to derive economic benefit) Factories Office building Delivery vans Lorries Plant machinery Computer equipment

b) Current asset
- Cash

- Raw materials - FG held for sale to customer - cash and bank accounts - Money owned by customers

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Assets can also be depreciable, intangible, fictitious etc

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Liability Payments owed by the business

Eg: A bank loan or bank overdraft Amounts owed to suppliers for goods purchased Taxation owed to the government Current liability- those liabilities to be paid within a year .Trade creditors, short term loan ,bank overdraft Non-current liability -those liabilities to be paid in more than a year.Long term loan, debentures

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Capital is the amount owed to the owner of the business by the business Owners put in money to start and are owed any profits which are generated by the business The capital will be reduced by the amount of drawings taken up by the owner

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The accounting equation

Assets = Capital + Liabilities

Resources: what they are = Resources: who supplied them

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The accounting equation rearrang

The equation can be rearranged so as to enable the calculation of missing figures:

Assets = Capital + Liabilities Capital = Assets Liabilities Liabilities = Assets - Capital

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Some important terminology

Expenditure-Capital and Revenue Bad debts Reserve Provision Depreciation

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Identify the following

Furniture Electricity Expenses Owner invested in business Obtained bank loan Bought Machinery Sold goods for cash Paid wages Paid stationary expenses Bank over draft

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Double Entry System


What is Debit and Credit? Depends on the type of the account Accounts can be classified into 3 types People (Including artificial person)Personal account 2. Assets-Real Account 3. Expenses and Incomes-Nominal account

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Rules Of Debit and Credit

Personal Account-Debit the receiver and credit the giver Real Account-Debit what comes in and credit what goes out Nominal Account-Debit all expenses and losses, credit all incomes and gains

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Identify debit, credit and type of account

Commenced business with cash Purchased goods for cash Paid wages Purchased furniture Received commission

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Introduction to Journal, Ledger and Trial Balance

Journal-A day book for recording all day to day transactions in a chronological order Ledger-Classification of Journal entries Trial balance-Prepared to check the arithmetical accuracy of the transactions which also serves as a base for the preparation of financial statements i.e. Income statement and Balance sheet.