UNIVERSITY OF MAIDUGURI CENTRE FOR DISTANCE LEARNING

Transcription

1 UIVERSITY OF MAIDUGURI CETRE FOR DISTACE LEARIG ACC 101: Basic Accounting I (2 Units) Course Facilitator:

2 ACC 101 BASIC ACCOUTIG I UITS : 2 Course Code/ Title: Credit Units: Timing: STUDY GUIDE Total hours of Study per each course material should be twenty Six hours (26hrs) at two hours per week within a given semester. You should plan your time table for study on the basis of two hours per course throughout the week. This will apply to all course materials you have. This implies that each course material will be studied for two hours in a week. Similarly, each study session should be timed at one hour including all the activities under it. Do not rush on your time, utilize them adequately. All activities should be timed from five minutes (5minutes) to ten minutes (10minutes). Observe the time you spent for each activity, whether you may need to add or subtract more minutes for the activity. You should also take note of your speed of completing an activity for the purpose of adjustment. Meanwhile, you should observe the one hour allocated to a study session. Find out whether this time is adequate or not. You may need to add or subtract some minutes depending on your speed. You may also need to allocate separate time for your self-assessment questions out of the remaining minutes from the one hour or the one hour which was not used out of the two hours that can be utilized for 2

3 ACC 101 BASIC ACCOUTIG I UITS : 2 your SAQ. You must be careful in utilizing your time. Your success depends on good utilization of the time given; because time is money, do not waste it. Reading: When you start reading the study session, you must not read it like a novel. You should start by having a pen and paper for writing the main points in the study session. You must also have dictionary for checking terms and concepts that are not properly explained in the glossary. Before writing the main points you must use pencil to underline those main points in the text. Make the underlining neat and clear so that the book is not spoiled for further usage. Similarly, you should underline any term that you do not understand its meaning and check for their meaning in the glossary. If those meanings in the glossary are not enough for you, you can use your dictionary for further explanations. When you reach the box for activity, read the question(s) twice so that you are sure of what the question ask you to do then you go back to the in-text to locate the answers to the question. You must be brief in answering those activities except when the question requires you to be detailed. In the same way you read the in-text question and in-text answer carefully, making sure you understand them and locate them in the main text. Furthermore before you attempt answering the (SAQ) be 3

4 ACC 101 BASIC ACCOUTIG I UITS : 2 sure of what the question wants you to do, then locate the answers in your in-text carefully before you provide the answer. Generally, the reading required you to be very careful, paying attention to what you are reading, noting the major points and terms and concepts. But when you are tired, worried and weak do not go into reading, wait until you are relaxed and strong enough before you engage in reading activities. Bold Terms: These are terms that are very important towards comprehending/understanding the in-text read by you. The terms are bolded or made darker in the sentence for you to identify them. When you come across such terms check for the meaning at the back of your book; under the heading glossary. If the meaning is not clear to you, you can use your dictionary to get more clarifications about the term/concept. Do not neglect any of the bold term in your reading because they are essential tools for your understanding of the in-text. Practice Exercises a. Activity: Activity is provided in all the study sessions. Each activity is to remind you of the immediate facts, points and major informations you read in the in-text. In every study session there is one or more activities provided for you to answer them. You must be very careful in answering these activities because they provide you with major facts of the text. You can have a separate note book for the activities which can 4

5 ACC 101 BASIC ACCOUTIG I UITS : 2 serve as summary of the texts. Do not forget to timed yourself for each activity you answered. b. In-text Questions and Answers: In-text questions and answers are provided for you to remind you of major points or facts. To every question, there is answer. So please note all the questions and their answers, they will help you towards remembering the major points in your reading. c. Self Assessment Question: This part is one of the most essential components of your study. It is meant to test your understanding of what you studied so you must give adequate attention in answering them. The remaining time from the two hours allocated for this study session can be used in answering the self- assessment question. Before you start writing answers to any questions under SAQ, you are expected to write down the major points related to the particular question to be answered. Check those points you have written in the in-text to ascertain that they are correct, after that you can start explaining each point as your answer to the question. When you have completed the explanation of each question, you can now check at the back of your book, compare your answer to the solutions provided by your course writer. Then try to grade your effort sincerely and honestly to see your level of performance. This procedure should be applied to all SAQ 5

6 ACC 101 BASIC ACCOUTIG I UITS : 2 activities. Make sure you are not in a hurry to finish but careful to do the right thing. e-tutors: The etutors are dedicated online teachers that provide services to students in all their programme of studies. They are expected to be twenty- four hours online to receive and attend to students Academic and Administrative questions which are vital to student s processes of their studies. For each programme, there will be two or more e-tutors for effective attention to student s enquiries. Therefore, you are expected as a student to always contact your e- tutors through their addresses or phone numbers which are there in your student hand book. Do not hesitate or waste time in contacting your e-tutors when in doubt about your learning. You must learn how to operate , because ing will give you opportunity for getting better explanation at no cost. In addition to your e-tutors, you can also contact your course facilitators through their phone numbers and s which are also in your handbook for use. Your course facilitators can also resolve your academic problems. Please utilize them effectively for your studies. Continuous assessment The continuous assessment exercise is limited to 30% of the total marks. The medium of conducting continuous assessment may be through online testing, Tutor Marked test or assignment. You may be required to submit your test or assignment through your . The continuous assessment may be conducted more than once. You must 6

7 ACC 101 BASIC ACCOUTIG I UITS : 2 make sure you participate in all C.A processes for without doing your C.A you may not pass your examination, so take note and be up to date. Examination All examinations shall be conducted at the University of Maiduguri Centre for Distance Learning. Therefore all students must come to the Centre for a period of one week for their examinations. Your preparation for examination may require you to look for course mates so that you form a group studies. The grouping or etworking studies will facilitate your better understanding of what you studied. Group studies can be formed in villages and township as long as you have partners offering the same programme. Grouping and Social etworking are better approaches to effective studies. Please find your group. You must prepare very well before the examination week. You must engage in comprehensive studies. Revising your previous studies, making brief summaries of all materials you read or from your first summary on activities, in-text questions and answers, as well as on self assessment questions that you provided solutions at first stage of studies. When the examination week commences you can also go through your brief summarizes each day for various the courses to remind you of main points. When coming to examination hall, there are certain materials that are prohibited for you to carry (i.e Bags, Cell phone, and any paper etc). You will be checked before you are 7

8 ACC 101 BASIC ACCOUTIG I UITS : 2 allowed to enter the hall. You must also be well behaved throughout your examination period. 8

9 9 ACC 101 BASIC ACCOUTIG I UITS : 2

10 ACC 101 BASIC ACCOUTIG I UITS : 2 Introduction Study Session 1: Definition, Meaning and the role of Accounting, As business activities expands, the needs for accountability emerged; Adequate financial information about a business help people with interest in the business take informed decisions about the business. Accounting is concerned basically with accountability. The underlying purpose of accounting is to provide financial information about an economic entity. The need for accounting is more pronounced in a business where a lot of finance, risk and energy are involved. Financial information is needed to plan and control the finance and operation of a business. Accounting helps stewards to give proper records on the assets put under their care. In this Study Session, you will be learn about the origin and history of accounting, definition of booking, definition of accounting, branches of accounting and accounting activities, the various stakeholders (i.e. users) interested in the accounting information and the regulatory frame-work, and rules that guides the practice of accounting. Learning Outcome for Study Session 1 At the end of this Study Session, you should be able to: 1.1 Define accounting 1.2 Discuss the basic needs for accounting information 1.3 Briefly discuss the history of accounting 1.4 Discuss regulatory framework and itemize the various regulators. 1.5 Identify the Qualities of Good Accounting Information 1.1 Definition of accounting Accounting is defined in various ways, but all putting out same point which is to gather information for decision making by the various stakeholders. Definition 1 Accounting is defined by the (ACCOUTIG TECHICIAS SCHEME WEST AFRICA, 2009) as the process of recording, classifying, summarizing and communicating financial information to users of financial information for decision making. 10

11 ACC 101 BASIC ACCOUTIG I UITS : 2 Definition 2 According to Boateng, (1884) accounting is the process of identifying, measuring, and communicating economic and financial information to permit informed judgment and decision by the users of the information. Definition 3 Accounting is defined as the act of gathering financial information, classification of this information, as well as summarizing and communicating these it to users for decision making. From these three definitions you can see that, this process starts from sorting relevant transactions and posting them into their ledger accounts by considering the date, particulars, the page or ledger folio and the amount. After posting, balancing the accounts is the next exercise which is the bookkeeping activities. When individual ledger accounts are balanced, then trial balance is drawn up. The act of keeping and preparing this record from the source document to the trial balance is referred to as (Book keeping) Meaning of Bookkeeping; Bookkeeping is defined as the classification and recording of business transactions in the books of account, thus Bookkeeping is the recording phase of accounting. The recording of the transactions is a routine task; therefore it tends to be repetitive. 1.2 Basic needs for accounting information Accounting is often called the language of business, since all entities prepare and communicate its financial data to help make better decisions. The groups of people who are interested in accounting information are often called users and are classified into internal users and external users. Internal users are stakeholders with direct involvement in the management and operations of the organization. They use this financial information to help improve the efficiency and effectiveness of an organization in meeting its goals. They include the following. (a) Owners of the business/investors: The owners need accounting information to assess how efficiently the management is performing they want to know how profitable the business has been. (b) Management: These are the people who are employed to run the affairs of the business for the owners. They need accounting information to ascertain the efficiency of the policy they formulate and to plan and control the resources of the business. (c) Employees of the entity: They need accounting information to enable them decide 11

12 ACC 101 BASIC ACCOUTIG I UITS : 2 how secure their job is and the ability of the business to pay good salaries and provide good welfare facilities. External Users of accounting information are not directly involved in running the organization, but are interested in the financial information prepared and communicated in the financial statement. These external users are; (a) Customers: These are the people who purchase the goods or services provided by the business. (b) Tax authority: this is considered the government interest in the business, as every business must pay tax to the tax authority i.e. the government. (c) Trade Creditors: These are the people who supply goods to the business on credit. 1.3 The history of accounting Modern accounting started with book-keeping in Italy by the Stewards of Commune of Genoa in the 14 th century, where the double entry system popularly known as the Italian method was first used. The system was spread in 1494 by Luca Pacioli, an Italian monk (priest), in his book titled Summa de Arithmetical, Geometrica, proportioni et proportionalita, published in the 14 century with topics on Arithmetic, Geometry and Proportion. The principles of the double entry system were briefly explained in the book. The popularity of this system made it necessary for stewards to report financial resources placed under their control during specific periods, since many businesses were left in the hands of stewards to manage by their owners. Such reports would include mainly the following: i. How the financial resources of the business have been invested during the period ii. The profit earned or loss incurred during the period and iii. The assets, liabilities and the owners equity at the end of the period under review. A lot of changes have been witnessed in accounting since its early days. These changes were informed by daily business challenges and the economic environments in which the business operates, placing more responsibilities on management of business to disclose its financial information. 1.4 Regulatory framework and the various regulators; Financial accounting is rules and principle based. Financial accounting is practiced by guided principles known as Generally Accepted Accounting Principles (GAAP) which are used to prepare and interpret financial statements effectively. GAAP are the bases for the formulations of accounting Principles, Standards, Concepts, and Assumption used in accounting. GAAP aims to make information in financial statement reliable, relevant and comparable. The main statutory document used together with GAAP for the regulation of business in igeria is the; 1. Companies and Allied Matters Act 1990 (CAMA 1990) as amended The company laws are enforceable in the court of law. 2. Security and Exchange Commission (SEC) for all quoted company. 12

13 ACC 101 BASIC ACCOUTIG I UITS : 2 3. Banks and Other Financial Institutions Act (BOFIA) 1991-related directly to the banking industry. 4. Insurance Act 2003-related directly to the Insurance industry. Other regulations consist of the following accounting standards: 5. Statements of Accounting Standards (SAS) issued by ASB (now Financial Reporting Standards (FRS) issued by Financial Reporting Council FRC). 6. International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by IASB from time to time. Scope of Accounting Though the main study is financial accounting; others relevant and supporting branches are cost Accounting, Management Accounting, Auditing, Government Accounting and Tax Management. -Cost Accounting Cost accounting is the process of accumulating financial data to provide information for managerial decision - ManagementAcco unting Management accounting provides information to management of a business to help them take better decision and to improve upon the efficiency and effectiveness of existing operations. -Auditing Auditing is the independent examination of the books of accounts and records of the company. The professional accountant will gather various forms of audit evidence before he can form an opinion on the financial statementsto give it a true and fair view. -Government Accounting (Public Sector Accounting) Government a c c o u n t i n g is an aspect of Accounting relating to the Public Sector where government has executive responsibility. Public sector consists of the ministries, parastatals and government department. Government accounting is concerned with planning, control and appraisal of government activities and in effect, accountability. The accounting information maintained here is referred to as public sector accounting or public sector accounting. -Accounting for Taxation The accounting profits generated in the financial statements provide the basis for determining the taxable profits of a company by the tax authority this study is referred to taxation. 13

14 ACC 101 BASIC ACCOUTIG I UITS : 2 Professional Accounting Bodies Professional bodies play a vital role in accounting training an influencing how accountants are professionally trained. These are listed below: 1. The Institute of Chartered Accountants of igeria (ICA) 2. Association of Chartered Certified Accountants (ACCA)- UK 3. Certified Institute of Management Accountants (CIMA)- UK 4. The Institute of Chartered Accountants of England and Wales (ICAEW)-UK 5. The American Institute of Certified Public Accountants (AICPA)-America 6. Association of ational Accountants of igeria (AA) etc The eed for Accounting Information The need for accounting information can be summarized as follows: 1. It provides information in form of financial statement useful for making economic decisions 2. It provides information to users for predicting, comparing and evaluating the earning power and financial strength of a business 3. It is used to judge the ability of management to utilize the entity s resources effectively in achieving the goals of the entity 4. It provides information to creditors for predicting and evaluating the cash flows of the entity 5. It provides management with detailed accounting data for use in planning and controlling the daily operations of the business 6. It provides information to government for determining the tax payable on the profit and/or other incomes of an individual or company and for formulating fiscal policies 7. It forms the basis for reporting on the activities of an enterprise as they affect the society 8. It serves as the basic instruments by which investors decide the securities in which to invest. 1.5 Qualities of Good Accounting Information Accounting information should possess the following qualities before users can rely on it to make decisions: (a) Relevance: The accounting information must include enough facts to satisfy the need of the user. For instance, management accounting information should be relevant to the decision to be taken with it. Financial accounting information should disclose enough information to satisfy the various users. (b) Reliability: The source of information must be verifiable; one source of evidence must corroborate the other, must be free from all forms of bias and can be dependent upon by users to be representing faithfully that which it ought to represent. 14

15 ACC 101 BASIC ACCOUTIG I UITS : 2 (c) Comparability: There should be no change in the basis for the preparation of the accounting information from period to period so that it will be easy to compare the results of operations over different accounting periods. (d) Timeliness: Accounting information must be made available early enough for its use. For instance, management requires certain information on daily basis or weekly basis for effective running of the business; if it comes late it would be useless. Annual reports and accounts must be published not long after the year end. (e) Objectivity: There must be no bias, window dressing or subjective judgment in the presentation of accounting information. Objectivity includes ability to trace transactions to documentary evidence and complying with required regulations in its presentation. (f) Understandability: Accounting information must contain enough details for good understanding. The details must neither be too little nor too much. Career in accounting The demand for accountants appears to be growing and outstripping supply. Job opportunities in today s business climate are better than ever for accountants. Accounting has many areas of opportunities which can serve as career path. These are financial, managerial, taxation, and other accounting related jobs and can be further broken into careers like; i. Financial accountants ii. Financial analyst iii. Banking and financial services iv. Educational services v. Liquidation and litigation services vi. Taxation and consultancy services vii. Employment - private and government. etc Summary of Study Session 1 In Study Session 1, you have learnt that: 1) Financial accounting is basically aimed at providing financial information about the business to users both internal and external for decision making. You learnt that this information is usually in the form financial statement. 2) You also learnt about the history of financial accounting and the Italian method now known as the double entry system, upon which the double entry principle is developed. 3) Financial accounting is ruled based and principled based; you also learnt about the Generally Accepted Accounting Principle (GAAP), which is the basic foundations upon which all accounting principles and regulations are developed. You learnt that GAAP helps accountants to prepare financial report that is reliable, relevant understandable, comparable and timely to users of these information. 15

16 ACC 101 BASIC ACCOUTIG I UITS : 2 4) That financial accounting provides a wide range of careers virtually in all sectors of the economy. ITQ Question Study Session 1 1. Who reports on the true and fair view of the financial statements.? 2. What is the usefulness of the Annual Reports and Accounts? 3. Financial accounting is ruled based and principled based state the generally applicable principles. ITA Answer Study Session 2 1. The company s accountant 2. For periodic review of company s performance 3. Generally Accepted Accounting Principle (GAAP), Self-Assessment Questions (SAQs) for Study Session 1 ow, that you have completed this Study Session, you can assess how well you have achieved its learning outcomes by answering the following questions. Write your answers in your study diary and discuss them with your tutor at the next study contact. You can check your answers with the otes on the Self-Assessment Questions at the end of this Module. SAQ 1.1 (tests learning outcomes 1.1, 1.2 & 1.3) Define financial accounting and bookkeeping Itemize all users of accounting information under the two basic types What is the double entry system first called in Italy SAQ 1.2 (tests learning outcomes 1.4) Explain the concept Generally Accepted Accounting Principle (GAAP) Briefly explain the other branch of financial accounting SAQ 1.3 (tests learning outcomes 1.5) What are the qualities of financial statement prepared based on GAAP 16

17 ACC 101 BASIC ACCOUTIG I UITS : 2 Study Session 2: Basic Accounting Principles, Assumption, Concepts and Conventions Introduction Given the legal implications guiding financial reporting, users expect financial statements to present fairly, and completely the company s financial operations. Financial accounting is based on facts, governed by principles, concepts, assumptions, conventions and constraints developed from Generally Accepted Accounting Principles (GAAP) already explained above. The Institute of Chartered Accountants of igeria (ICA, 2010) states that GAAP aims to make information in financial statement relevant, reliable, and comparable, the institute further asserts that; a. Relevant information affects the decisions of its users. b. Reliable information is trusted by users. c. Comparable information is helpful in contrasting organizations. GAAP are the foundations upon which the four (4) basic accounting principles, four (4) assumptions, two (2) constraints, and other given conventions and concept rest. Learning Outcomes At the end of this session, you should be able to: 2.1 Explain the four (4) basic accounting principles, the four (4) basic assumptions, the two (2) constraints, and other given conventions and concepts. 2.2 Explain the various terminologies used in the statement of financial position. 2.3 Explain and demonstrate the Accounting Equation by application Accounting principle, assumptions, conventions and concepts Principles: these are the four (4) basic principles upon which every financial transaction must stand for it to be deemed a full transaction measurable in accounting terms. They are; 1. The measurement principle: this principle holds that accounting information should be on actual cost and cost should be measured on a cash or equal-to-cash basis. This means that only items or transactions that can be measured or valued in cash terms will be considered and items not measurable in terms of money will not be included in the financial statement. 2. The revenue recognition principle stands to explain when revenue should be recognized in the accounting transaction, should be recognized when earned - that is when services are 17

18 ACC 101 BASIC ACCOUTIG I UITS : 2 performed or when a seller transfers ownership of products to the buyer. This principle is aimed at explaining when and what should be allowed as credit transactions. 3. The expense recognition principle, also called the matching principle, holds that for any accounting period, the earned revenue should be matched with the cost (expenditure) that earned them and in the same year which the expenditure was incurred. 4. The full disclosure principle states that a company reports full in detailed information that are materials in the financial statements, meaning any information which will affect the decision of users must be reported Assumptions: Just like the four (4) basic principles, there are four (4) assumptions which must hold for a valid transaction to be recorded; 1. The Going-concern assumption is a presumption that the business will continue to operate for an unforeseeable future without being closed. 2. The Monetary unit assumption simply means that financial transactions are expressed in monetary terms i.e. money unit such as the aira in igeria, dollar in the United States etc. 3. The Time period assumption is the assumption that the business operations will be accounted and reported for a period of 12 months. This concept is also known as periodicity concept. 4. The Business entity assumption holds that all business be accounted for separately from the owners and from other businesses eg. First bank is different form GT bank and both companies are different from their owners, meaning they can sue and be sued Constraints: this places a limitation bound and guide to financial transactions to be recorded for in the financial statement. 1. The materiality constraint prescribes that only information that would influence the decisions of a reasonable person need be disclosed. Materiality concept is a relative term in size and importance since what is material and important for one organization will not be for another. 2. The cost-benefit constraint holds that only information whose benefits of disclosure is greater than the costs of providing it to users need be disclosed in the financial statement Convention and concept: these are generally agreed ways to present a fact which will guide in the way financial transactions can be presented and recorded. 1. Prudence concept requires fairness with sound judgment in reporting financial transaction details, taking decision without favour to any specific shareholder. 2. Substance over Form Business transactions should be accounted for and presented in accordance with their financial substance and reality and not merely by their legal form. Examples are found in; lease contracts the reality is taken above the legal term 3. The Consistency concept requires that the adoption of a method and a policy in treating an item should be maintained for a long time and should not be changed but used consistently from period to period e.g depreciation or bad debt provision. 18

19 ACC 101 BASIC ACCOUTIG I UITS : 2 4. Accrual concept states that revenues should be recognized in the period they are earned and not in the period they are received and expenses should be recorded in the period they are incurred and not in the period they are paid for. 5. Historical Cost Concept holds that the cost values of assets are retained throughout the accounting books and the assets expire by writing off yearly depreciation to get the current value. 6. Objectivity Concept holds that financial statements should not be influenced by personal biasand that no group of stakeholder/user should be favoured over others. 7. Fairness principle requires that accounting reports should be prepared not to favour any group or segment of society. 8. Realization Concept, unlike the accrual concept, is concerned with determining when revenue is earned. It holds that revenue should be recognized at the time goods are sold and services are rendered; that is the point at which the customer has incurred liability. 9. Double entry principle this is the oldest known and indisputable principle of accounting. It is the principle upon which modern accounting is based. It explained that every transaction must be recorded in the books at least two times- This also means that for every receiver there must be a giver. The double entry is the beginning point of the accounting equations, with every transaction having an effect on at least two accounts. As far as double entry principle is concerned, there must always be two parties to a transaction. Two recordings of any transaction, two accounting records to a transaction. Put in accounting terms there must be a debit and a credit to every transaction. Terminologies used in the statement of financial position. -Capital This is the owners equity in the business after all liabilities due outsiders are deducted from it. In accounting it is the amount of money used to start a business. -Assets Assets are the economic resources of a business that are expected to bring immediate and future benefits to the business. Assets are owned and controlled by the organization. Assets are classified into non-current and current assets. i. on-current assets 19

20 ACC 101 BASIC ACCOUTIG I UITS : 2 These are the economic resources that aid income generation and will remain in the business for more than one accounting period. They include land and buildings, motor vehicles, equipment, machinery, furniture etc. ii. Current Assets These are the economic resources of the business which are easily converted to liquid cash or can be used up within an accounting period e.g. cash in hand and at bank, all receivables and inventories of goods -Liabilities These are obligation of the business to outsiders and to the owners and usually will become claims against the assets of the business in the event of a liquidation. They are divided into current liabilities and non-current liabilities. i. Current Liabilities These are the liabilities of the business that are meant to be paid within twelve months. e.g. payables and all outstanding expenses. ii. on-current liabilities: These are liabilities that will take more than one year before repayment is due. e.g. long-term loans. Accounting Equation The accounting equation is a mathematical representation of the statement of financial position of a business at all-time showing its assets and the claims upon them in form of liabilities and equity, all accounting entries and posting are demonstrated following the accounting equation based on the double entry principles. The accounting equation is stated as ASSETS=LIABILITIES + OWERS (EQUITY) Demonstrating the Accounting Equation by Application Let us illustrate the accounting equation (a) Yagana, a proprietor of Adisco Enterprises started business with cash of 150, 000 The accounting equation is; Assets = Capital + Liabilities i.e. 150, 000 (cash) = 150, Assuming that in addition to the cash invested, Yagana introduced 25, 000, loan from the bank into the business. The cash position is now 175, 000, made up of owner s capital of 150, 000 and liability to an outsider 25, 000 Assets = Capital + Liability 175, 000 (Cash) = 150, , 000 Yagana Enterprises spent 120,000 to buy a building to be used as office and bought chairs and tables for 10,000. It also purchased for cash some inventory for resale at the cost of 20

21 ACC 101 BASIC ACCOUTIG I UITS : 2 30,000. The accounting equation will remain as in (b) above but the composition of the assets has changed. Assets = Capital + Liability Chairs and tables + Inventories of Goods + Building + Cash = Capital + Liability 10, , , ,000 = 150, ,000 Given different combinations of assets, liabilities and capital the equation continues to be the same at each side and representing the equality of both side. Summary In Study Session 2, you have learned about: i. Financial accounting is rule and principle based, and also about the basic principles, assumptions, constraints, conventions and concepts of accounting. ii. The various terms used in the Accounting Equation, such as assets, liabilities and capital. iii. The applications of the Accounting Equation showing its effects on the statement of financial position. ITQ Question Study Session 2 1. are the economic resources of a business that are expected to bring immediate and future benefits to the business. 2. The. is a mathematical representation of the statement of financial position of a business ITA Answer Study Session 2 1. Assets 2. Assets = Capital + Liabilities Self-Assessment Questions (SAQs) for Study Session 2 ow that you are through with this Study Session, to assess how well you have achieved its Learning objectives, you may answer the following questions. Write your answers in your study notes and discuss them with your Tutor at the next study support meeting. SAQ 1.1 (Testing Learning outcomes 2.1) Explain briefly the four (4) basic accounting principles, and four (4) assumptions SAQ 1.2 (Testing Learning outcomes 2.2) State the accounting equation and list and explain each variable in the equation accordingly 21

22 ACC 101 BASIC ACCOUTIG I UITS : 2 References Basic Accounting theory and practice 1 (2014) Dr. A. A. Malgwi, Mr. Victor O. Atabo Financial Accounting Made Simple Robert Igben otes You are advised to make these principle, assumptions, constraint, conventions and concept part of you, know and understand them for they are the foundation of accounting when it comes to application. 22

23 ACC 101 BASIC ACCOUTIG I UITS : 2 Study Session 3: Accounting Process Introduction Accounting as an act consisting of a process which starts from the recording stage to the final stage of giving the report to users of the accounting information for decision making. Every transaction recorded in the financial statement goes through this process, which starts from the sources document all through the journal, the ledger, trial balance and the final accounts. This is diagrammatically shown below. Learning Outcomes Source documents Journal Ledgers Trial Balance Final Accounts After studying this session, you should be able to: 3.1 Explain the accounting process to record a financial transaction. 3.2 Explain the various terminologies used in each of these recording stages. 3.3 Demonstrate practically the recording phases from each level to the final accounts 3.1 The Accounting Recording Process The process of recording accounting transaction and reporting it in the final account is known as the accounting cycle. Each of the steps in the process is explained below Source Documents The source document as the name implies are the source of financial information to be recorded in the books of accounts. Source documents are evidence, usually paper document 23

24 ACC 101 BASIC ACCOUTIG I UITS : 2 that a transaction has taken place. They are proofs for transactions that have taken place, showing details of parties in the transaction i.e. who is receiving a benefit at what expenses, details about the amount involved, date and item of trade. Importance of source documents 1. They serve as evidence of financial transactions 2. They guide against fraud 3. They serve as evidence in audit process 4. They are usually signed by the parties to the transaction therefore they are not usually denied Examples of Source Documents The main source documents that are used for recording in the books of original entry are: 1 Sales invoice 2 Purchases invoices 3 Credit notes 4 Debit notes 5 Payment vouchers 6 Bank pay-in-slips 7 Cheque counterfoils 8 Receipts 9 Purchase order 10 Delivery note 11 Goods Received ote 12 Bin Card 13 Monthly bank statements 14 Petty cash vouchers Sales Invoices A sales invoice serves as the source document to record in the sales day book. All credit sales are recorded in the sales day book. The sales invoice is a document sent by the seller to the buyer (usually for credit sales) and it is used as evidence for credit sales Purchases Invoice A purchase invoice serves as the source document to record in the purchases day book. The purchases invoice is the opposite of the sales invoice sent by the supplier to the customer usually for credit purchases transactions. Credit note A credit note is a document given to refunds cash to the buyer for either being overcharged or for goods returned by a customer for any of the following reasons: - damage to the goods before delivery- wrong specification etc. 24

25 ACC 101 BASIC ACCOUTIG I UITS : 2 Debit note A debit note to a supplier will be used to request for a credit note by the buyer. While at the same time the seller may issue a buyer a debit showing that his account will be charged. Payment Vouchers In an organization every payment must be supported by a payment voucher. Examples are payment vouchers for salaries and wages, petty cash vouchers etc, usually prepared as evidence for the expenses. Bank Pay-in-slips This serves as evidence of cheque and cash paid into the bank by an organization and individuals. It is evidence for money deposited in the bank. Cheque Counterfoils Cheque counterfoils serve as evidence of payment to creditors through the bank and withdrawals using the cheque book. Receipts Receipts are issued for cash and cheques received from a customer for goods sold or services rendered to him. It is evidence for cash paid by the customer. Purchase Order A purchase order is issued by a customer requesting the seller to supply certain quantities of goods of specified description. The purchase order will also state the agreed price and the delivery point and date. An example of a purchase order is the Local Purchase Order (LPO). Delivery ote Delivery note accompanies the goods dispatched to the customer, showing what is receipt by the customer. Goods Received ote The good received note shows the evidence that the goods dispatched to an organization are received in good condition and meet the specifications. It is used as source document in the bin stock card. Bin Card Bin card records movement of inventories. When inventories are added to the store or warehouse bin card is debited and when inventories are issued to production, the bin card is credited Books of Original Entry/Journal Books of Original Entry are books of prime entry. They are also called the journal because they are used to record daily business transactions. These are books in which transactions are first recorded in the accounting cycle and it is the second stage in the recording cycle. Transactions are first recorded here from all the source documents and passed to the ledger. The journal is divided into two types. 1. The subsidiary journal and 2. General journal 25

26 ACC 101 BASIC ACCOUTIG I UITS : 2 - Subsidiary journals The subsidiary journal is further divided into five - these are: i. Sales day book; used to record all credit sales to customers. The total figure is credited to the sales/revenue accounts as part of sales but credit sales to the customer. While the individual customer accounts that made up the total credit sales are debited with their individuals figures only as trade receivables (debtors). ii. Purchases day book; used to record all credit purchases from suppliers. The total figure is debited to the purchases accounts as part of purchase but credit purchases from suppliers. While the individual trade payables/suppliers accounts that made up the total credit purchases are credited with their individual s figures only as trade payables (creditors). iii.sales returns book/returns inward book; the sales returns book or returns inward book is the book of original entry that records any returns on goods sold to customers with the total debited to the return inward journals and the value of the returns credited to the individual customers accounts. iv. Purchases returns book/returns outward book; The purchase returns book or returns outward book is the book of original entry that records returns on goods purchased to the suppliers or manufacturers. The total balance is credited to the returns outward accounts and the individuals returns is debited to the v. Cash book; The cash book records all cash and bank transactions from the source document both receipt and payment. The cash book is divided into single, two and three colum cash book and the petty cash book used to record minor expenses which are many and when recorded in the cash book will make the transaction cumbersome. The cash book is divided into two equal parts debit (Dr) and credit (Cr) side, usually shown in T format. - General journal General journal, also known as journal proper, is used to record all transactions that cannot be recorded into the subsidiary journal. The following transactions that cannot be recorded in the five subsidiary journals are; 1. Opening and closing entries 2. Transfer from one account to another 3. The purchases or the sales of fixed asset on credit 4. Adjustments in account 5. Correction of errors Ledger The ledger which is the third stage of the accounting recording cycle contains information from the journal the second time. The type of account maintained in a ledger is what makes it a debit balance or a credit balance and determines whether the account will be increasing or decreasing i.e. positive or negative. DR CR 26

27 ACC 101 BASIC ACCOUTIG I UITS : 2 Accounts Accounts are the financial transactions posted or recorded from the Journals into the ledgers, this information determines the type of ledger, the financial effect on the ledger and whether the ledger is increasing or reducing. Asset account (Debit) Increase Decrease (Credit) Liability account (Debit) Decrease Increase (Credit) Capital account (Debit) Decrease Increase (Credit) Revenue account (Debit) Decrease Increase (Credit) Expenses account (Debit) Increase Decrease (Credit) Students should note that a ledger contains accounting information, sometimes used interchangeably with accounts; this does not imply that they mean the same thing. Importance of the ledger accounts (i) Keeping permanent records of assets, liabilities, income, expenses and capital. (ii) Providing information for preparing the trial balance, the income statement and the statement of financial position. 27

28 ACC 101 BASIC ACCOUTIG I UITS : 2 (iii) Showing the details of the movement in each account. Chat of Accounts Accounts can be grouped under three main headings; these headings are called chats of accounts 1 Real Account 2 Personal Accounts 2 ominal Accounts Trial Balance Trial Balance is a statement showing list of balances in a double entry form extracted from the ledgers to test the arithmetical accuracy of the accounts. The totals of the debit and credit must be in agreement. The trial balance which is the fourth stage of the accounting recording process provides balances that are used to prepare the final accounts ature of Trial Balance i) It consists of all ledger balances extracted from the accounting books ii) It is drawn at a particular time. iii) The credit and debit column total must agree iv) It must be titled and dated v) It must be sequentially arranged in the order of credit and debit items Uses of the Trial Balance The main uses of the Trial Balance in accounting process are as follows: i) To check the arithmetical accuracy of entries in the ledger accounts. ii) To facilitate easy preparation of final accounts iii) It can be used as evidence and to confirm that proper records have been kept. iv) It can be used to prepare accounting schedule of the material items in the trial balance. v) To detect such errors of posting that can easily be identified by the trial balance. All assets All expenses Gains/incomes All liabilities Capital/Equity Sales Purchase Trial balance DR xx xx xx xxx CR Xx Xx Xx Xx Xxx 28

29 ACC 101 BASIC ACCOUTIG I UITS : Final Account for Sole Trader The essences of the preparation of the final account is to give the report of the business, the final account consist of two components, namely the Income Statement and the Statement of Financial Position. The income statement helps to determine the Gross Profit or Gross Loss and also to determine the net profit when expenses are deducted, while the Statement of Financial Position, which is simply based on the accounting equations, shows the business position in terms of its assets, liabilities and owners equity (capital). The final account is prepared based on equations as shown below: i. Income Statement calculated using the equation; Turnover/Revenue - Cost of Sales = Gross Profit. i.e. T-COS=GP The equation above will give us: T = Turnover (Sales) COS = Cost of goods sold GP = Gross profit ii. Statement of Financial Position is prepared using the accounting equation Assets=Liabilities + Owners Equity - Income Statement for the Year Ended 31 st September 20xx Revenue/Sales Less Returns inward Less cost of sales: Opening inventory xxx Add: Purchases xx Carriage inwards (xx) xxx xxx Less: Returns Outward (xx) Cost of good available for sales xxx Less Closing inventory (xx) xxx Add wages xx Cost of good of sales/cost of sales Gross profit xxx (xx) xxx (xxx) xxx Other incomes: Discount received All received (e.g. rent received) Reduction in liabilities Less Expenses: xx xx xx xxx 29

30 ACC 101 BASIC ACCOUTIG I UITS : 2 All expense (rent paid, bills etc.) xx Increases in liabilities xx All losses (e.g. Bad debt) xx Salaries xx Discount allowed xx Depreciation xx xxx et profit xxx - Statement of Financial Position as at 31 st September 20xx ASSETS: Current Assets: Inventory (Stock) Trade Receivables (Debtors) Less Provision for Bad debt Cash and Cash equivalent Cash at Bank Bill Receivables Prepayment expenses Accrued Income on-current Assets (Fixed Assets assets): Land Building and Premises Plant and machinery Motor van Furniture and Fittings Investment Total assets Equity and Liabilities: Current Liabilities: Trade Payables Over draft (short term debts) Bills payables Accrued expenses on-current Liabilities: Long term debts Debenture Mortgage loan Xx Xx Xx Xx Xx Xx Xx Xx xx(a) Xx Xx Xx Xx Xx Xx xx(b) xxx (a+b) Xx Xx Xx Xx xx(x) Xx Xx Xx xx(y) 30

31 ACC 101 BASIC ACCOUTIG I UITS : 2 Total liabilities Financed by: Capital (Accumulated surplus) Add: et Profit Less Drawings Total equity Total equity and liabilities xxx(x+y)=xy Xxx Xx Xxx (xx) xxx(z) xxx (z+xy) 3.3 Practical demonstration of the recording process from source document to the final accounts. Illustration 1 The following are the transaction of Makama Bala who started a business trading in general merchandise in the month of January 2004; January 1: started business with cash 20,000 January 2: paid rent in cash 1,400 January 3: took out of cash till and paid it into the bank 9,500 January 5: bought office furniture paid by cheque 1,270 January 6: cash sales paid direct into the bank by customer 6,960 January 7: Addo paid us by cheque 1,100 January 14: paid wage by cash 770 January 18: Garba Musa paid us in cash 2,900 January 22: paid Mustapha by cheque 1,680 January 24: cash sales 6,600 January 25: paid motor expenses by cheque 950 January 26: A customer name Aki paid us by cheque 1,880 January 27: withdrew from the bank for business use 3,000 January 28: paid carriage inward by cash 300 January 29: withdrew cash from bank for to petty cashier 2,000 January 30: electricity paid by cheque 500 January 30: Pat paid by cash 1,000 January 31: paid Mr. John a creditors by cheque 4,000 You are required to write up the cash book for the month of January 2004 and post the transactions to their corresponding ledger entries. Suggested Solution Makama Bala Date Particulars f Cash Bank Date Particulars f Cash Amou nt 31