Introduction to Accounting. F.M.Kapepiso

Size: px

Start display at page:

Download "Introduction to Accounting. F.M.Kapepiso"

Gervase Cox
6 years ago
Views:

1 Introduction to Accounting F.M.Kapepiso

2 Learning objectives At the end of the lecture, you should be able to: Describe the main definition of accounting Explain why study accounting and its functions Demonstrate an understanding of the history of accounting Explain the basic accounting equation Explain the meaning of transactions and events

3 What is accounting Accounting is a system that communicates a message about the financial effects of all the decisions made by a business in the past. Generally accepted definitions: Bookkeeping involves the identification and recording of economic events only and is therefore just one part of the accounting process. Accounting is the process of identifying, measuring/recording and communicating economic information to allow informed judgments and decisions by users of the information.

4 Why study Accounting Knowledge is needed by the users of financial information; and On obtaining an accounting qualification, the accountant has a variety of career opportunities: Auditor Accountant Chartered Accountant (CA) Taxation consultant Financial Manager

5 The Function of accounting The main aim is to capture information about a business and its Financial activities. For recording of financial information, analyzing and presenting it to users for decision making. For helping in coming up with informed financial decisions. For helping in managing finances.

6 Development of Accounting Business transactions were recorded more than 6000 year ago, In early years, transactions were recorded by hand & even so today, even with availability of computers, Due to the need to account for assets entrusted to people/institutions, by the entrepreneur. An entrepreneur is a person to whom assets are entrusted. His/her responsibility is to give account of the financial results to the suppliers of the assets,

7 Development of Accounting Publisher of the first chapter on accounting was - Benedetto Cotrugli. Year 1458 and was about the commercial function, Year Luca Pacioli published a section on the Venetian method of double entry bookkeeping in his Summa de arithmetica geometria proportioni, Year 1543, 1547 & in Germany 1549 the first works on double entry bookkeeping appeared. Theory of accounting, which is the why as opposed to the how, began only in the 19 th century.

8 Standards Standards are the ideas of a single global accounting language. The framework is standardized in the same way through out the globe. It started with the International accounting Standards Committee (IASC) in Over the years this committee developed 41 global accounting standards, referred to as International Accounting Standards (IAS). This committee was then replaced by the International Accounting Standards Board (IASB), established in The new board adopted all 41 IAS and again started the development of more global accounting standards. So far the created IASB has developed 8 new standards, referd to as International Financial reporting standards (IFRS).

9 Accounting Equation Accounting equation is basically the accounting formula and it serves as the foundation of double entry system The are three elements of the accounting equation Assets, liabilities and equity It can be explained by saying that if a firm is to be set up and start trading, then it needs resources. This can be shown as: Resources available in the business = Resources supplied by the owner In accounting, terms are used to describe things and can be shown as: Assets = Owners equity or Capital Usually, people other than the owner have supplied some of the assets. The equation changes to: Assets = Capital + Liabilities It is a fact that the totals of each side will always equal one another

10 Accounting Equation: Example 1 If the assets of a business are N$ 20,000 and the liabilities are N$ 13,000, the owner s equity will be: a) N$ 20,000 b) N$ 13,000 c) N$ 33,000 d) N$ 7,000 e) None of the above

11 Accounting Equation: Example 2 Calculate the missing amount in the following accounting equations: ASSETS = CAPITAL + LIABILITIES 1200 =? = 440 +? 940 =? + 240? = =? + 0

12 Transactions and Events In our society, all economic interaction occurs by way of transactions between different parties. Each transaction includes the transfer of value from one party to the other A transaction can therefore be described as events which can be measured in terms of money and have a bearing on the financial position of the entity. A transaction involves transfer of money or money s worth from one person to another An event is used to mean a happening, as a consequence of transaction s, a result

13 Example 3 You received a loan from the government of $10,000 to pay for your tuition fees at UNAM. You have spent $4, for registration and you are left with a balance of $6, Required: Identify a transaction and an event? Solution: $4000 registration is a transaction and $6000 balance is an event Practice questions: Identify a transaction and an event? 1. Introduced cash into the business of $ Delivering a service to a client 3. Paying telephone account in cash 4. Your sister borrowed some money from you and promised to pay

14 Effect of transaction on accounting equation Transactions which affect asset element of the equation e.g. 1. Purchased equipment from Game store for $4,000 by cash. 2. Game store receives a cheque of $100 from a customer Mr K, as part of the payment of his account Transactions which affect asset and liabilities element of the equation e.g. 1. Purchased furniture on credit from game store for $1, Paid Game store $4,500 by cheque for services rendered Transactions which affect equity element of the equation e.g a) Investment by owner b) Drawing by owner c) Income transactions d) Expense transactions

15 Effect of transaction on accounting equation Transactions which affect equity element of the equation e.g a) Investment by owner Deposited $5000 into a bank account opened to start a business b) Drawing by owner The owner withdrew $300 for personal use c) Income transactions 1. AB office received $1,900 in cash for rendering photocopying 2. AB office renders photocopying services to Mr Smith on credit d) Expense transactions a) Wages paid of $150 to its employees b) A photocopying machine belonging to AB office is services by Mr. Peter and he allows a 30 day payment period Required: For each transaction identify which transaction will be affected? Record each transaction under the accounting equation

16 Accounting Equation Practice questions 1: You start a business that buys and sells second hand bicycles. 1. To start the business you contribute $ of your own money and deposit this into the business bank account. 2. The business still require further funds so you borrow $ cash from your parents (interest free) and deposit this into the business bank account. 3. The business purchases 5 second hand bicycles for $2 000 cash each. 4. The business sells 3 of the second hand bicycles for $3 400 cash each. 5. You withdraw $1 500 cash from the business bank account and celebrate your first sale by doing a trip up the Bosua Pass. Required: show how the transactions affect the financial position of the business as represented by A=C+L. Indicate clearly whether the element has increased or decreased and provide the relevant amount and account affected.

17 Practice questions 2: Accounting Equation The following transactions of Handbags (Pty) ltd were recorded for in a business: 1. Purchased 30 briefcases for $ Sold 2 briefcases for Purchased a cellphone and paid $ Purchased a table and paid $ Borrowed $2000 from your sister Required: For each transaction identify which transaction will be affected? Record each transaction under the accounting equation.

18 Thanks

About Financial Accounting

About Financial Accounting Volume 1 Fifth Edition About Financial Accounting Volume 1 Fifth Edition Contributing authors F Doussy (editor) D Scott Volume 2 Fifth Edition Contributing authors JS Jansen