Principles of Accounting (4051)

Form 1 Notes.

Topics to be covered
1. Introduction to accounting
2. The accounting equation
3. Main definitions
4. Users of accounting information
5. Business Organizations

Introduction to Accounting
Accounting - It is the process of preparing financial statements to permit informed judgements
and decisions by users of financial information.
Book keeping- is the process of recording data relating to business transactions in the books of
accounts.
Differences between Book keeping and Accounting
Book keeping Accounting
Recording of transactions and maintaining of preparation of financial statements and their
double entry interpretation
Performed daily Performed periodically
Book keeping is limited only to maintaining Accounting covers both book keeping and
double entry accounting work
Requires O or A level or a Diploma in Requires at least a Degree in Accounting of
Accounting Finance

Importance of Accounting
For decision making
Record keeping
Prevention and discovery of fraud
Getting of funds and loans
Reputation and credit building
Examples of careers in Accounting

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Cash manager , credit manager, auditor, tax advisor, financial accountant, investment banker,
insurance broker, academic career e.g teacher, lecturer
The Accounting Equation
It shows how the business is financed
The resources supplied by the owner (capital) should be equal to the resources owned by the
business (assets)
CAPITAL = ASSETS
In most businesses, however the owner do not provide all resources but have to borrow from
others (liabilities) so the equation becomes
CAPITAL = ASSETS – LIABILITIES
The Main Definitions
Assets
They are resources that are owned by the business. Assets can be current assets or non current
assets.
Current assets
These are assets that are expected to be turned into cash within a financial year. They include
inventories, trade receivables, other receivables, bank and cash
Non-current assets
These are long term assets bought for use in the business and not for resale. These assets have a
physical form and can be touched, felt and seen. These include properties, machinery, fixtures
and fittings, equipment and vehicles
Liabilities
These are obligations of the business which needs to be paid in future. Liabilities can be current
liabilities or non-current liabilities
Current liabilities
These are obligations of the business which have to be paid within one financial year. They
include trade payables, other payables and bank overdraft.
Non-current liabilities
These are obligations of the business which have to be repaid after 12months. These includes
long term loans, mortgages and debentures.

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The distinction between current and non-current
current Non-current
Short term Long term
Lasting less than 12months Lasting more than 12months
Capital - These are resources invested into the business by the owner.
Drawings - These are goods or money taken out of the business by the owner for private or
personal use. Drawings reduce the amount of capital since the resources invested will be taken
back.
Revenue - It is the income obtained from the main operating activities of a business.
Expenses - These are day to day costs of operating a business e.g payment of rent, electricity,
wages and salaries
Sales – These are goods sold which had been previously bought for resale.
Purchases – These are goods bought for resale
Purchases returns - These are goods bought on credit for resale which have been returned to the
supplier
Carriage inwards - These are costs of transporting purchases to the business
Carriage outwards - These are costs of delivering goods sold to customers.
Inventory - These are goods held for sale (stock of goods), use in production (stock of raw
materials), or awaiting further processing (stock of work in progress)
Users of financial information
Financial statements are used by a variety of groups for a variety of reasons. People who are
interested in the financial information of a business are also referred to as stakeholders.
Stakeholders Reason for use
Managers To assess overall performance of the business
Employees To negotiate wages and salaries and for job security reasons
Shareholders/ owners To assess the return/ profits from the business
Potential investors To assess past performance as a basis for making investment
decisions
The Government To assess profitability for tax purposes
Lenders e.g Banks To assess the ability of the business to pay back loans
Customers To assess performance in relation to likelihood of continued trading

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 Business Organisations
A business is an organization engaged in commercial activities to satisfy human needs and
wants. It can either be:
a) Production of goods
b) Buying and selling of goods
c) Provision of services
Types of business activities
a) Trading business- this a business which buys and sells goods for example wholesalers
and retailers.
b) Service business- this is a business which does not sell tangible goods but instead
provides intangible services for example an accounting firm offering services like
auditing.
c) Manufacturing business- this is a business which buys raw materials and converts them
into finished products for sale.
Types of business organisations.
Businesses can either be private sector or public sector.
Private sector organisations
 Are owned and controlled by individuals
 Are largely financed by the government
 Are generally profit oriented
 Includes organisations like sole traders, partnerships
Public sector organisations
 Are owned and controlled by the government
 Are largely financed by the government
 Mainly aims to provide essential goods and services at affordable prices.
 Includes public utilities like GMB, ZBC, ZUPCO, ZESA
A business can take the following form.
1. Sole Trader Business
It is a business that is owned and managed by one person.
Advantages of sole trader business
 Minimum government regulations
 Close contact with customers
 Quick decision making
 Direct relationship between effort put and reward

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  Benefit of secrecy as there is no need to publish financial results.
Disadvantages of sole trader business
 Limited amount of capital
 Poor decision making
 Limited managerial ability
 Death of the owner can lead to closure of the business

2. Partnership business
 It is a business owned and managed by more than one person but not morethan 20.
 The owners are called partners and they are governed by the partnership act.
 The partners may also have a Partnership Agreement or Deed which include information
such as the amount of capital to be introduced by each partner, the ratio in which profits
or losses will be shared.
Advantages of Partnerships.
 Access to more capital.
 Partners can pool resources, ideas and expertise
 Partners can sharethe workload
 Sharing of risks and losses
 Easy formation
Disadvantages of Partnership
 The number of partners is limited to 20 therefore expansion is limited
 Partners have less independency than sole traders
 Death or retirement of a partner results in the dissolution of a partnership and the
remaining partners form a new partnership
 A decision made by one partner binds all partners.

3. Limited Companies
Advantages of limited companies
 Can raise more capital
 There is dcemocratic management as shareholders can vote
 Ability to hire specialist services and qualified personnel.
 Better scope for growth and expansion.
 Public confidence as financial statements are audited.

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Disadvantages of limited companies
 Delay in decvision making
 Excessive government control
 High costs of management
 Difficult to form