Accounting Study Notes
Book Keeping VS Accounting
Book Keeping is recording all transactions that affect the
business and creating books of prime entry whereas,
Accounting is using the books of prime entry to create
Financial statements
Important Definitions
Statement of financial position: Shows assets and
liabilities of a business on a certain date
Income Statement: a statement prepared for the
trading period to show gross profit and profit/loss for
the year
Gross Profit: profit before subtracting expenses
Profit for the year: Profit after all expenses deducted
Profit & Loss section: Shows Profit/Loss and all
expenses
Trading section: Sows revenue, cost of sales and
gross profit
Progress of business is measured by comparing the
financial statements of one year to another
Capital: Amount of resources provided by the owner.
Holds Credit balance
Liabilities: Anything owed by a business. Non-Current
are payable in more than 1 yr. Current are payable
within a year
Assets: Anything owned by a business. Non-Current
belong to the business for more than a year &
generate income for the business. Current assets can
be converted into cash within a yr
Closing inventory: goods in stock at the end of the
financial yr
Trade receivables: Money people owe to the
business. (Debtors)
Trade payables: Money business owes to the people
Current Assets recorded in the following order in the
SFP: Closing inventory; Trade receivables; Bank;
Cash. I.e. assets are recorded with the most liquid at
the bottom
Purchases: Goods bought by the business for the
intention of being resold
Purchases returns/Returns outwards: Goods returned
by business to supplier
Sales: Goods sold by the business to generate
income (Non-Current asset are not considered sales
if sold, rather, theyre classified under other income
Sales Returns/Returns Inwards: Goods returned to
business by customers
Drawings: Cash or goods taken out by owner of the
business
Expenses: Costs that incur in day to day running
made to generate income
Petty Cashbook: Used to record low value cash
payments
Imprest: amount of money restored to petty cash at
the beginning of each period
Trial Balance: List of balances on the accounts in the
ledger at a certain date. These are balances posted
from the ledger accounts
Depreciation: estimate of loss in value of an asset
over its expected working life
Cash Discount: Reduction of price to encourage sales
Books of prime entry: can also be referred to as
books of original entry. Compiled by a bookkeeper.
They are Cashbooks, Petty Cashbooks, Journals
Business Documents
There are 6 business documents:
1. Invoice – Issued by supplier when selling
2. Debit note – Issued by buyer/customer to request
reduction in price. Not included in accounting records
3. Credit note – Issued by seller to notify buyer of
reduction in price
4. Statement of Account – Issued by seller to notify
buyer of goods on credit to summarize transactions
for the month
5. Cheque – Written order to a bank to pay a stated
sum of money to the person or business named on
order
6. Receipt – Proof of payment
Trial Balance
Assets have Debit value
Liabilities have Credit value
Capital has Credit value
Expenses have Debit value
All gains have Credit value
Debit side and credit side should balance always
Possible errors in the trial balance if they fail
to balance
1. Error of addition within the trial balance
2. Error of addition within one of the ledger accounts
3. Entering figure on the wrong side
4. Making single entry for the transaction rather than a
double entry
5. Entering a transaction twice on the same side of the
ledger
Possible errors in the trial balance even if
they balance
1. Error of commission – occurs when transaction
entered on correct side, but in the wrong account of
the same class
2. Error of complete reversal – occurs when the correct
amount is entered in the correct accounts, but the
entry has been made on the wrong side
3. Error of omission – this occurs when a transaction
has been completely missed
4. Error of original entry – This occurs when an incorrect
figure is used when a transaction is first entered in
the accounting records. The double entry will then
use the incorrect figure
5. Error of Principle – This is when a transaction is
entered using the correct amount and on the correct
side but using the wrong class of account
6. Compensating error – This is when two or more
errors cancel each other out
Depreciation
Causes of depreciation
Physical deterioration: Result of wear & tear due
to normal use or poor physical state due to rust, rot,
decay etc...
Economic reasons: Asset may become inadequate
as it no longer meets the needs of the business. May
also be because asset has become obsolete as newer
& more efficient assets are now available
Passage of time: Arises when asset has set amount
of years
Depletion: This is when value is taken out of the
asset eg Mines/Wells
Methods of calculating depreciation
1. Straight line
2. Reducing balance
3. Revaluation
Straight line method
In this method, the same amount of depreciation is
charged every year
Formula is: Cost of asset/Number of expected years.
If there is residual value, its edited as follows:
(Cost of asset – Residual value) / (Number of
expected years)
Reducing balance
In this method, depreciation charged is decreased
each year as its calculated with net book value rather
than cost
Net Book Value = Cost price – Total depreciation to
date
Value of asset can never fall to 0 as the depreciation
is always calculated as a percentage of the Net Book
Value
This method is used where the greater benefits from
the use of the asset will be gained in the early years
of its life. Assets depreciated by this method often
have lower maintainence costs in the early years.
Used for assets which quickly become out of date
due to advancing technologies
Revaluation Method
Used where it's not practical, or difficult to keep
detailed records of certain types of non-current
assets
This method of depreciation is where the opening &
closing value of a non-current asset are compared to
determine the depreciation for the year
Accounting treatment of depreciation
After calculating depreciation, the following is done:
1. Add to/Change the expenses in the income
statement
2. Create provision for depreciation account & post the
expense by crediting provision account. This ledger
shows accumulated depreciation charged over the
years and has a credit balance
3. The provision for depreciation balance is then
transferred to the SFP & deducted from the cost of
the non-current asset concerned to get the NBV
When Calculating Depreciation, Take note of
the following:
1. Financial period (Date)
2. Depreciation
3. Depreciation method
Accounting Principles
Business Entity Principle: Menas that the business
is treated as being completely separate from the
owner of the business
Consistency principle: Means that accounting
methods must be used consistently from one
accounting period to the next. If not applied, it’ll be
hard to compare financial results from year to year
Principle of duality: Means that every transaction
is recorded twice, once on the debit and once on the
credit side
Going concern principle: Means that accounting
records are maintained on the basis that the
business will continue to operate for an indefinite
period of time. If business will cease to operate in the
near future, the asset values in the SFP will be
adjusted to their expected sale value which are more
meaningful than their book value in this situation
Money measurement principle: Means that only
information which can be expressed in terms of
money can be recorded in the accounting records
Matching principle: Means that the revenue of the
accounting period is matched against the costs of the
same period
Principle of Prudence: Means that profits and
assets should not be overstated & losses and
liabilities should not be understated
Realization principle: Means that revenue is only
reguarded as being earned when the legal title to
goods passes from the buyer to the seller
Journals
