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BOOK KEEPING IBOOK KEEPING I

LECTURE 1LECTURE 1

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Aims of the LectureAims of the Lecture What is Accounting and the purpose What is Accounting and the purpose

of Accounting.of Accounting. The use of Financial StatementsThe use of Financial Statements Users of Financial StatementsUsers of Financial Statements Accounting cycle during a periodAccounting cycle during a period Forms of business organizationsForms of business organizations The accounting equation The accounting equation Solution of exercisesSolution of exercises

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A service that is systematically A service that is systematically recordingrecording and and summarizingsummarizing the the financial  financial transactions of a business and then transactions of a business and then analyzinganalyzing, verifying and reporting the , verifying and reporting the results. results.

The person in charge for the execution of The person in charge for the execution of accounting is known as an Accountant, and this accounting is known as an Accountant, and this individual is typically required to follow a set individual is typically required to follow a set of rules and regulations of the IFRS (International of rules and regulations of the IFRS (International Financial Reporting Standards). Financial Reporting Standards).

What is Accounting?What is Accounting?

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Purpose Purpose of Accountingof Accounting Accounting allows a company to analyze Accounting allows a company to analyze

the financial performance of the business the financial performance of the business and look at statistics such as net profit. and look at statistics such as net profit. Therefore the management is able to Therefore the management is able to make informed judgment and better make informed judgment and better decision.decision.

Defines the economic position of a company Defines the economic position of a company (assets of the company, liabilities - (assets of the company, liabilities - responsibilities, capital)responsibilities, capital)

Provides useful results and information for the Provides useful results and information for the present and future position of the company.present and future position of the company.

Planning of future activitiesPlanning of future activities Computation of Net Profit/Loss Computation of Net Profit/Loss

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Financial StatementsFinancial Statements

The Accounting service is analyzing data with The Accounting service is analyzing data with the preparation of financial statements. the preparation of financial statements. The The most widely used financial statements are:most widely used financial statements are:

The Statement of Financial Position (Balance The Statement of Financial Position (Balance Sheet) and Sheet) and

The Income Statement (Trading and Profit & The Income Statement (Trading and Profit & Loss account). Loss account).

To achieve its goals, an accounting system may To achieve its goals, an accounting system may make use of computers and video displays as well as make use of computers and video displays as well as handwritten records and reports printed on paperhandwritten records and reports printed on paper

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Financial StatementsFinancial Statements 1. Balance Sheet:1. Balance Sheet: is a statement of the assets, liabilities is a statement of the assets, liabilities

and owners’ equities and owners’ equities as at a specific point in timeas at a specific point in time (next day (next day things could be different).things could be different). AssetsAssets – are things – are things ownedowned by the business such as motor vehicles, by the business such as motor vehicles,

machinery, inventory (goods manufactured or purchased for machinery, inventory (goods manufactured or purchased for resale), money outstanding by debtors, balance at bank and resale), money outstanding by debtors, balance at bank and prepaid expenses. prepaid expenses.

Assets are divided into Assets are divided into fixed assetsfixed assets: : A long-term tangible  piece A long-term tangible  piece of property that a firm owns and uses in the production of its of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash income and is not expected to be consumed or converted into cash any sooner than at least one year's time, and any sooner than at least one year's time, and current assetscurrent assets:Are :Are all assets that a business can turn to cash to pay debts and all assets that a business can turn to cash to pay debts and liabilities without having to sell fixed assets. .liabilities without having to sell fixed assets. .. . Goodwill is an Intangible F.A. Goodwill is an Intangible F.A.

LiabilitiesLiabilities – are amounts – are amounts owed owed such as money due to creditors, such as money due to creditors, bank overdrafts, short term loans.bank overdrafts, short term loans.

Owners’ equity /capitalOwners’ equity /capital – the money contributed by the – the money contributed by the individual in the business - is a type of liability but this amount is individual in the business - is a type of liability but this amount is due to the owner of the business rather than to ‘outsiders’. It due to the owner of the business rather than to ‘outsiders’. It increases by any new capital brought in and by the net profit made increases by any new capital brought in and by the net profit made by the business and reduces by any amounts withdrawn by the by the business and reduces by any amounts withdrawn by the owner. owner.

GoodwillGoodwill typically reflects the value of typically reflects the value of intangible assets such as a strong brand intangible assets such as a strong brand name, good customer relations, good name, good customer relations, good employee relationsemployee relations,innovation,new ,innovation,new products and favorable locationproducts and favorable location. The . The evidence that goodwill exists is the proven evidence that goodwill exists is the proven ability to earn excess profitsability to earn excess profits..

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Statement of Financial Position Statement of Financial Position (Balance Sheet)(Balance Sheet) as at 31st as at 31st December 20YYDecember 20YY

FixedFixed AssetsAssets

Land and BuildingsLand and BuildingsFurniture and FittingsFurniture and FittingsMotor VechiclesMotor Vechicles

GoodwillGoodwill

€

X

X

X

X

CurrentCurrent AssetsAssets

StockStock f goods f goodsDebtorsDebtors

BankBankCasCash h

X

X

X

X

Capital Capital

Add Net ProfitAdd Net Profit

Less DrawingsLess DrawingsX

X

€

XX

Current LiabilitiesCurrent Liabilities (amounts due within a year)(amounts due within a year)

CreditorsCreditors

Bank OverdraftBank Overdraft

Short Term LoanShort Term Loan

X

X

X

Long-term Loan

X

X X

Long-term Liabilities Long-term Liabilities (repayable later than one year)(repayable later than one year)

PremisesPremises

MachineryMachinery

PrepaymentsPrepaymentsBills ReceivableBills Receivable

Statement of Financial Position Statement of Financial Position (Balance Sheet)(Balance Sheet) as at 31st as at 31st December 20YYDecember 20YY

FixedFixed AssetsAssets

Land and BuildingsLand and BuildingsFurniture and FittingsFurniture and FittingsMotor VechiclesMotor Vechicles

GoodwillGoodwill

€

X

X

X

X

CurrentCurrent AssetsAssets

StockStock f goods f goodsDebtorsDebtors

BankBankCasCash h

X

X

X

X

Capital Capital

Add Net ProfitAdd Net Profit

Less DrawingsLess DrawingsX

X

€

XX

Current LiabilitiesCurrent Liabilities (amounts due within a year)(amounts due within a year)

CreditorsCreditors

Bank OverdraftBank Overdraft

Short Term LoanShort Term Loan

X

X

X

Long-term LoaLong-term Loan

X

X X

Long-term Liabilities Long-term Liabilities (repayable later than one year)(repayable later than one year)

PremisesPremises

MachineryMachinery

PrepaymentsPrepaymentsBills ReceivableBills Receivable

Assets are shown on balance in liquidity Assets are shown on balance in liquidity order: we start with the least liquid and we order: we start with the least liquid and we finish with the most liquid.finish with the most liquid. For assets, For assets, liquidity means nearness to cash. For this liquidity means nearness to cash. For this reason cash is the last item on the balance reason cash is the last item on the balance sheet.sheet.

Liquidity refers to the ease in which an Liquidity refers to the ease in which an asset can be converted to cash. Cash is asset can be converted to cash. Cash is therefore the most liquid of all assets. therefore the most liquid of all assets. Assets that are very liquid are shown on Assets that are very liquid are shown on the balance sheet as current assets. the balance sheet as current assets. Current assets are assets that are expected Current assets are assets that are expected to be converted to cash in 12 months or to be converted to cash in 12 months or less.less.

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The Accounting EquationThe Accounting Equation Assets = Liabilities + CapitalAssets = Liabilities + Capital

Or otherwise :Or otherwise : Capital=Assets-Liabilities Capital=Assets-Liabilities

The balance sheet must always balance which The balance sheet must always balance which means means

must always satisfy the above equation, at any must always satisfy the above equation, at any time time

assets equals liabilities plus the capital .assets equals liabilities plus the capital .

Balance Sheet as at 31 December Year 20XX

Fixed Assets € €

Land and BuildingsFurnitures and fittings xMotor Vehicles x xGoodwil

Current Assets

Closing Inventory xDebtors xPrepayments xBank xCash x x

xxxxxx

Capital Account xAdd Net Profit xLess Drawings x x

Long-trrm LiabilitiesLong term loan

Current Liabilities

Creditors xAccruals xBank Overdraft xShort term loan x x

xxxxxx

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2. Income Statement: 2. Income Statement: Presents the results of Presents the results of operations operations for a period of time.for a period of time. It usually covers a It usually covers a year of business activity in contrast to balance year of business activity in contrast to balance sheet which is as at a specific point in time. sheet which is as at a specific point in time.

The income statement is prepared following the The income statement is prepared following the accruals accruals concept:concept: the income and expenses are recorded as they the income and expenses are recorded as they occurred regardless of whether cash has been received or occurred regardless of whether cash has been received or paid .paid .

Income Income – the sales revenue shows the income from – the sales revenue shows the income from goods/services sold in the year. goods/services sold in the year.

Expenses Expenses – in order to make revenues we must incur – in order to make revenues we must incur expenses: an outflow of money to pay for an item or service expenses: an outflow of money to pay for an item or service e.g. wages, rents, electricity e.t.ce.g. wages, rents, electricity e.t.c

The income statement is split into two parts a) the Trading The income statement is split into two parts a) the Trading account which gives the gross profit and b) the Profit & Loss account which gives the gross profit and b) the Profit & Loss account which gives us the Net Profit.account which gives us the Net Profit.

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Trading and Profit & Loss accountTrading and Profit & Loss account

Opening StockOpening Stock

Add PurchasesAdd Purchases

Less Purchases ReturnLess Purchases ReturnLess Closing stockLess Closing stock

€

X

XX

X

Gross Profit c/dGross Profit c/d

Wages and SalariesWages and SalariesInsuranceInsuranceRentRent

Depreciation of motor vehiclesDepreciation of motor vehiclesand Furniture's and Furniture's

Bad DebtsBad Debts

X

X

X

X

X

SalesSalesLess Sales ReturnsLess Sales Returns

X

€

X

Discounts ReceivedDiscounts Received

X

X

Cost of SalesCost of Sales X

X

Gross Profit b/dGross Profit b/d

Office ExpensesOffice ExpensesX

XDiscount allowedDiscount allowed

Net Profit Net Profit

X

X

X

X

Trading and Profit & Loss accountTrading and Profit & Loss account

Opening StockOpening Stock

Add PurchasesAdd Purchases

Less Purchases ReturnLess Purchases ReturnLess Closing stockLess Closing stock

€

X

XX

X

Gross Profit c/dGross Profit c/d

Wages and SalariesWages and SalariesInsuranceInsuranceRentRent

Depreciation of motor vehiclesDepreciation of motor vehiclesand Furniture's and Furniture's

Bad DebtsBad Debts

X

X

X

X

X

SalesSalesLess Sales ReturnsLess Sales Returns

X

€

X

Discounts ReceivedDiscounts Received

X

X

Cost of SalesCost of SalesX

X

Gross Profit b/dGross Profit b/d

Office ExpensesOffice ExpensesX

XDiscount allowedDiscount allowed

Net Profit Net Profit

X

X

X

X

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The above layout of the income statement is not mainly The above layout of the income statement is not mainly useful but it assists the appreciation of the actual double useful but it assists the appreciation of the actual double entry processes and the realization that the income entry processes and the realization that the income statement is part of the double entry.statement is part of the double entry.

The modern-vertical layout is as follows:The modern-vertical layout is as follows:

Income statement:Income statement: Trading and Profit & Loss accountTrading and Profit & Loss accountSales xSales xLess Cost of Sales:Less Cost of Sales:Op. Stock xOp. Stock xPurchases xPurchases xLess Closing stock (x) (x)Less Closing stock (x) (x)GROSS PROFIT xxGROSS PROFIT xxLess Expenses (x)Less Expenses (x)NET PROFIT xxxNET PROFIT xxx

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The modern-vertical layout of Income Statement is as follows:

Income statement: Trading and Profit & Loss accountSales xLess Cost of Sales:Op. Stock xPurchases xLess Closing stock (x) (x)GROSS PROFIT xxGROSS PROFIT xxLess Expenses:

Wages / Salaries x Heating & Lighting x Rent x Insurance x Advertising x Bad Debts x Depreciation x Stationery x Commission Paid x Bank interest & charges x Cleaning x Office Expenses x (x)

NET PROFIT xxxNET PROFIT xxx

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ExercisesExercises