Accounting Basic1 FIRST EDITION

WRITER: ANTOINETTE JOHNSON

Accounting Basic1 FIRST EDITION

WRITER: ANTOINETTE JOHNSON

Table of Contents

Titles Page #

Introduction to Principles of Accounts

What is Accounting…………………………………………………………………………….

What is book keeping……………………………………………………………………………

Users of accounting information…………………………………………………………………

The accounting Equation…………………………………………………………………………...

The classified Balance Sheet

What is a Balance Sheet …………………………………………………………………………

Identify the components of a Balance Sheet………………………………………………………

Construct a Simple Balance Sheet………………………………………………………………..

Different types of Assets and Liabilities…………………………………………………………..

Construct Classified Balance Sheet……………………………………………………………...

Ledgers and Trial Balance

The different types of ledgers……………………………………………………………..

The different classes of accounts………………………………………………………….

Significant of debit and Credit in each class of Account…………………………………

I love accounts, and so should you

so let’s get started. This book

entails:

Introduction to Principles of

Accounts.

Classified Balance Sheet

&

Ledgers and Trial Balance

Introduction

This book is created for Secondary students at the grade nine level it is created to give them a

firm background in the introductory process of accounting, what is accounting, introduction to

the balance sheet also how to record transactions in the Ledgers, Balance-off these transactions

and to transfer information in the creation of a Trial Balance. This book also breaks down the

foundation of accounting the users of accounting information, provide knowledge about what are

Assets, Liabilities and also who are Debtors and Creditors. This book is a sophisticated and easy

guide in the general understanding of accounting.

Authors Information

Name of Author is Antoinette Johnson a student teacher at the Mico

University College with the dreams and aspiration to one day

become a business teacher who teaches Accounts and Principle of

Business to future business men and women and also aspiring

business teachers at the secondary level. In the creation of this book I

think about the young future accounts how important it is let them fall in love with the subject at

first sight, let them realize the importance of accounting, what it is and how it is a wonderful

subject to learn and to know about. For in our everyday life we use day life we use accounting

for we spend money, budget and analyze monetary figures everyday so it is a wonderful subject

to grasped and learn about. With this book I guarantee their first look at accounts will let the

want to learn more about the subject each day.

1.Introduction to Principles of Accounts

Objectives

After you have studied this chapter, you should be able to :

explain what is accounting

know what is book keeping

describe the users of the accounting information

understand the accounting equation

Introduction

This chapter gives an introduction to Accounting and what it is.

1.1 What is Accounting

It is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit or loss for a

given period, and the value and nature of a firm's assets, liabilities and owners' equity.

Accounting is very important it is used by businesses and individual in their day to day monetary

transactions. For the buying and selling of goods and services budgeting and also recording of

financial actions that has taken is also known as accounting.

1.2 What is book keeping?

The part of accounting that is concerned with recording data is often known as book keeping.

Until about one hundred years ago all accounting data was recorded in books hence the term

book keeping.

Now a days books can still be used however computers have drastically taken over in the

recording of financial data.

1.3 Users of Accounting Information

Users of Accounting Information:

Users of accounting information can be separated in two areas Internal and External users

Internal Users ( Primary Users) of accounting information include the following:

Management: for analyzing the organization’s performance and position and taking appropriate

measures to improve the company results.

Employees: for assessing company’s profitability and its consequences on their future

remuneration and job security.

Owners: for analyzing the viability and profitability of their investment and determining any

future course of action

External users (Secondary users) of the accounting information include the following:

Creditors: for determining the credit worthiness of the organization. Terms of credit are set by

creditors according to the assessment of their customers’ financial health. Creditors include

suppliers as well as lenders of finance such as banks.

Tax Authorities: for determining the credibility of the tax returns filed on behalf of the

company.

Investors: for analyzing the feasibility of investing in the company. Investors want to make sure

they can earn a reasonable return on their investment before they commit any financial resources

to the company.

Customers: for assessing the financial position of its suppliers which is necessary for them to

maintain a stable source of supply in the long term

1.4 Accounting Equation

The accounting equation breaks down and simplifies the accounting process. In the accounting

process if a firm is to be set up and start trading, then it needs resources. In the first place it is the

owner of the business who has supplied all of the resources. This can be shown

Resources in the business = Resources supplied by the owner

The amount of the resources supplied by the owner is called capital. The actual resources that

are then in the business are called assets.

Assets = Capital

However people other than the owner have supplied some of the assets. Liabilities is the name

given to the amounts owing to these people for these assets. The equation for this is

Assets= Capital+ Liabilities

It can be seen that the two sides of the equation will have the same totals. This is because we are

dealing with the same thing from two different points of view. It is :

Resources: what they are= Resources: who supplies them

( Assets) ( Capital + Liabilities)

It is a fact that the totals of each side will always equal one another, and that this will always be

true no matter how many transactions there may be. The actual assets, capital and liabilities may

change, but the total of the assets will always equal the total of capital + liabilities.

Assets consist of property of all kinds , such as Building ,Tractors, Machinery and so on. Debts

wowed by customers and the amount of money in the bank account are included in the assets.

Liabilities consist of money owing for goods supplied to the firm and for expenses. Also loans

made to the firm included.

Capital is mostly called the owners’ equity or net worth

Answer ALL questions

1. What is accounting?

2. What is the name of the areas of the users of the accounting information?

3. Give three users of the accounting information.

4. What is the accounting Equation?

5. What is book keeping?

End of topic assignment

2. The classified Balance Sheet

Objectives

After you have studied this chapter, you should be able to :

define the Balance Sheet

identify the components of a Balance Sheet

construct a Simple Balance Sheet

identify the different types of Assets and Liabilities

construct Classified Balance Sheet

Introduction

This chapter gives a brief introduction of the balance sheet and its components.

2.1 Define the balance sheet

What is the Balance Sheet?

a statement of the assets, liabilities, and

capital of a business or other

organization at a particular point in time,

detailing the balance of income and

expenditure over the preceding period.

2.2 Components of the Balance Sheet

The components of a Balance sheet are:

FIXED ASSETS

Are assets that are purchased for long term used in the business and are not quickly to be

converted in to cash. Examples of fixed assets are Building, Tractors, Furniture’s …

CURRENT ASSETS

Current asset are assets which can be expected to be sold, consumed, or used up through the

normal operations of a business. Examples of Current Assets are Bank, Stock (Inventory),

Cash….

CURRENT LIABILITIES

Current liabilities are a company's debts or obligations that are due within one year, appearing on

the company's balance sheet and include short term debt, accounts payable,

accrued liabilities and other debts.

LONG TERM LIABILITIES

Long-term liabilities are liabilities with a future benefit over one year, such as loans that must be repaid

over a ten year period.

CAPITAL OR EQUITY

Are funds used to start a business venture these funds can come from personal savings , loans,

shares….

DRAWING

This is resources that the owner or proprietor take out of the business for his personal use. For example

Cash, stock…

2.3 Simple Balance Sheet

Example of a Simple Balance Sheet

Fig 1

T. Taylor

Balance Sheet as at 31 June 1992

Assets $

Tractor 2000

Building 3000

Stock of Goods 100

Debtors 200

Cash in hand 100

5300

Capital and liabilities

Capital 5000

Creditors 300

5,300

In the simple balance sheet it is done horizontally it does not contain the full aspect of all the financial

information. It only provides a foundation and a firsthand look at the balance sheet for beginners in order

to serve as a guide.

2.4 Classified Balance Sheet

Fig 2

Fig 2 Show case images of a Classified Balance Sheet which entails all the components of the balance

sheet.

Answer all Questions

What is a Balance Sheet?

What are the components of a Balance sheet ?

Construct a classified Balance Sheet and A simple Balance Sheet from the information below.

Details $

Capital 1000

Cash 200

Bank 100

Stock 200

creditors 50

Net Profit 250

Premises 100

Debtors 50

Machinery 50

End of topic assignment

3. Ledgers and Trial Balance

Objectives

Identify the different types of ledgers

Describe the different classes of accounts.

Explain the significant of debit and Credit in each class of Account.

Construct ledger accounts

Balance and close ledger accounts

Prepare Trial Balance

Introduction

This chapter is geared up to teach learners about the types of ledgers and to educate them on the

Trial Balance.

3.1 Identify the different types of Ledgers

GENERAL LEDGERS

A general ledger is a complete record of financial transactions over the life of a company. The

ledger holds account information that is needed to prepare financial statements, and includes

accounts for assets, liabilities, owners' equity, revenues and expenses. Examples of accounts that

are in the general ledgers are:

Examples of Accounts that

are found in the General ledger

1. Premises

2. Cash

3. Bank

4. Purchases

5. Sales

6. Fixtures

7. Building

8. Stationary

9. Staff Pay

10. Rent

SALES/ DEBTORS LEDGERS

The Sales ledger is a ledger that holds the records and transactions of the debtors in a business.

For example persons or businesses who owes the business.

PURCHASES/ CREDITORS LEDGERS

The purchases or creditors ledger holds the records and transactions of the persons or businesses

that the business or organization OWES. These are the persons or businesses who the business or

organization is in debt to.

3.2 Classification of Accounts

NOMINAL ACCOUNTS

Are accounts such has Revenue and Expenses.

Revenue- is the amount of money that a company actually receives during a specific period,

including discounts and deductions for returned merchandise. Examples of Revenues are:

Examples of Revenues

1. Discount Receive

2. Interest Receive

3. Rent Receive

4. Accounts Receive

Expenses- An expense is the reduction in value of an asset as it is used to generate revenue.

Examples of Expenses

Examples of Expenses

Accounts Payable

Rent Payable

Staff pay

Insurance

REAL ACCOUNT

Real accounts are asset accounts. Example of real accounts are Premises, Building, Fixtures and

Fittings.

PERSONNAL ACCOUNTS

Personal accounts are accounts such as debtors and creditors accounts.

Debtors- Are businesses or persons that OWES the business.

Creditors- Are businesses or persons that the business OWES.

3.3 Significant of Debit and Credit in each class of Account

NORMINAL ACCOUNT

Revenues ALWAYS carry a CREDIT balance.

Example fig 1

Transactions Effect Action

May 1 Rent Receive $ 20.00

cash.

Rent Receive- Credit with

20.00 Increase

Cash Debit with 20.00

increase

Rent receive CREDIT for

there is an increase and the

company receives funds.

Cash increases for there is

money entering in he account

and when assets INCREASE

you DEBIT.

Expenses carries a CREDIT balance when there is an INCREASE and a DEBIT balance when it

DECREASES.

Fig 2.

Transactions Effect Action

April 2 Paid Rent with Cash

$200.00

Rent ( Debit) Decrease

Cash ( Credit ) Decrease

Rent decrease for it was paid

by cash so it has a DEBIT

balance.

In return leaving cash with a

CREDIT balance for there is

a decrease in the cash in order

to pay the rent.

April 3 Took machinery

$200.00 on credit from

L. Brown

Machinery ( Debit)Increase

L. Brown(Creditor) (Credit)

INCREASE

Machinery increases so it will

have a DEBIT balance for

when assets increase it carries

a DEBIT balance,

L. Brown increases for he is

a Creditor which is aexpense

and the Business OWES for

the Machinery supplied.

REAL ACCOUNT

Real accounts which are ASSET accounts carries a CREDIT balance when it DECREASES

AND

Carries a DEBIT balance when it INCREASES.

Transactions Effect Action

Paid Staff by Cash 200.00 Staff decreases DEBIT

balance

Cash Decreases CREDIT

balance.

Staff decrease leaving a Debit

balance for when expenses

decrease it carries a debit

balance.

Cash decreases by paying the

staff so it carries a Credit

Balance for when ASSETS

decrease it carries a Credit

balance.

L. Miller( DEBTOR) paid us

by Cheque $ 300.00

L. Miller decrease CREDIT

Bank Increase DEBIT

When debtors decrease you

CREDIT for they are assets to

the business for they OWE

the business and when assets

decrease you Credit.

Bank increases which is an

ASSET so it carries a DEBIT

balance.

PERSONNAL ACCOUNTS

Creditors carries a Debit balance when there is a Decrease in the account.

AND

Carries a Credit balance when there is an increase in the account.

Debtors carries a Debit balance when there is an increase in their account for as said earlier they

are regarded as assets to the business so when there is a increase they carry a DEBIT balance.

When there is a Decrease they carry a CREDIT balance.

How you Balance –Off Financial accounts

\

Step 1. Ensure that you have recorded all transactions

correctly.

Step 2. Ensure that you have recognised the lesser and the greater side of each

account.

Step 3.Take away the lesser side of each account from

the graeter side.The amount that is left will form the

balance b/d and c/d

Step 4. On the lesser side you record the Balance c/d and it must be entered at the end of the month as

shown below

Step 5. On the Greater side you record the Balance b/d that must be entered at the

begining of the a new month.

3.4 Construct ledger accounts and Balance off each account

Complete the ledger accounts for Sinclair balance off and construct the trial balance for the

month ended August 31, 2010

Aug 5 Cash Sales $ 100.00

Aug 6 Bought goods from L. Brown 20.00

Aug 7 Sold goods to M.Ray 100.00

Aug 8 Bought goods from M.Cleer 30.00

TRANSACTIONS ARE DONE BELOW FOR EXERCISE 1.1

General Ledger

Cash a/c

DR CR

Aug 5 Sales 100.00

100.00

Aug 31 Balance c/d 100.00

100.00

Sales a/c

DR CR

Aug 31 Balance c/d 200.00

Aug 5 Sales 100.00

Aug 7 M. Ray 100.00

200.00

Sep 1 Balance b/d 200.00

Purchases a/c

DR CR

Aug 6 L. Brown 20.00

Aug 8 M. Cleer 30.00

50.00

Sep 1 Balance b/d 50.00

Aug 31 Balance c/d 50.00

50.00

Purchases Ledger

L. Brown a/c

DR CR

Aug 31 Balance c/d 20.00

20.00

Aug 4 Purchases 20.00

20.00

Sep 1 Balance b/d 20.00

M. Cleer a/c

DR CR

Aug 31 Balance c/d 30.00

30.00

Aug 8 Purchases 30.00

30.00

Sep 1 Balance b/d 30.00

Sales Ledger

M. Ray

DR CR

Aug 31 Balance c/d 100.00

100.00

Aug 7 Sales 100.00

100.00

Sep 1 Balance b/d 100.00

3.5 Trial balance

Example of Trial Balance for Exercise 1.1

Trial Balance

M. Sinclair

As on August 31 2009

Cash

Sales

Purchases

Debtor: M.Ray

Creditors: L. Brown

M. Cleer

DR

100

50.00

100.00

$250.00

CR

200

20.00

30.00

$250.00

3.4 The Trial Balance and its Purpose

TRIAL BALANCE

A list of account titles and their balances in the books, on a specific date, shown in debit and

credit columns.

PURPOSE OF THE TRIAL BALANCE

Trial Balance acts as the first step in the preparation of financial statements. It is a

working paper that accountants use as a basis while preparing financial statements.

Trial balance ensures that for every debit entry recorded, a corresponding credit entry has

been recorded in the books in accordance with the double entry concept of accounting.

Trial balance ensures that the account balances are accurately extracted from accounting

ledgers.

Trail balance assists in the identification and rectification of errors.

What are the Different types of ledgers and their purpose?

Give the steps in balancing off accounts

What are Nominal Accounts, Real Accounts and Personal Accounts?

What Is the Trial Balance and its Purpose?

Record the following transactions in the ledger balance off and construct the Trial Balance

The books of Ray and Son are as Follows for the month of April 2010:

Apr1. Started business with $3000.00 in the bank

Apr 2 Bought car by cheque $100.00

Apr 4 . Got a loan of $4000.00 cash from R. James

Apr 5. Sold goods $100.00 to R. Wray

Apr 8 Bought goods $20.00 from M. Murray

Apr 10 Cash Sales 200.00

Apr 13 Bought a motor van 50.00

End of topic Assignment

References

Businessdictionary. (2016). Accounting. www.businessdictionary.com.

Investipedia. (2016). Financial Ledgers. www.investopedia.

Investopedia. (2016). Revenues & Expenses. www.investopedia.com.

Sangster, F. W. (1999). Business Accounting 1. London: Financial Times Pitman Publishing.