Notesale: Turn your study into money

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Introduction to Accounting

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Assignment 1 Due on 18th July 2012

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OFO-SFAE -2012

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Business transactions

Has economic effect?
Yes

For example
• Buying goods
• Paying for services

Accounting concern

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No

For example
• Hiring employee before
salary payment
• Receiving an order
No accounting concern
BUT may contain useful
information

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Financial Accounting is justified to the extend that an entity
carries out numerous transactions and may have several
interested parties (users)
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 Where incomes exceed expenses the business has made a
profit
 Where expenses exceed incomes the business has a loss;
 Incomes are increases in resources other than those
resources introduced by owners or lenders
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 The funding is generally from two sources i
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▪ Owners (capital) ;and
▪ Lenders (liabilities)
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 A statement of cash flows shows the cash balances at the
beginning and end of the financial period and receipts and
payments made
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g
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g
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g
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Changes in Owners wealth (capital or equity):
 Presenting the changes that have taken place in owners wealth;
by
 Preparing a reconciliation of opening and closing balances - SOCE

OFO-SFAE -2012

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User

Relation

Decisions

Investors Owners and
potential
owners

Have invested in the -To know whether it is profitable so that they can
business or would
withdraw some resources to meet personal needs
like to invest
-Evaluate management, decide to pull out or
inject more capital

Employees

Provide services

Customers

Rely on the business Evaluate whether they can continue relying on
the business for better goods and services
for goods and
services

Suppliers

Supply goods to the
business and in
some cases on
credit

OFO-SFAE -2012

Assess job security and negotiate for better
terms

Also evaluate whether they can rely on the
business as a future source of revenue and also
establish whether the business is able to pay
goods supplied on credit

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User

Relation

Decision

Lenders

Provide loans to the Would like to evaluate the ability of the business to
business on both
pay both the amount advanced and where relevant
short term and long- interest on the loans
tern

The
government
and its
agencies

A regulator of the
business

Collect relevant taxes if the business is profitable,
assist in regulation and also collecting the national
statistics

The public

No direct relation
but is affected by
the business in
different ways

Source of employment
Request for donations and other charitable activities

OFO-SFAE -2012

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As stated earlier a business has resources referred to as
assets
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At any time in a business the assets must be equal to the
total funding:
Therefore:
 Total assets = Total funding which can also be rewritten as
The Accounting Equation
 ASSETS = CAPITAL + LIABILITIES

OFO-SFAE -2012

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Generally an asset is defined as:
 Resource; from which the business expects
 Future economic benefits
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 Current assets are expected to last in the business for less
than 12 months
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 Intangible assets – Goodwill, patents, copyrights, long-term licenses
and others
 Investment property – Land and buildings acquired for earning
rental or market price appreciation
 Financial assets – Include investment in shares and lending (issuing
loans) where they are for the long-term
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OFO-SFAE -2012

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Current assets are expected to last in the business for less than 12
months from the statement of financial position date
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(NB in accounting Trade receivables are also referred to
as financial assets as the business expects cash)
 Cash at bank and cash in hand
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OFO-SFAE -2012

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Other businesses may have unique assets depending on the
nature of industry
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A liability is formally defined as
 an obligation of the business
 arising from past events; from which the business expects
 an outflow of economic resources
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 Main examples are
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




Long term loans,
Some long – term obligations like leases,
Employee retirement benefits ;and
Deferred taxes (for companies)
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 Main examples are


 Trade payables, that arise from purchase of goods on





credit ;or
Other payables that arise from unpaid expenses and
prepaid incomes,
Bank overdrafts,
Short term loans,
Taxes (for companies)
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 Normally this will be done in order of liquidity, i
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from cash first to Property, plant and equipment
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 A re arrangement of the accounting equation:
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 CAPITAL = ASSETS - LIABILITIES

OFO-SFAE -2012

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Capital is also in different forms and depends on the
type of business
...

 In a partnership , the capital of each partner is
separately identified and may also be split into fixed
or current
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

OFO-SFAE -2012

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Share capital:
 Given in terms of number of shares which are assigned a
minimum value called par/face/nominal/principal
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 By law this is transferred to as a separate reserve and can
be used to issue free or bonus shares or cater for issue
costs
...
Can be distributed as
dividends in the future
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Other organizations have different types of capital for
example not for profit making organizations and pension
funds have an accumulated fund and not capital

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Discuss
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Do you think Accounting is useful for the BBS
program? (10 marks)
For the two questions provide a minimum of five
points to justify your answer

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