Notesale: Turn your study into money

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Basic Accounting
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Financial information is
very important in decision making in a business
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Further, the business activities also impact
various other parties
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Owners, debt holders, investors,
customers, employees and the government are usually considered as key interested
parties among other parties
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Accordingly, providing information is the main objective
of accounting
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- To know whether the business has earned an adequate profit
- To know whether the financial position of the business is sound
- To fulfill legal requirements (presentation of financial reports is a mandatory
requirement by law for some organisations)
- To minimize disadvantages arising through ommission and commission of
transactions, and to organize financial activities
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These reports are generally termed as Financial Statements
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For example, when a business purchases goods on cash basis, cash
and goods are exchanged between the business and the supplier
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In a business, there can be various types of transactions
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Examples :- Sales of goods for Rs 100 000 Monthly salary payment of Rs 50 000
Obtain a bank loan amounting to Rs 300 000 Payment of Rs 5 000 for electricity
In addition, to the exchange of resources mentioned above, some events that had
occurred in businesses are also considered in accounting
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10 000 A trade receivable that becomes a
bad debt - Rs
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Most of the transactions that occur in a business are associated with purchases and
sales of goods and providing services
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If the value of the transaction is settled at the point of the
transaction, it will be considered as a transaction on cash basis
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Assets

- Equity
- Liabilities
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Income and Expenses
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Examples :- Purchase of a machine by a business Purchase of a motor vehicle by a
business
In order to recognize an asset in accounting reports, its cost/value should be able to
be measured reliably
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Examples :- If a machine that had been purchased by a business is used to
manufacture and sale goods, the cash that flows to the business in future from that
machine
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If any item does not generate future economic benefits, that item cannot be
considered as an asset
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This
means, the business should be able to use that asset according to the discretion of the
business and to take decisions on the asset
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A building on a rental basis cannot be considered as an
asset as it is not controllable by the business
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- Arose as a result of a past transaction
- Controlled by the business
- Inflow of future economic benefit to the business
Accordingly, an asset could be defined as follows
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The assets of a business can be categorised into two types as follows
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Examples :- Stocks to be resold, loans and advances receivable that needs to be
recovered within 12 months
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Examples :- Land and buildings, machinery, furniture, equipment, motor vehicles
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Examples :- A loan obtained from a bank

The business is bound to repay these liabilities in future
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When these liabilities are settled, the resources
which generate future economic benefits (assets) will flow out from the business
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Example :- In settling a bank loan, it requires to pay cash and cash outflows from
the business
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Current Liabilities : The liabilities that should be settled in a short period of time as
within 12 months are classified as current liabilities
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Examples :- Trade creditors that arise when goods are purchased on credit for resale,
accrued electricity expense
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Example :- The portion of a bank loan that needs to be settled after one year
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After the settlement of such liabilities the assets that remains belongs to
the owners of the business
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500 000 worth of assets and a bank
loan amounting to Rs
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Rs
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500 000 of assets has to be
used to settle the bank loan and therefore, the remaining of assets worth of Rs
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Equity = Assets - Liabilities
= Rs 500 000 - Rs 200 000
= Rs 300 000
In a sole proprietorship, the capital invested represents the equity
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Accordingly,
Profit = Income – Expenses
Profit belongs to the owners of the business
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Profit can be calculated separately and thereby it can be added to the equity
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In o

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