INTRODUCTION TO ACCOUNTING

COURSE LEARNING OUTCOME:

By the end of this course, students will be able to:

Describe accounting, the different types of organisations and analyse the uses and users
of financial information, the purpose of preparing the financial reports.

Identify the accounting process by describing the transactions and sources of documents,

Analyse and record the transactions after understanding and with the knowledge of the
accounting equation, debits, credits, double entry system, journal, ledger postings, T-
Account, trial balance. Apply accounting concepts and principles to prepare financial
reports for unincorporated businesses.

Apply the various adjustments to the accounts for the preparation of Financial Statements
and able to formulate using Spread Sheets. Plan their financial needs and able to provide
information regarding the sources of capital.

Define control accounts and apply the technique of preparing the debtors control account
and creditors control account.
 CHAPTER - 1

INTRODUCTION TO
ACCOUNTING
 ACCOUNTING IS A LANGUAGE OF
BUSINESS.

Accounting is divided into two sections:-

1.Bookkeeping 2.Accounting
Bookkeeping:

- is a process of detailed recording of all

financial transactions.

- the basis of maintaining detailed records(the

two effects) is known as Double Entry
Bookkeeping.
Accounting:

- It uses the bookkeeping records to

prepare the Financial Statements at
regular intervals.
-This Financial Statements include:

I. An Income Statement or Trading and Profit & Loss

A/c which is prepared to know the profit or loss of a
business.

II. A Balance Sheet which is prepared to know the

financial position of a business.
- In Accounting, the progress of the business
can be measured by comparing the financial
statements of one year with those of the
previous years or with those of the other
similar businesses.
- Accounting is therefore concerned with :-

Recording of data,
Classifying & Summarizing data,
Communicating what has been learned from
the data.

DEFINITION OF ACCOUNTING

The process of identifying, measuring and communicating

economic information to permit informed judgments
and decisions by users of the information.
2. PURPOSES OF PREPARING FINANCIAL
REPORT:

The information provided by

the financial statements shows the
owner what has happened during a
certain period of time & helps in
monitoring the progress of the business.

The plans for the for the future

development of the business are also based
on the financial statements.
 3. USERS OF ACCOUNTING INFORMATION:

i. Owners Of The Business:

To know the profitability (Profit/loss)

To know their financial resources (Assets).

ii. A Prospective Buyer:

With the help of the financial statements to analyze the

overall performance of the business.

iii. The Bank:

To make a decision in lending money to the owner.

iv. Tax Inspector:

To calculate the taxes payable by the owner.

v. A Prospective Partner:

If the owner wants to share ownership with someone else,

then the prospective partner uses accounting information to
know the overall performances of the business.

vi. Investors:

The existing investors or the new investors who are

interested to invest their money in the business, uses the
accounting information, to make a decision on their
investment.
4. FORMS OF BUSINESS ORGANIZATIONS:

i. Sole Traders

ii. Partner ships

iii. Member governed bodies

iv. Companies
i. Sole Traders:

Sole traders are individuals who have started their

business on their own.

There is only one owner.

It is an unincorporated business no separate entity.

No legal distinction between the assets of the
business and assets of the owner.

Sole trader is responsible for the debts of the

business.

Profit made are regarded as the owners by the tax

authorities and are subject to income tax.
ii. Partnerships:

Partnerships occur when two or more individuals join

together to form a business.

A partnership can be incorporated as a limited liability

partnership or as an unincorporated business.

If, unincorporated then the same principles as outlined for

sole traders apply,
except that the partners will be jointly liable for partnership
debts.

In many instances, the partnership will have a partnership

agreement, that may alter the profit-sharing ratios between
the partners.

Partners have to pay income tax on the profits of the

partnership.
iii. Member-governed bodies:

Some entities are run by its members for the benefit

of the members.

Primary aim is to provide service to its members.

Its main financial objective is not profit-motive.

Many of the organizations are unincorporated.

Some are large, formal and subject to their own

legislation.
 Examples of this type of organizations include-
mutual building societies,
sports clubs, and
life assurance companies.

In many instances, to protect their members private

wealth, these entities are incorporated, not like
normal companies.

They are not limited by shares but limited by

guarantee.

They do not have share capital and shareholders.

iv. Companies:
Companies are incorporated by law as separate legal
entities.

Companies can own assets and can take action in

their own right.

Companies are regulated by legislation (the

Companies Act 2006), the accounting profession and
the stock exchanges (if listed).

Companies are subject to more strict regulation than

other forms of business organizations.
 Companies have to pay corporation tax.

The two most common forms of company are:

Public limited companies (plc), and
Private limited companies (ltd).

Limited liability
Owners liability is limited to the amount invested in
the company.