Introduction

AS WE welcome the new school year, we must identify the host of possibilities waiting to be unfolded. It is a great pleasure to be with you. I must extend a warm welcome to those who have been with me from last school year, and further extend a special welcome to those of you visiting for the first time.

It is understandable that many students will feel nervous or even anxious when being introduced to a new subject, but it is extremely important for you to quickly overcome those feelings. I endeavour to take you through your examination syllabus smoothly. Remain calm and exert every effort to make your 2018-2019 school year with me a profound success.

ACCOUNTING CONCEPTS

Every element of society, from an individual to a business entity, makes decisions on how to distribute its resources wisely so as to get the best result from investment. The process that helps in making these decisions is known as accounting. This is done by:

Recording

Classifying

Summarising

Reporting business transactions and interpreting their effects on the affairs of the entity.

It is, therefore, clear that the recording of data, or bookkeeping, is definitely the simplest step in the accounting process.

THE ACCOUNTING EQUATION

Assets to liabilities represent the relationship of the financial condition or position of a business.

ASSETS

These are things of monetary value owned and used in the business. There are two types of assets:

CURRENT ASSETS

These assets can be easily converted into cash if not already cash, e.g., stock, cash at bank,

FIXED ASSETS

These are assets used to enhance the business and help the business operate and make profit. They are not for resale for profit, e.g., buildings, machinery, motor vehicle.

LIABILITIES

These are amounts owed for assets supplied to the business. There are two types of liabilities:

CURRENT LIABILITIES

These must be paid within the year (unless told otherwise) e.g., goods bought on credit.

LONG-TERM LIABILITIES

These have an extended period of time to be paid, e.g., mortgage, bank loans.

OWNERS’ EQUITY

This is the interest of the owners in the business. It is another name for capital.

The accounting equation is connected by a fundamental relationship with these THREE elements: assets, liabilities and owners’ equity. The equality of the asset, on one side, with the claims of the creditors and owners on the other side, is clearly expressed in this equation, as illustrated below:

I Assets = Liabilities + Equity

The accounting equation gives the assumption that the business owns its assets subject to the rights of the creditors and owners.

EXAMPLE 1

Assume that a business: Owned $200,000 Owed creditors $140,000 Owed the owner $60,000

The accounting equation would be:

Assets = Liabilities + Equity $200,000 = 140,000 + 60,000

If over a given period the business had a net income of $20,000, the accounting equation would be:

Assets = Liabilities + Equity

$220,000 = 140,000 + 80,000

Balance Sheet:

The accounting equation is presented as a statement called the balance sheet. Some other items listed in the balance sheet:

Stock: Unsold goods

Creditors: A person to whom money is owed for goods or services. Debtors: A person who owes money to the business for goods or services supplied.

Illustration of balance sheet, including some items: