Introduction to

Accounting
Unit 1 :
The Nature of Accounting and
Accounting Equation
Objectives
 After you have studied this chapter,
you should:
Know what accounting is
Know who are the main users of
accounting information
Understand what is meant by assets,
liabilities and capital
Understand the accounting equation
Common accounting terminology
Types of business
Types of financial statements
What is Accounting?
Accounting is the language of
business.

Accounting can be defined as
“the process of identifying,
measuring, and communicating
economic information to permit
informed judgments and
decisions by users of
information.
 Accounting is the art of
recording, classifying,
and summarising money
transactions and events
The history of Accounting
Accounting began because people
needed to

qRecord business transactions
qKnow if they were being
financially successful
qKnow how much they owned and
how much they owed


q
Accounting comprises 4 main
activities
Recording
Classifying
Summarising: (when preparing
The Profit and Loss Account, and
The Balance Sheet)
Interpretation

The branches of
Accounting
What is bookkeeping?
Bookkeeping is the process of
recording data relating to
accounting transactions in the
accounting books.
Bookkeeping is the mechanical
task involving the collection of
basic financial data.
These data are entered in special
records known as books of
account and then extracted in
the form of a trial balance.
The purpose of accounting
Itis to provide information to the
management by using the data
recorded by book-keeping and
converting it into financial
statements.
ØBalance sheet
ØProfit and loss account
ØCash flow statement
Types of business
The main users of accounting
information
The objectives of financial
statements
Provide information on the financial
position of the business at the
start of the period.
Provide information on the financial
of the business at the end of the
period.
• Show the analysis of the changes
during the period.
The financial stability of the
business.
• Indicate the future prospects of the
Users of financial
statements
Internal groups
The management and the
employees
Employees; their interest:
üEmployment stability
üWage negotiation
Management; their interest:
üall aspects (Performance)

Users of financial statements
External groups
Investors
Lenders
Suppliers
Customers
Government
General Public
 The Accounting Equation:

qResources supplied by the

owner = Resources in the
business
qCapital = Assets
qCapital = Assets – Liabilities
qAssets = Capital + Liabilities
qResources: what they are= Resources: who
supplied them
 (Assets) (Capital+
Liabilities )
 The Accounting Equation:

 The concept of a Balance Sheet is

based on the accounting equation,
which is:

se ts = Lia b ilitie s + O w n e r’ s equ

Terminology
Business entity. The owner is
separate from the business as
such we record business
transactions in the business
books.
Any transactions carried out by
the owner outside of the
business are not reflected in the
books of the business.

Business transaction. Any event that
affects the business e.g. purchase of
goods for resale, payment of business
expenses, etc.
Business transaction can be for cash
or on credit.
Cash transaction means that cash was
paid or received in exchange for goods
and services.
Credit transaction means that goods or
services were rendered or received for
which the payment will be
received/paid later.
Terminology
Capital. Any value introduced by
the owner into the business. This
value can be represented by
cash and assets.

Drawings. Any value withdrawn
by the owner from the business
for personal use. This value can
be cash and goods.

Terminology
Debtors. Customers to whom
goods have been sold or
services have been provided for
which they not yet paid.
Creditor. Suppliers from whom
the business have purchased
goods or acquired services for
the business has not yet paid.
Trading Accounting. This is a
statement which is used to
compute gross profit .

Terminology

Profit and loss account This is a
statement used for computing net
profit.

Balance sheet. A statement which
shows what a business owes and
own at a particular point of time.

Assets
Assets. Any item of value owned
and used by the business to
carry out its trade.
They can be subdivided into
a) Current Assets, fluctuating
day to day
b) Fixed assets, used by the
business over a long period of
time .
Liabilities.
These are amounts owed by the
business to outsiders. They can
be subdivided into
a) Short term liabilities .

b) Long term liabilities.

