Accounting

Introduction

Learning objectives Tick off

Record and account for transactions and events resulting in income, expenses, assets,
liabilities and capital in accordance with the appropriate basis of accounting and the laws,
regulations and accounting standards applicable to the financial statements
Identify the main components of a set of financial statements and specify their purpose and
interrelationship

Specific syllabus learning outcomes are: 1c, 3a

Practical significance
A key principle is that a business is a separate entity from its owners. This is expressed in the accounting
equation, which underlies double entry bookkeeping, and hence the whole of accounting. The Liza Doolittle
example shows how a small entity starts trading.

Stop and think

Think for a moment about what the following terms mean: capital, asset, liability, debtor and creditor. In
this chapter we will see that an entitys assets always equal its liabilities plus equity or capital, and that any
entity which uses credit of any form that is, taking time between incurring a debt and paying it in cash
has debtors and creditors which it must record.

Working context
You may be involved on a small assignment where a person has started up a business and has not started
any bookkeeping. This chapter will help you to appreciate the issues at stake. Alternatively you may be
involved on an assignment for a huge client. Accounting for all entities, from a tiny start-up to a huge
multinational, is based on the principles outlined in this chapter.

Syllabus links
The material in this chapter will be developed further in this paper, and then in the Financial Accounting
paper later in the Professional stage and the Financial Reporting paper in the Advanced stage.

22 The Institute of Chartered Accountants in England and Wales, March 2009