1.

Week 1: Accounting Basics

1.

Business Organizations

1.

What is Accounting?

2.

Users of Accounting Information

3.
Accounting Principles, Standards and Regulations

2. Week 2: Understanding Financial Statements

1.

Accounting Equation

2.
Financial Statements

3. Week 3: Transaction Processing

1.

The Accounting System

2.

Double-entry Accounting

3.
Correcting Errors
4. Week 4: Measuring Income
1.

Income Measurement Basics

2.

Income Measurement Principles

3.

Income Measurement Mechanics

4.
Accounting for Trading Activities

5. Week 5: Completing the Accounting Cycle

1.

Worksheet

2.

Year-end Procedures

3.
Glossary

Why Accounting?
Accounting is the foundation on which individuals, organizations and
societies build economic activities. The foundation of a house lacks the
 glamour of the drawing room, but it is indispensable for the safety of the
structure and of its occupants. Much the same way, successful economies
and societies are built on good accounting. Credible financial reporting
encourages people to save and invest. Accountants are like anaesthetists
- hardly seen or remembered by the patient but key members of the
surgical team.

Accounting is often confused with bookkeeping, a small part of

accounting. Accounting is really about measuring economic activities and
organizing and presenting information about those activities. A good
knowledge of accounting helps us to design accounting systems and
prepare financial statements, budgets, cost statements, and tax returns.
Formulating and executing government policies requires reliable and
timely information that comes from robust accounting systems.

Accounting strengthens the accountability of individuals, organizations

and societies. It is an important part of a country's economic, social and
political institutions.

Business Organisation

Business activities:

Manufacturing goods: This involves converting raw materials into finished

products by applying production processes e.g. making cars, producing
medicines and crafting furniture.

Providing services: Services result in an experience e.g. repairing

watches, composing music, performing surgery and banking.

Trading: This involves buying and selling goods e.g. vending beverages,
hawking vegetables and dealing in shares.

Common forms of business organization:

Sole proprietorship: A single individual owns a business and has unlimited

liability.

Partnership: Two or more individuals own a business and have unlimited

liability.

Limited company: A separate entity owns a business. The shareholders

have limited liability.
 A Rundown on the Forms of Business Organization
Here is a rundown of the three forms of business organizations covered in
this lecture: Proprietorship, Partnership and Company.

Proprietorship Partnership Company

Getting started Instant start Near-instant start Takes time

Decision-making Highly flexible Reasonably flexible Constrained

Raising capital Difficult Difficult Easy

Legal compliance Simple Simple Burdensome

Suitability Small business Mid-sized business Large business

Recap: what is accounting chapter

The accounting information system:

Input: Business transactions and events e.g. purchase of goods, payment

to suppliers, sale of used equipment.

Process: Applying accounting standards, policies and laws e.g. estimating

the use life of a machine, determining when a sale takes place, deciding
on what to disclose.

Output: Statements and returns e.g. financial statements, tax returns,

financial information filed with regulators.
 Financial accounting: To meet the needs of outsiders e.g. shareholders
and banks.

Management accounting: To meet the needs of insiders e.g. managing

directors and financial controllers.

Fraud and ethical compromises diminish the value of accounting

information. The best way to avoid fraud is to say NO to it the first time.

Recap: Users of information system

The users of financial statements include:

owners,

lenders,

employees,

managers,

governments, and

regulators.

Knowing accounting helps them to understand and monitor a business organization and
improve the quality of their decisions.

Here are some common financial performance measures that owners,

lenders, managers and others use.

Measure Definition

Profit margin Profit/Revenue

Return on assets Profit/Assets

 Asset turnover Revenue/Assets

Current ratio Current assets/Current liabilities

Debt-to-equity ratio Total liabilities/Shareholder's equity

Debt service cover Net operating income/Debt service

Interest cover Profit before interest and tax/Interest expense

The variables in these measures are taken from financial statements.

Recap: Accounting standards and regulations

Accounting is the language of business. The rules of accounting consist of
assumptions, principles and standards.

Accounting measurement assumptions:

Reporting entity: The owners business transactions and personal transactions

are separate.

Going concern: The business is a continuing enterprise, unless there is substantial

evidence to the contrary.

Historical cost: Assets not meant for sale are to be presented at their cost of
acquisition.

Periodicity: The periodicity assumption breaks up the life of an enterprise into time
periods in order to provide information for these purposes.
 Money measurement: Only transactions and events that can be measured in
money are recorded.

Generally accepted accounting principles, or GAAP, include measurement

assumptions, concepts and rules and that define accepted accounting
practice.

Accounting standards narrow down the choice of available acceptable

methods.

Accounting policies state how a firm has applied the accounting methods.

The International Accounting Standards Board develops a single set of

accounting standards known as the International Financial Reporting
Standards.

Many countries follow the IFRS and others, including India, are aligning
domestic accounting standards with the IFRS.

Recap: Accounting equation

The accounting equation: Assets = Liabilities + Equity

Asset: Expected to give benefits and the owner controls the benefits.

Liability: Expected to require sacrifice of cash or other assets.

Equity: (a) Assets Liabilities; (b) Sum of capital contributed by the owner(s) and
retained earnings.

The expanded accounting equation: Assets = Liabilities + Capital +

Revenues Expenses Dividends Drawings

How to work with the accounting equation:

1. Understand the transaction.

2. Analyze the transaction and identify the asset, liability and equity items.

3. Determine the effect of the transaction on the asset, liability and equity items.
Self-assessment: 2 account equation
0 points possible (ungraded)

Joy Decorators had the following transactions in July 20XX:

(a) Provided services for cash.

(b) Bought supplies to be paid for in August.

(c) Paid May salaries.

(d) Received payment for services provided in June.

(e) Accepted a customers contract for providing services in September.

(f) Paid proprietors personal insurance premium for 20XX.

Using the format given below, state whether each transaction resulted in
increase or decrease or had no effect on the total amounts of the
companys assets, liabilities and equity.

Transaction Assets = Liabilities + Equi

(a)
No effect Increase
Increase
correct corre

correct

(b)
Increase Increase No effect

correct correct corre

(c)
Decrease Decrease No effect

correct correct corre

 (d)
No effect No effect No effect

correct correct corre

(e)
No effect No effect No effect

correct correct corre

(f)
Decrease No effect Decrease

correct correct corre

Submit
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Submit button.

TRANSACTIONS OF VIKRAM ART CORNER:

The effect of six transactions of Vikram Art Corner on the accounting

equation appears in the table below. The amounts are in rupees.

Assets = Liabilities + Equity

Cash Trade Art Art Trade Vikram's

Receivables Supplies Equipment Payables Capital

Balance 10,000 28,000 4,200 27,900 17,100 53,000

 (a) 1,000
1,000

Balance 9,000 28,000 4,200 27,900 16,100 53,000

(b) + 9,200 + 9,200

Balance 9,000 37,200 4,200 27,900 16,100 62,200

(c) + 3,200
3,200

Balance 5,800 37,200 4,200 31,100 16,100 62,200

(d) + 2,700 + 2,700

Balance 5,800 37,200 6,900 31,100 18,800 62,200

(e) + + 3,100
3,100

Balance 8,900 37,200 6,900 31,100 18,800 65,300

 (f) + 11,100
11,100

Balance 20,000 26,100 6,900 31,100 18,800 65,300

Recap: Financial statements

Statement of profit and loss (income statement):

Revenue: Core operating revenue, non-core operating revenue, non-operating income

Expenses: Cost of materials consumed, employee benefits, interest,

depreciation, income tax.

Balance sheet (statement of financial position):

Assets: Non-current assets and current assets.

Liabilities: Non-current liabilities and current liabilities.

Equity: Share capital and retained earnings.

Cash flow statement (statement of cash flows):

Operating activities: Collections from customers, payments to supppliers, income

tax paid.

Investing activities: Purchase and sale of fixed assets, dividend received,

interest received.

Financing acivities: Share capital issued and bought back, debt issued and repaid, dividend
paid, interest paid.
RECAP Accounting systems
The accounting system organizes information systematically in order to
provide information for making decisions.

Key terms:

Journal: A chronological record of transactions.

Account: A record of increases and decreases in an asset, liability or

equity item.

Ledger: A collection of accounts.

Chart of accounts: A complete list of the account titles used in an

organization.

Trial balance: A list of account balances.

Here is a description of a few accounts:

Prepaid expense This account holds the amount paid for those
goods or services, which would be received on
a future date. e.g. Insurance, magazine
subscription, etc.

Asset Accounts Trade receivables The amount to be received on a future date, for
the goods or services sold on credit.

Bills receivable A legal document used to receive an amount

due from the customer.
 Trade payables This account holds the amount to be paid for
those goods or services, which have been
received on the present date.

Liability Accounts Bills payable A legal document which contains the amount
due to a supplier.

Unearned revenue Amounts received for goods or services to be

delivered on a future date.