DEFINITION OF ACCOUNTING

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DEFINITION OF ACCOUNTING

• Accounting is the process of identifying,
  measuring and communicating economic information
  about an entity to permit informed judgments and
  decisions by users of the information (Anthony et
  al, 1995)

2
What economic information?

• Examples
• Assets of the entity
• Liabilities of the entity
• Expenses income of the entity
• Performance of the entity
• Financial position of the entity
• Liquidity position of the entity

3
Users of accounting information

• Management
• Investors Shareholders/owners lenders
• Creditors/ suppliers
• Debtors/customers
• Government
• The public/ Community
• Financial analysts
• Employees

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Branches of Accounting
Financial accounting Management accounting
1. Provides economic information useful to external users 1. Provides economic information useful to internal users
2.Generates general purpose financial statements 2. Generates specific purpose statements and reports
3. Reports on financial effects of past events 3. Set up for future oriented reports
4. Must conform to external standards 4. Not subject to external standards
5. Uses objective data 5. Uses subjective data.


5
Separate entity concept

• a business is treated as a distinct entity, or
  different persona separate from the owners who
  provided capital.
• transactions entered into by the business have to
  be dealt with from the point of view of the
  entity whose books are being done, not from the
  point of view of the owners.

6
Accounting equation

• flows from the separate entity concept
• the assets of a business will always be equal to
  the sum of its liabilities plus its owners
  equity.
• Assets Equity Liabilities.
• Equity Assets Liabilities.
• Liabilities Assets Equity.

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• Where
• Assets are resources controlled by an entity as a
  result of past events and from which future
  economic benefits are expected to flow to the
  entity.
• Liabilities are present obligations of an entity
  arising from past events, the settlement of which
  is expected to result in an outflow from the
  entity of resources embodying economic benefits.
• Equity (or owners interest) is the net interest
  in the assets of the entity after deducting all
  its liabilities.

8
Double entry system of accounting 

• Every financial transaction gives rise to two
  accounting entries
• Each entry shows dual effect of the transaction
  on the accounting equation.
• Note A transaction is an agreed upon transfer of
  value from one party to another which affects the
  amount, nature or composition of an entitys
  assets, liabilities or equity.

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• The double entry rule says
• For every debit entry there must be a
  corresponding credit entry in the ledger.
• IN SHORT
• Debit the receiver and credit the giver.

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Books of Accounts

• Subsidiary books
• Subsidiary books are those books where
  transactions are recorded as information is
  extracted from the source documents. These books
  are also referred to as books of prime entry,
  books of original entry or books of first entry.

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Subsidiary books
Subsidiary book use Source document
Cash book Cash transaction Receipts, bank deposit slips, cheque counterfoils bank statements
Petty cash book Small cash payments Petty cash voucher
Sales journal Credit sales Sales invoice
Purchases journal Credit purchases Purchases invoice
Sale returns journal Returns inwards/sales returns Credit Note (C/N)
Purchases returns journal Returns outwards/ purchases returns Credit Note (C/N)
General journal Any other transactions Depends with nature of transaction invoice, C/N
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Subsidiary books

• Subsidiary books are books in which entries are
  made prior to their posting to the divisions of
  the ledger. They are not part of double entry
  with the exception of the cash book. The purposes
  of subsidiary books are
• To relieve the ledger of unnecessary detail by
  posting thereto only summarized data
•  

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Subsidiary books

• To classify transactions and enable periodic
  totals to be posted to appropriate accounts in
  the ledger.

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• General journal
• The typical uses of the general journal are to
  record
•  The sale, or purchase, of non-current assets on
  credit
• The correction of errors
• Opening entries, i.e. entries to open the books
  of the entity
• Other transfers.

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The Ledger

• It is the main book of accounts
• All transactions entered in subsidiary books are
  posted to the ledger
• Divisions of the ledger are
• The cashbook
• Sales/debtors ledger
• Purchases/creditors ledger
• The General ledger
•  

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Divisions of the Ledger
Ledger Section Contents
Cash book Cash and bank accounts
Sales /debtors ledger Personal accounts of trade debtors
Purchases /creditors ledger Personal accounts of trade creditors
General ledger Proprietary accounts, loan capital accounts, asset accounts, income accounts and expense accounts.