Accounting
Explanatory notes
Pre-reading:
In these notes we will look at the basic level of accounting, we will
look at how accounting works, how to classify accounts, and finally
go on to look at complex examples of accounting and more in-depth
financial accounting. We will mainly discuss the classification of
accounts and how they increase and decrease, we will look at how
we balance an account, the accounting equation, accounting cycle,
vat calculations, a summary of markup equations, how to apply
them, and how to do a general journal. Then we will look at more
complex accounting, depreciation calculations, financial statements
of a sole trader, partnerships.
Introduction:
Accounting can be formally described as an organizational system,
that many organizations, firms, businesses, and even households
use to coordinate their finances. We specifically look at businesses in
these notes. Imagine how people and businesses would be, without
any sort of system to coordinate their finances. It would be a
complete mess. Accounting is like organizing your room, imagine if
things were out of place and you did not know where things went or
where to put them, it would be so frustrating. Just like accounting,
we need to put values into respective homes and categorize them, so
that we can measure the performance of businesses or
organizations.
Accounting is organized or coordinated through ledgers, notes,
journals, and statements. When we talk about “the books” of a
,business or a firm, we are referring to the accounting records that
contain all the documents above.
The Double-entry system
Luca Pacioli developed this modern form of accounting, which we
use in our accounting methods today. The double-entry system
refers to two book entries, one debit, and one credit. This double-
entry system will affect all the transactions, this means every
transaction will have at least one debit and one credit. Debits and
credits help to decide which side an account increases on, and which
side of an account decreases on. So, when we record a transaction,
we need to decide which account will increase or decrease and
whether each account will increase or decrease on the debit or credit
side.
What are accounts? These refer to the tools in accounting that help
run a business. These tools include assets, inventories, receivables,
capital, incomes, liabilities, and finally expenses. It is further
categorized as Assets, Owners Equity, and Liabilities.
, Assets
Increases the worth of a business, we could have both tangible and
intangible assets. An asset is described as a piece of valuable
property owned by a business or a person, assets help take care of,
or decrease debts or other liabilities. We have two main types of
assets;
Non-current assets: These are assets that are expected to last more
than a year. Examples: Vehicles, furniture, equipment, investments,
etc.
Current assets: These are assets that have an expected life of less
than a year. Examples: Trading inventory, current bank account,
cash float, debtors control etc.
Owners' Equity
This refers to how wealthy a business is. There are a few things that
affect the wealth of a business, drawings, expenses, incomes, and
capital.
Equities/Proprietary accounts:
Drawings: Refers to what an owner or owners take out of a
business. It is referred to as an equity account as it directly affects
the wealth of a business. Example: When an owner takes out stock
from the business for his/her own use.
Capital: Refers to what an owner puts into a business, to carry out
the operations of the business. This is the second equity account as
