Our Accounting [ACC101 Introduction] University Notes are the perfect study companion for any student looking to excel in their accounting class. These colorful notes provide in-depth explanations of the most important concepts, accompanied by numerous examples and adjustment figure elaborations to...
, Basic introduction to accounting
BASIC TERMINOLOGY
Item of value owned by a person or business and used to make a profit.
Something OWNED by the business that is either cash or can be sold for cash.
Definition of an asset:
• A resource
• Under the control of the entity
• As a result of a past event
• Of which future economic benefits are expected to flow to the entity
Acknowledgement Criteria of an asset:
• economic benefits will flow to the entity
• The cost or value of the item must be dependable
ASSET Assets fall into two categories:
NON-CURRENT ASSETS
• Tangible / fixed assets [These are physical assets, which can be touched. It
is used to run the business]
• Financial assets [This represents the cash investment in a financial
institution for more than a year to earn interest]
CURRENT ASSETS
• Stock
• Trade - and other receivables
• Cash and cash equivalents
DEBTORS People who owe money to the business for goods bought on credit.
The net worth of the business at any given time.
• Is the net asset value of the entity
• The interest that the owner has in the assets of the entity after all the
OWNERSHIP INTEREST liabilities have been deducted
• Equity consists of capital or assets contributed by the owner to generate
profit
• This is the amount that the entity owes to the owner
TRADE INVENTORY This amount is calculated when the physical Inventory Take-up amount is more
than the figure for trading inventory in the general ledger.
SURPLUS
TRADE INVENTORY This amount is calculated when the physical stocktaking amount is less than the
figure for trading stock in the general ledger.
SHORTAGE
COST OF SALES The cost price of all goods sold.
CREDITORS Persons/suppliers to whom the business owes money.
An amount that a person or business owes to another person or business.
Definition of a liability:
• The current obligation of the entity
• As a result of past events
LIABILITY
• The settlement is expected to lead to an outflow of economic benefits
Recognition Criteria of a liability:
• Economic benefits of the entity will flow
• The cost or value of the item must be dependable
BAD DEBTS Debts were written off due to debtors who could not pay their debts.
,ACCUMULATED INCOME Income is still owed to the business at the end of the financial year.
/ INCOME RECEIVABLE
ACCRUED EXPENSES / Expenditure is still due at the end of the financial year.
EXPENSES PAYABLE
LOSS When the expenses are more than the income.
PREPAID EXPENSES Expenses already paid for the next financial year.
ADVANCE RECEIVED Revenue already received by the business for the next financial year.
INCOME
The amount by which fixed assets decrease in value over a period of time as a result
IMPAIRMENT of repeated use.
PROFIT When the income is more than the expenses.
The percentage added to the cost price to calculate the selling price, i.e., the profit
PROFIT STORAGE percentage.
Income is known as the money EARNED by selling goods or providing services.
Definition of an income:
• The acquisition of economic resources during an accounting period
• In the form of an increase in assets or a decrease in liability
INCOME • Which leads to an increase in equity
• Exclude amounts made by owners
Recognition Criteria of an income:
• Economic benefits will flow to the entity
• The cost or value of the item must be measurable reliably
An expense is known as the cost of running the business
Definition of an expense:
• Reduction of economic resources during the current accounting period
• By way of giving up assets or increasing liabilities
EXPENDITURE • Which leads to a decrease in equity
• Excluding distributions to owners
Recognition Criteria for an expense:
• Economic benefits of the entity will flow
• The cost or value of the item must be dependable
ASSETS = OWNERSHIP INTEREST [EQUITY] + LIABILITIES
ASSETS EQUITY LIABILITIES
Dr. A Cr. Dr. E Cr. Dr. L Cr.
+ - - + - +
NON-CURRENT ASSETS Dr. Withdrawals Cr. NON-CURRENT LIABILITIES
Tangible / fixed assets + - (will be refunded over 12
• Grounds and infrastructure months)
• Equipment • Mortgage loan
• Vehicles • Loans
Financial assets Dr. Capital Cr.
• Fixed deposit (longer than 12 + - CURRENT LIABILITIES
months) (will be refunded in less than 12
months)
CURRENT ASSETS • Trade Creditors
Dr. Expenses Cr.
Stocks • Overdrawn bank (Cr.)
• Trading stock
+ - • Short-term portion of the
Z Cost of sales
• Consumables on hand Z Interest expense
loan
Trade and other receivables Z Rental expense • Accrued expenses payable
• Debtors control Z Salaries and loans • Received in advance income
• Accrued income / income Z Stationery
Z Fuel
receivable Z Packaging material
• Prepaid expenses Z Repair work
Cash and cash equivalents Z Insurance
• Bank (Dr.) Z Advertisements
Z Discount allowed
• Petty cash Z Telephone
• Exchange money Z Water and electricity
• Fixed deposit (less than 12 Z Loss on sale of asset
months) Z Bad debt
Z Depreciation
Z Trade stock shortage
Z Provision for bad debts
adjustment (+)
Dr. Income Cr.
- +
Z Sales
Z Current Income
Z Interest income
Z Rent income
Z Discount received
Z Bad debts recovered
Z Profit on sale of asset
Z Trading stock surplus
Z Provision for bad debts
adjustment
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