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Nature of Accounting Unit 1

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1 Nature of Accounting Unit 1

2 Learning Objectives The meaning & functions of Accounting
The difference between Accounting & Bookkeeping The purpose of keeping Accounting records The Accounting Cycle/Process Identify the different users of Accounting information

3 What is Accounting Accounting is the language of business It involves:
Recording transactions Classifying transactions Summarising transactions Interpreting and analysing transactions

4 4 Steps in Accounting Recording Journal
Day to day recording of transactions “T “shape accounts Classifying Ledger Summarising Trial Balance Verification of accuracy of accounts Interpretation Final Accounts Preparation of reports Ratio Analysis

5 Accounting verses Bookkeeping
Bookkeeping involves the actual data recording This is often computerized in organizations Accounting is concerned with the use, analysis & interpretation of accounting records

6 Financial Statements Income Statement or Profit & Loss Account
Revenue – Expenses = Income (or profit) Balance Sheet Asset – Liability = Owners Equity Cash flow statement $ Receipts - $ Payments = Changes in cash balance

7 Users and Uses of Accounting Information

8 Managers, to know: Profitability Return on investment
Operational efficiency (day-to-day operation) Ensure security of investment Basic functions like planning, budgeting, decision-making and control purposes

9 Prospective investors, to ascertain
Earning capacity of the business Solvency or financial strength of the business Ability of the management Decision to invest in a business

10 Creditors/ Banks, to find out
The borrower's capacity for repayment Whether to grant a credit or advance money to a busines The limits of advance, or credit limits for a customer

11 Employees/ Unions To discuss and arrange labour contracts
To be assured of steady employment To determine the ability of the business to pay higher wages

12 Tax inspectors/ Government
To evaluate tax returns to calculate tax payable by the business To check that the business is following the government rules and regulations

13 General Public To know the effect of pricing on customers
To judge the ability of the firm to survive and honour it's product warranties

14 Owners of the business, to ascertain
Profitability of the firm Security of capital Return on their investment (ROI) Resources owned Financial stability Whether to increase of decrease their existing ownership in the firm

15 Common Terminology Capital Resources supplied by the owners to the business Assets Resources owned by the business Liabilities What the business owes for the assets supplied Purchase Goods bought by the business Sales Goods sold by the business

16 Common Terminology Purchase return/ Goods returned by the business to it's suppliers Return outwards Sales return/ Goods returned to the business by it's customers Return inwards Creditor A person to whom the business has to pay for goods and services rendered. Debtor A person from whom the business has to receive money for goods and services supplied.

17 Common Terminology Stock Unsold goods
Expense Cost of operating the business Revenue Money received for goods and services supplied Profit Revenue minus expenses Loss Expense minus revenue

18 The Accounting Equation
Assets = Liabilities + Owner's Equity

19 Types of Business Sole Trader Features This is a one-man show
Capital put in by the owner Business is run by the proprietor Profits and losses at the year end are taken over by the proprietor Usually small retail establishments Unlimited liability

20 Types of Business Partnership Features
Minimum 2 people, maximum 10 or 20, depending upon the type of partnership Capital contributed by all partners Every partner has a right to participate in the business Each partner acts as the principal and agent of the firm Profits or losses at the end of the year are shared in the agreed ratio Usually professionals like doctors, lawyers, accountants, etc Unlimited liability

21 Types of Business Company Features
Largest form of business organisation Capital contributed by the public, who are joint owners of the company Can be public or private Separate legal entity Registered under the company's act Ownership and management is usually separate No limit to the maximum amount of members Accounts must be prepared and audited yearly under the company's act

22 Q & A

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