1. 1 INTRODUCTION TO ACCOUNTING Week 1: LECTURE 1

2. 2 Aims of the Lecture What is Accounting and the purpose of Accounting. What is Accounting and the purpose of Accounting. The use of Financial Statements The use of Financial Statements Users of Financial Statements Users of Financial Statements Accounting cycle during a period Accounting cycle during a period Forms of business organizations Forms of business organizations The accounting equation The accounting equation Solution of exercises Solution of exercises

3. 3 A service that is systematically recordingand summarizing the financial transactions of a business and then analyzing, verifying and reporting the results. A service that is systematically recording and summarizing the financial transactions of a business and then analyzing, verifying and reporting the results. The person in charge for the execution of accounting is known as an Accountant, and this individual is typically required to follow a set of rules and regulations of the IFRS (International Financial Reporting Standards). The person in charge for the execution of accounting is known as an Accountant, and this individual is typically required to follow a set of rules and regulations of the IFRS (International Financial Reporting Standards). What is Accounting?

4. 4 Purpose of Accounting Accounting allows a company to analyze the financial performance of the business and look at statistics such as net profit. Therefore the management is able to make informed judgment and better decision. Accounting allows a company to analyze the financial performance of the business and look at statistics such as net profit. Therefore the management is able to make informed judgment and better decision.

5. 5 Financial Statements The Accounting service is analyzing data with the preparation of financial statements. The most widely used financial statements are: The Accounting service is analyzing data with the preparation of financial statements. The most widely used financial statements are:  The Statement of Financial Position (Balance Sheet) and  The Income Statement (Trading and Profit & Loss account). To achieve its goals, an accounting system may make use of computers and video displays as well as handwritten records and reports printed on paper To achieve its goals, an accounting system may make use of computers and video displays as well as handwritten records and reports printed on paper

6. 6 USERS OF FINANCIAL STATEMENTS The financial accounts provide a wealth of information that is useful to various users of financial information USERS OF FINANCIAL STATEMENTS The financial accounts provide a wealth of information that is useful to various users of financial information INVESTORSCUSTOMERS MANAGEMENT OWNERS SUPPLIERS EMPLOYEESUSERSLENDERS THE PUBLICCOMPETITORSGOVERNMENT

7. 7 Managers: need information on a monthly basis to control the business, plan for the future and evaluate profitability. They prepare budgets based on past performance and they compare it to actual results. Managers: need information on a monthly basis to control the business, plan for the future and evaluate profitability. They prepare budgets based on past performance and they compare it to actual results. Owners: The financial Statements tell the owners just how successful the business has been and also summarise in brief its present financial position Owners: The financial Statements tell the owners just how successful the business has been and also summarise in brief its present financial position Investors: are concerned with how secured and profitable is their investment in the specific company. This is shown in the income statement. Investors: are concerned with how secured and profitable is their investment in the specific company. This is shown in the income statement. Employees: are interested to know if an employer can offer secure employment, possible salary increases and retirement benefits. They are also interested in the pay and benefits obtained by senior management! Employees: are interested to know if an employer can offer secure employment, possible salary increases and retirement benefits. They are also interested in the pay and benefits obtained by senior management!

8. 8 Lenders: Banks and other financial institutions who lend money to a business require to know if they will be repaid. This is shown in the balance sheet which displays the solvency of the firm. Lenders: Banks and other financial institutions who lend money to a business require to know if they will be repaid. This is shown in the balance sheet which displays the solvency of the firm. Government: need to know how the economy is performing so as to plan financial policies. Also the tax authorities evaluate the tax witch is payable by the companies with the use of financial statements. Government: need to know how the economy is performing so as to plan financial policies. Also the tax authorities evaluate the tax witch is payable by the companies with the use of financial statements. Suppliers: need to know if the business is able to pay short-term debt when it falls due. Suppliers: need to know if the business is able to pay short-term debt when it falls due. Competitors: wish to compare their own performance against that of other firms that are operating in the same sector. Competitors: wish to compare their own performance against that of other firms that are operating in the same sector.

9. 9 Accounting Cycle During Period Accounting Cycle During Period Also known as “bookkeeping cycle ”, is the process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. Also known as “bookkeeping cycle ”, is the process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. The main steps of the accounting cycle are: The main steps of the accounting cycle are: Collecting and analyzing data from transactions and events. Collecting and analyzing data from transactions and events. Posting entries to the general ledger. Posting entries to the general ledger. Adjusting entries appropriately. Adjusting entries appropriately. Preparing an adjusted trial balance. Preparing an adjusted trial balance. Organizing the accounts into the financial statements. Organizing the accounts into the financial statements. Closing the books. Closing the books. Preparing a post-closing trial balance to check the accounts. Preparing a post-closing trial balance to check the accounts..

10. 10 Forms of business organizations Sole Trader: Owned and operated by one person, although there might be any number of employees. A Sole Trader is fully and personally liable for any losses that the business might take. Sole Trader: Owned and operated by one person, although there might be any number of employees. A Sole Trader is fully and personally liable for any losses that the business might take. Partnership: Owed and operated by two or more people called the ‘partners’. Partnership: Owed and operated by two or more people called the ‘partners’. Partners are ‘jointly and severally’ liable for any losses that the business might make. Partners are ‘jointly and severally’ liable for any losses that the business might make. Traditionally the big accounting firms have been partnerships Traditionally the big accounting firms have been partnerships

11. 11 Company: Owned by many people (shareholders) and operated by many people (thought not necessarily the same). Company: Owned by many people (shareholders) and operated by many people (thought not necessarily the same). There can be one shareholder or many thousands of shareholders. There can be one shareholder or many thousands of shareholders. Each shareholder owns part of the company. Each shareholder owns part of the company. As a group, they elect the directors who run the business. As a group, they elect the directors who run the business. Directors often own shares in theirs companies. Directors often own shares in theirs companies. Not all shareholders are directors. Not all shareholders are directors. Companies are almost always limited companies (This means that the shareholders will not be personally liable for any losses the company incurs). Companies are almost always limited companies (This means that the shareholders will not be personally liable for any losses the company incurs). Their liability is limited to the nominal value of the shares that they own. Their liability is limited to the nominal value of the shares that they own.

12. 12 For all three types of organization, the money contributed by the individual, the partners or the shareholders is referred to as the business capital. In the case of a company the capital is divided into shares. Capital

13. 13 Financial Statements  1. Balance Sheet: is a statement of the assets, liabilities and owners’ equities as at a specific point in time (next day things could be different). Assets – are things owned by the business such as motor vehicles, machinery, inventory (goods manufactured or purchased for resale), money outstanding by debtors, balance at bank and prepaid expenses. Assets – are things owned by the business such as motor vehicles, machinery, inventory (goods manufactured or purchased for resale), money outstanding by debtors, balance at bank and prepaid expenses. Assets are divided into fixed assets: A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time, and current assets: the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.. Goodwill is an Intangible F.A. Assets are divided into fixed assets: A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time, and current assets: the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.. Goodwill is an Intangible F.A. Liabilities – are amounts owed such as money due to creditors, bank overdrafts, short term loans. Liabilities – are amounts owed such as money due to creditors, bank overdrafts, short term loans. Owners’ equity – is a type of liability but this amount is due to the owner of the business rather than to ‘outsiders’. It increases by any new capital brought in and by the net profit made by the business and reduces by any amounts withdrawn by the owner. Owners’ equity – is a type of liability but this amount is due to the owner of the business rather than to ‘outsiders’. It increases by any new capital brought in and by the net profit made by the business and reduces by any amounts withdrawn by the owner.

14. 14 Statement of Financial Position (Balance Sheet) as at 31st December 20YY Fixed Assets Land and Buildings Furniture and Fittings Motor Vechicles Goodwill € X X X X Current Assets Stock Debtors Bank Cash X X X X Capital Add Net Profit Less Drawings X X € X X Current Liabilities (amounts due within a year) (amounts due within a year) Creditors Bank Overdraft Short Term Loan X X X Long-term Loan X XX Long-term Liabilities (repayable later than one year)

15. 15 The Accounting Equation The Accounting Equation Assets = Liabilities + Capital Assets = Liabilities + Capital Or otherwise : Capital=Assets-Liabilities Or otherwise : Capital=Assets-Liabilities The balance sheet must always balance which means must always satisfy the above equation, at any time assets equals liabilities plus the capital.

16. 16  2. Income Statement: Presents the results of operations for a period of time. It usually covers a year of business activity in contrast to balance sheet which is as at a specific point in time. The income statement is prepared following the accruals The income statement is prepared following the accruals concept: the income and expenses are recorded as they concept: the income and expenses are recorded as they occurred regardless of whether cash has been received or occurred regardless of whether cash has been received or paid. paid. Income – the sales revenue shows the income from goods/services sold in the year. Income – the sales revenue shows the income from goods/services sold in the year. Expenses – in order to make revenues we must incur expenses: an outflow of money to pay for an item or service e.g. wages, rents, electricity e.t.c Expenses – in order to make revenues we must incur expenses: an outflow of money to pay for an item or service e.g. wages, rents, electricity e.t.c The income statement is split into two parts a) the Trading account which gives the gross profit and b) the Profit & Loss account which gives us the Net Profit.

17. 17 Trading and Profit & Loss account Opening Stock Add Purchases Less Purchases Return Less Closing stock € X X X X Gross Profit c/d Wages and Salaries Insurance Rent Depreciation of motor vehicles and Furniture's Bad Debts X X X X X Sales Less Sales Returns X € X Discounts Received X X Cost of Sales X X Gross Profit b/d Office Expenses X X Discount allowed Net Profit X X X X

18. 18 The above layout of the income statement is not mainly useful but it assists the appreciation of the actual double entry processes and the realization that the income statement is part of the double entry. The above layout of the income statement is not mainly useful but it assists the appreciation of the actual double entry processes and the realization that the income statement is part of the double entry. The modern-vertical layout is as follows: The modern-vertical layout is as follows: Income statement: Trading and Profit & Loss account Sales x Less Cost of Sales: Op. Stock x Purchases x Less Closing stock (x) (x) GROSS PROFIT xx Less Expenses (x) NET PROFIT xxx

19. 19 Main Types of Business Transactions Duality Concept: Each and every transaction that the business makes has two aspects and has a double effect on the business balance sheet and/or income statement and the accounting equation. Duality Concept: Each and every transaction that the business makes has two aspects and has a double effect on the business balance sheet and/or income statement and the accounting equation. B/ce Sheet Incm Stat. B/ce Sheet Incm Stat. 1. SALES OF GOODS: If with cash cash sales 1. SALES OF GOODS: If with cash cash sales If with credit debtors sales If with credit debtors sales  2. PURCHASES: If with cash cash stock stock If with credit creditors If with credit creditors stock stock  3. PURCH. OF FIXED ASSETS: If with cash cash F. A F. A If with credit creditors If with credit creditors F.A F.A

20. 20 B/ce Sheet Incm Stat B/ce Sheet Incm Stat 4. PAYMENT OF EXPENSES: cash expense 4. PAYMENT OF EXPENSES: cash expense 5. BRING NEW CAPITAL: cash 5. BRING NEW CAPITAL: cash capital capital  6. DRAWINGS: cash capital capital

21. 21 The business entity concept Accepted accounting principles require that a set of financial statements describe a specific business body, which is called business entity. Accepted accounting principles require that a set of financial statements describe a specific business body, which is called business entity. Financial Accounting information relates only to the activities of the business entity and not to the activities of its owner. For e.g. if the owner buys a car for him and his family to use personally, this transaction will not influence the balance sheet elements at all. Financial Accounting information relates only to the activities of the business entity and not to the activities of its owner. For e.g. if the owner buys a car for him and his family to use personally, this transaction will not influence the balance sheet elements at all. The business entity is treaded as separate from its owners. The business entity is treaded as separate from its owners.

22. 22 Exercises