AC120 lecture 2 Role of financial accounting Accounting equation development Principles of double entry bookkeeping

Accountants are associated with... …bookkeeping …financial statements preparation...costing products and services …advice on saving money …helping to run a business or personal finance …financial budgeting …tax planning and calculations …consultancy …auditing

Accounting is concerned with... information gathering, measuring and recording of data –bookkeeping classifying and summarising the data –financial statements preparation communicating what has been learned to interested users to allow them make economic decisions Useful for those who need to make economic decisions and plans. Accounting information serves no purpose unless it is needed and wanted by someone, somewhere for something.

Financial/Management Accounting  Financial accounting information is addressed to users external to the organisation. Information is conventionally produced in the form of financial statements – highly aggregated and structured, and comparable between organisations. Subject to the regulatory framework  Management accounting focuses on the information needs of those inside the organisation. Greater volumes of information available to management than to parties external to the business. Variety of formats and contents possible depending on particular needs of management of each organisation – no regulation.

Business start up scenario Scenario: –B Smith decides to set up his own business. He lodges his savings of €5,000 in to a bank account in the name of the business (Accounting Solutions buys and sells accounting textbooks) –In addition, the business receives a €2,500 loan from the bank as new business start up assistance –Using accounting language, what is the economic status of this business? What are the resources and obligations of the business?

Transactions affecting the business What is the impact of the following on the resources and obligations of Accounting Solutions (AS): AS buys books on credit for €500 AS sells books on credit for €100 AS sells books for cash €200 AS pays €200 to the creditor B Smith contributes additional savings of €1,000 to the business

Accounting Solutions business Assets€ –Bank8,500 –Stock/Inventory 200 –Debtor 100 Total assets8,800 Capital6,000 Liabilities –Bank loan2,500 –Creditor 300 Total capital plus liabilities8,800

Double entry bookkeeping Large numbers of transactions require an system of record keeping that reveals the ongoing activities in an efficient way This is the double entry system of bookkeeping –Individual accounts for each asset, liability and capital –For each account, left hand side is the debit side and right hand side is the credit side

Double entry rules Assets –Increase => debit the account –Decrease => credit the account Liabilities and capital –Increase => credit the account –Decrease => debit the account

The asset of stock/inventory Most businesses want to make a profit and therefore wish to sell stock for more than cost Stock account records cost of goods purchased We require the accounting system to be more sophisticated if it to reflect profit making activities in a useful way Therefore, transactions involving stock are recorded in the following way –Stock goes out => we sold it or we returned it to the organisation from which we bought it –Stock comes in => we bought it or it was returned by customers to whom we sold it

Accounts and entries Stock goes out => sales account returns outwards account Stock comes in =>purchases account returns inwards account Debit and credit rules that apply to stock apply to the sales, purchases and returns accounts

Lecture references Thomas 4 th ed, chapters 1,2, 3, 4 Britton and Waterston 3 rd ed, chapters 1, 5 Wood 2 nd ed, chapters 2, 3, 4