NATIONAL INSTITUTE OF OPHTHALMOLOGY

BACHELOR OF SCIENCE IN OPTOMETRY

BASIC ACCOUNTANCY (OPTOZC 112) LESSON 1
INTRODUCTION TO BASIC ACCOUNTING

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

LEARNING OBJECTIVES
At the end of the chapter, you should be able to:

trace the development of accounting; state the difference between book-keeping and accounting; state the functions of book-keeping and accounting; describe briefly the types of business units; describe briefly the accounting cycle; understand various commonly used accounting terms.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

BOOK-KEEPING AND ACCOUNTING:

BOOK-KEEPING is defined as a process of recording business

transactions accurately and systematically according to certain set rules.

Examples of business activities such as purchases of goods, sales of goods and collections and payments of debt In accounts, these business activities are termed transactions and since all information was recorded in books, hence we get the term book-keeping.

ACCOUNTING involves the process of recording business transactions

accurately and systematically, i.e. book-keeping.

The accounting information is thus classified for the preparation of financial reports. The business transactions and accounting reports are further processed to analyzing and interpreting to enable the business make decisions and plans for the future.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

FUNCTIONS OF BOOK-KEEPING AND ACCOUNTING

Book-keeping and accounting serve the same purpose in that both portray an accurate financial picture of a business entity. Their functions include:

Providing proof that a business transaction has taken place; Recording, classifying and summarizing business transactions in monetary unit systematically; Supplying information regarding all assets and liabilities of the entity so that the financial standing of the entity can be ascertained at any fixed time; Supplying all information regarding the expenses and revenues of the entity.

Accounting plays a further role in that it provides all this information by recording, classifying, reporting, analyzing and interpreting business transactions and activities. Such information will enable the owner to make decisions and take appropriate actions for the future betterment of the business.

Difference between Book-Keeping & Accounting

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

TYPES OF BUSINESS UNITS
Characteristics
1. No. of members One

Sole Proprietorship

Partnership
Between 2-20. In special cases the maximum members can be 50. Partners

Limited Companies Private Ltd

Between 2-50

Public Listed
Minimum 2 and no maximum

2.

Source of capital

Owner

Shares issued to a restricted group of shareholders

Shares issued to the public

3.

Liability

Unlimited the liability of the owner is not limited to the amount of capital invested

Unlimited except if the partnership is stated limited partners

Limited limited to the amount invested in the company

4.

Relationship between owner(s) and business entity Ownership transfer

Legally the business is not separated from the members Through sale of business Consent from all partners required

The business is a legal entity separated from its members Shares can be only transferred with the consent of all shareholders Shares can be freely transferred

5.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING
Represent the whole accounting process, from recording until interpreting financial information. Accounting is diversified professions financial accounting, managerial accounting, tax accounting, auditing,

ACCOUNTING CYCLE
(1) Source Documents

(9) Financial Report

(2) Books of Prime Entry

BOOKKEEPING
Bookkeepers are responsible in safeguarding the completeness and accuracy of the book of accounts

(6) Closing Entries

(3) Ledger

Involves Process 1 - 6
(5) Balance Day Adjustments (4) Trial Balance

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
1. Source Documents.

ORIGINAL INVOICE Nu Office-Tech Enterprise Lot.DO14, Tingkat Bawah Kompleks Karamunsing 88882 Kota Kinabalu, Sabah Tel : 088-865434 Fax : 088-864343
To: Farmasi Pro-Care Sefuwan Order No: 0A/018 No.A01, Tingkat Bawah Wisma SEDCO, Blok A 89200 Papar, Sabah Unit Price (RM) 2100.00 1200.00 2000.00 Date : 3 Sep, 2009

Inv.No: 1476

The source documents are the original record of a transaction. During an audit, source documents are used as evidence that a particular business transaction occurred. Examples of source documents include: cash receipts, customer invoices, supplier invoices, purchase orders, deposit slips, etc.

No 1 2 3

Details HP Intel PC HP Laserjet EZ Acc S/Ware

Quantit y 1 1 1

Total Price (RM) 2100.00 1200.00 2000.00 5300.00 5300.00

Less : Trade Discount TOTAL (Ringgit Malaysia : Five thousand three hundred only) Terms & Conditions: 5% 10 days Carriage : FOB E & O. E Safuwan . Received by:

Nina
Issued by:

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
2. Books of Original/Prime Entry.

The documents are then classified and posted to the appropriate books of original/prime entry. Prime entry books include: Cash Book and Journals Journal Proper/General Journal, Purchase Journal, Sales Journal, Purchase Returns Journal and Sales Returns Journal.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
3. The Ledgers.

The entries done in Prime Entry books are thus transferred to ledgers. Ledgers are books of accounts where records from the journal are classified and posted. Books of ledgers include: General Ledger (for all Assets, Liabilities, Revenues and Expenses Accounts), Purchases Ledger (ledger records of creditors) and Sales Ledger (ledger records of debtors).

DR Date
2008 Jan 31 Balance

GENERAL LEDGER
CAPITAL ACCOUNT
Details F
c/d

CR Details F Amount
10,000 10,000 00 00 00

Amount
10,000 10,000 00 00

Date
2008 Jan 1

Cash

Feb

Balance

b/d

10,000

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
MAJU JAYA SDN. BHD TRIAL BALANCE AS AT 28TH. FEB, 2013
Serial Nos
CA01 CA02 FA03 OE01 E001 E002 E003 R001 E003 R002 CA03 CL01

4. Trial Balance
Credit (RM)

Particulars
Cash in Hand Cash at Bank Furniture Capital, 1st Mar 2007 Drawings Purchases Wages Sales Commission paid Interest received Accounts Receivable : Ong & Co Accounts Payable : Chan Bros

Folio
CB01 CB02 GL01 GL02 GL03 GL04 GL05 GL06 GL07 GL08 DL01 CL01

Debit (RM)
800 8 450 1 350

From the records in the Ledger, a Trial Balance is extracted to check the accuracy of the double-entry system. If the journal entries are error-free and were posted properly to the ledger or inversely the ledger entries were to be error-free, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credit, the an error has occurred somewhere in the process.

16 000 1 250 8 450 1 500 5 000 100 150 550

1 300 22 450 22 450

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
5. Balance Day Adjustments

The adjustments are done to comply with the Accrual Concept. This concept requires that expenses incurred for a particular accounting period should be reckoned in the same period, irrespective of the fact whether these expenses have been paid in cash or not in that year. The same holds true for revenues, i.e., revenues earned in a specific accounting period are construed as incomes of the same period, irrespective of their receipts.

6. Closing Entries

This is the stage where all adjustments are finalized and all accounts are closed to Trading and Profit Loss Accounts. The preparation of these accounts are to determine the profits and losses incurred by the firm in that accounting period.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

ACCOUNTING CYCLE
7. Financial Reports

FAIRMAN
INCOME STATEMENT FOR THE YEAR ENDING AT 30th . JUN, 2013
Sales Sales Returns (Net Sales) Less: COST OF GOODS SOLD: Opening Stock Purchases Purchases Returns (Net Purchases) Carriage Inwards Closing Stock GROSS PROFIT Add : Other Revenues: Discounts Received Commissions (Total Income) Less: General & Administrative Expenses: Wages Community Chest Donation Repairs and Maintenance Financial Expenses: Interest on Loans Selling & Distribution Expenses: Discounts Allowed NET PROFIT 71 500 (900) 74 000 13 500

The last stage are preparations of financial statements or financial reports. Financial statements (or financial reports) are formal records of a business' financial activities. Financial statements provide an overview of a business' financial condition in both short and long term. There are four basic financial statements:

51 150 (400)
50 750 1 100 65 350 (14 300 (51 050) 19 550 680 1 350 2 030 21 580 8 000 880 1 560 10 440 1 500 400 (12 340) 9 240

Income Statement : also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Balance Sheet : also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and net equity as of a given point in time. Statement of retrained earnings: explains the changes in a company's retained earnings over the reporting period. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

LESSON 1 INTRODUCTION TO BASIC ACCOUNTING

COMMONLY USED ACCOUNTING TERMS
1. 2. 3. 4. 5. 6.

Assets Liabilities Owners Equity Expenses Revenue Double Entry Book-Keeping System