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Frank Woods Business Accounting 1 Twelfth Edition

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Chapter 1 The accounting equation and the statement of financial position

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Learning objectives
After you have studied this chapter, you should be able to: Explain what accounting is about Briefly describe the history of accounting Explain the relationship between bookkeeping and accounting List the main users of accounting information and what accounting information they are interested in
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Learning objectives (Continued)

Present

and explain the accounting equation Explain the relationship between the accounting equation and the layout of the statement of financial position (balance sheet) Explain the meaning of the terms assets, capital, liabilities, accounts receivable (debtors) and accounts payable (creditors)
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Learning objectives (Continued)

Describe

how accounting transactions affect the items in the accounting equation Draw up statements of financial position after different accounting transactions have occurred

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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What is accounting?
Accounting can be defined as:
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of that information.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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The history of accounting

Accounting

has existed for at least 10,000 years, with early records indicating its use in Mesopotamia. The Pipe Roll is the earliest system in England, which was an annual description of rents, fines and taxes due to the King. Double entry bookkeeping was first used by an Italian firm in Southern France in 1299.
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Ethics
The IFAC Code states that a professional accountant must comply with the following fundamental principles: Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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What are the objectives of accounting?

Is

the business making a profit or a loss? What is the business worth? What is a transaction worth? How much cash is in the business? How wealthy is the business? How much is the business owed? How much does the business owe? Keeping a financial check on activities.
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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What is bookkeeping?
Bookkeeping is the process of recording data relating to accounting transactions in the accounting books.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Users of accounting information

Managers

Owner(s)

of the business A prospective buyer The bank Tax inspectors A prospective partner Investors Creditors
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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The accounting equation

Resources supplied by the owner = Resources in the business

Capital = Assets
But if someone else has provided some of the assets: Capital = Assets Liabilities Assets = Capital + Liabilities
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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The total of one part of the statement of financial position should always be equal to the total of the other part.

Every transaction affects two items in the accounting equation. Sometimes that may involve the same item being affected twice, once positively (going up) and once negatively (going down).
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Assets = Capital + Liabilities

Assets

Capital

Properties
Buildings Machinery Inventories ( Stocks) Motor vehicles

Funds invested in the business + Retained Profits

Loan Trade Creditors Accruals

Liabilities

Cash Trade Debtors Prepayment and Advances

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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The statement of financial position and the effects of business transactions

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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The statement of financial position and the effects of business transactions

On 1 May 2011, B. Blake started in business and deposited 60,000 into a bank account opened specially for the business
Effect

Assets
Increase (Cash at bank)

Liabilities

Capital
Increase

Statement of financial position as at 1 May 2011 Assets: Cash at bank 60,000 Capital 60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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On 3 May 2011, Blake buys a small shop for 32,000, paying by cheque
Effect Assets Increase ( Shop) Decrease (Cash at bank) Liabilities Capital

Statement of financial position as at 2 May 2011 Assets Shop 32,000 Cash at bank(60 000 32 000) 28,000 60,000 Capital 60,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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On 6 May 2011, Blake buys some goods for 7,000 from D. Smith and agrees to pay for them some time within the next two weeks
Effect Assets Liabilities Capital

Increase (Inventory)

Increase (Account Payable)

Statement of financial position as at 6 May 2011 Assets Shop 32,000 Inventory 7,000 Cash at bank 28,000 67,000 Less: Account payable (7,000) 60,000 Capital 60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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On 10 May 2011, goods which cost 600 were sold to J. Brown for the same amount, the money to be paid later
Effect Assets Decrease (Inventory) Increase (Account Receivable) Liabilities Capital

Statement of financial position as at 10 May 2011 Assets Shop 32,000 Inventory (7 000 600) 6,400 Account receivable 600 Cash at bank 28,000 67,000 Less: Account payable (7,000) 60,000 Capital 60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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On 13 May 2011, goods which cost 400 were sold to D. Daley for the same amount. Daley paid for them immediately by cheque
Effect Assets Decrease (Inventory) Increase (Cash at Bank) Liabilities Capital

Statement of financial position as at 13 May 2011 Assets Shop 32,000 Inventory ( 6 400 400) 6,000 Account receivable 600 Cash at bank ( 28 000 + 400) 28,400 67,000 Less: Account payable (7,000) 60,000 Capital 60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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On 15 May 2011, Blake pays a cheque for 3,000 to D. Smith in part payment of the amount owing
Effect Assets Decrease (Cash at bank) Liabilities Decrease (Account Payable) Capital

Statement of financial position as at 15 May 2011 Assets Shop 32,000 Inventory 6,000 Account receivable 600 Cash at bank (28 400 3 000) 25,400 64,000 Less: Account payable ( 7000 3000) (4,000) 60,000 Capital 60,000
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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J. Brown, who owed Blake 600, makes a part payment of 200 by cheque on 31 May 2011
Effect Assets Increase (Cash at bank) Liabilities Capital

Statement of financial position as at 31 May 2011 Assets Shop 32,000 Inventory 6,000 Account receivable (600 200 ) 400 Cash at bank (25 400 + 200 ) 25,600 64,000 Less: Account payable (4,000) 60,000 Capital 60,000

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

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Thank You

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012