Introduction to

Accounting principles

Chapter 1

Wood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009 1-1

 Learning Objective 1

Understand the need for accounting

and its importance in
business management

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-2

 Need for accounting and its
importance to business man.

Managers
Managers
Owners
Owners

How much money is coming into the

business from the sale of goods
and/or services

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-3

 Need for accounting and its
importance to business man.

Managers
Managers
Owners
Owners

How much it is costing to run the business

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-4

 Need for accounting and its
importance to business man.

Managers
Managers
Owners
Owners

For every pound/dollar/euro coming in and

going out of the business

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-5

 Learning Objective 2

Appreciate the difference between

accounting and book-keeping

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-6

 Difference Bookkeeping &
Accounting

Bookkeeping
– recording the
transactions
of an organization

Accounting
– analysis of the
performance
of an organization

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-7

 Accounting

Managers
Managers Investors
Investors
Owners
Owners Government
Government

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-8

 Definition of Accounting

Accounting
Accounting is is the
the process
process that...
that...
analyzes,
analyzes,
records,
records,
classifies,
classifies,
summarizes,
summarizes,
reports,
reports, and...
and...
interprets
interprets financial
financial information.
information.

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1-9

 Focus of Bookkeeping

Financial
Financial facts:
facts: selling,
selling, buying,
buying, cost
cost calculation,
calculation, paying
paying etc.
etc.

 Recording
Recording transactions
transactions on on accounts
accounts
 with
with double
double entry
entry
 66 rules
rules of
of making
making double
double entry
entry on
on the
the
accounts
accounts
 Accounting
Accounting equation:
equation:
Assets
Assets  Liabilities
Liabilities == Capital
Capital

Influence
Influence on
on balance
balance sheet
sheet
Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 10
 History of Accounting

Seven key ingredients were required for the

development of a formal system of accounting:
- Private property
- Capital
- Commerce
- Credit
- Writing
- Money
- Arithmetic

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 11

 The objectives of accounting

Accounting has many objectives, including letting

people and organisations know:

 IfIf they
they are
are making
making aa profit
profit or
or aa loss
loss
 What
What their
their business
business isis worth
worth
 What
What aa transaction
transaction was
was worth
worth to to them
them
 How
How muchmuch cash
cash they
they have
have
 How
How wealthy
wealthy they
they are
are
 How
How muchmuch they
they are
are owed
owed
 How
How muchmuch they
they owe
owe someone
someone else else
 Keeping
Keeping aa financial
financial check
check on on the
the things
things they
they do
do

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 12

 Learning Objective 3

Understand that the accounting sequence

is the basis for preparing
financial statements

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 13

 Learning the accounting
sequence

Recording accounting data

Classifying data

Summarising data

Communication information

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 14

 Learning Objective 4

Understand the concept of

financial control

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 15

 Learning
(concept of financial control)

Business
Businessisisformed
formed

Trading
Tradingwith
withothers
othersinvolves
involvesmoney
money

Control
Controlof
ofmoney
moneyisisessential
essential

Good
Goodfinancial
financialcontrol
control Bad
Badfinancial
financialcontrol
control

Profit
Profit Loss
Loss

Succes
Succes!! Failure
Failure!!
Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 16
 Learning Objective 5

Know what the two most

important financial statements are.

1.
1. The
Thetrading
tradingand
andprofit
profit and
andloss
lossaccount;
account;
2.
2. The
Thebalance
balancesheet.
sheet.

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 17

 Learning Objective 6

Identify the main users of

Accounting information.

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 18

 Learning
(Users of accounting information)

Possible users of accounting information include:

Managers
Managers
Owner(s)
Owner(s)ofof the
thebusiness
business
AAprospective
prospectivebuyer
buyer
The
The bank
bank
Tax
Tax inspectors
inspectors
AAprospective
prospectivepartner
partner
Investors
Investors

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 19

 Learning Objective 7

Distinguish between
the different types of
business organisations.

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 20

 Types of business
Organisations

Type of Organisation Characteristics

Sole trader One person/name, solely liable
for all debts and business profits
Partnership Group of > 1 and =< 20 people
focusing on particular business
Goal: making Profit

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 21

 Types of business
organisations
Type of organisation Characteristics
Private Legal entity with at least 2 shareholders.
Limited company The liability of shareholders is limited to
amount they have agreed to invest
Public Legal entity with limited shareholder
Limited company liability, it can ask the public to subscribe
for shares in its business
Non-trading Clubs, associations and other non profit
organisation organisations normally run for the benefit
of their members to engage in a particular
activity
Goal: Non Profit

Wood/Robinson: Book-keeping and Accounts, 7th , © T. 1 - 22

 End of Chapter 1

Wood/Robinson: Book-keeping and Accounts, 7th , © T. Sijtsma 2009 1 - 23